AG James Sues Student Loan Servicer for Mismanaging Loan Forgiveness Program

Attorney General Letitia James

PHEAA Mishandled Borrowers’ Applications, Public Service Workers Left with Crushing Debt

NEW YORK – New York Attorney General Letitia James today sued the Pennsylvania Higher Education Assistance Agency (PHEAA) — one of the nation’s largest student loan servicers — for failing to properly administer the Public Service Loan Forgiveness (PSLF) program. The PSLF program is a federal program that forgives the student loans of borrowers who have made qualifying loan payments while working in public service for 10 years. PHEAA’s deceptive, unfair, and abusive practices in administering the federal program have contributed greatly to the large number of rejected PSLF applications, despite the fact that tens of thousands of New Yorkers are eligible for the program.

“Despite a decade of honorable public service to our state and this nation, hard-working New Yorkers have been left with nothing but the runaround and broken promises,” said Attorney General Letitia James. “PHEAA’s abuses have not only denied these dedicated public servants the benefits they have earned, but have undermined the goals of the loan forgiveness program. My office will never tire in our efforts to hold companies accountable for their lies and deception, and will never stop fighting to advocate on behalf of our state’s public servants.”

The PSLF program was created in 2007 to encourage graduates to work in public service by offering loan forgiveness to borrowers who complete a period of public service while making qualified payments on their student loans. Specifically, the program is intended to permit eligible graduates to obtain forgiveness on eligible federal student loans after 10 years of public service, during which 120 qualifying loan payments are made. The program should enable graduates to take low-paying jobs in government and at nonprofits that serve veterans, the elderly, low-income children, people with disabilities, victims of domestic violence, and other vulnerable groups — ensuring teachers, nurses, social workers, firefighters, and members of the armed forces all have an option to help them cancel out their student loan debt.

In her lawsuit, Attorney General James argues that PHEAA — operating as FedLoan Servicing — has failed to:

  • Accurately count PSLF-qualifying payments, and has instead relied on borrowers to catch its multitude of errors;
  • Apply policies consistently;
  • Provide borrowers with explanations of its determinations; and
  • Inform borrowers of their options to appeal FedLoan’s mistakes or undo their consequences.

Moreover, borrowers who have attempted to question FedLoan’s counts have been left waiting for months for an explanation — if they received one at all — despite officials admitting that the company’s payment counts are unreliable and that FedLoan relies on borrowers to catch payment count errors.

These failures have resulted in an increase in the loan balances for New York borrowers, an extended time period that borrowers are in repayment, and improper denials when borrowers have applied for public services loan forgiveness.

In her suit, Attorney General James goes on to assert that PHEAA’s misconduct extends to its administration of income-driven repayment (IDR) plans, which are intended to help struggling federal loan borrowers avoid delinquency and default by limiting monthly payments based on income and household size. PHEAA has failed to process IDR applications in a timely manner and has failed to accurately calculate monthly payments. PHEAA has also steered borrowers to less beneficial options, such as forbearance or consolidation, instead of more cost-effective IDR plans. Additionally, PHEAA’s misconduct has included making false statements to borrowers with cancer about their eligibility for a special deferment.

FedLoan’s misconduct have been a significant contributor to the shockingly high rate of rejection of PSLF program applications; more than 98-percent of applicants have been rejected as ineligible for forgiveness.

This case is being handled by Special Counsel Carolyn Fast and Assistant Attorney General Sarah E. Trombley of the Consumer Frauds and Protection Bureau, under the supervision of Deputy Bureau Chief Laura Levine and Bureau Chief Jane M. Azia. The Consumer Frauds and Protection Bureau is a bureau of the Division of Economic Justice, which is led by Chief Deputy Attorney General Christopher D’Angelo.

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