Biden administration punishes more student loan servicers for delays

August 19, 2024

Aidvantage, EdFinancial and Nelnet, companies that help manage the federal government’s $1.6 trillion student loan portfolio, will face pay cuts of up to $2 million for failing to send timely billing statements to a total of 758,000 borrowers, the Education Department said Friday.

It is the second time in recent months that the department has withheld money from a servicer over the issue.

The punishment is the latest fallout from the tumultuous restart of federal student loan payments after a 3½-year pandemic pause. Since payments resumed in October, borrowers have complained of inaccurate bills, long wait times to reach customer service and delayed enrollment in President Biden’s new signature repayment plan.

Some experts say there is plenty of blame to go around between Capitol Hill, the Education Department and student loan servicers. But the department is holding servicers, who collect payments on behalf of the government, accountable for the chaos.

“The Biden-Harris Administration will not give student loan servicers a free pass for poor performance and missteps that jeopardize borrowers,” Education Secretary Miguel Cardona said in a statement Friday. “When unacceptable errors are uncovered, servicers should expect to be held accountable and borrowers should count on this administration to hold them harmless.”

Servicers were supposed to give borrowers at least 21 days notice before their first bill was due, but almost all of the contractors missed that deadline to varying degrees. The Education Department said Aidvantage failed to mail out timely statements to 697,734 of the borrowers whose loans it services, which will result in the department withholding $2 million from its contract. EdFinancial stands to lose $161,410 for failing to send 55,674 people their bills on time, while Nelnet will be docked $13,382 for doing the same to 4,616 borrowers, the federal agency said.

In October, the department withheld $7.2 million from Missouri Higher Education Loan Authority, commonly known as MOHELA, for not sending 2.5 million borrowers statements on time. Of those borrowers, more than 800,000 subsequently missed their first full payment and became delinquent, though it is not clear whether that was simply because of the delayed notices.

Biden administration begins punishing servicers for student loan errors

The department did not disclose how many people impacted by Aidvantage, Nelnet and EdFinancial’s late statements were delinquent. At any other time, delinquent borrowers would be reported to the credit bureaus, but the Biden administration instituted a 12-month grace period that runs until October sparing those with past-due accounts from that fate for now. Still, delinquency puts borrowers at risk of losing credit toward federal loan forgiveness programs.

The Education Department said it has directed the servicers to place all affected borrowers into administrative forbearance until the problem is resolved. While in forbearance, borrowers will not owe payments and accrued interest will be adjusted to zero. The department will also count the time in forbearance as progress toward loan forgiveness programs.

For its part, Aidvantage, a division of Maximus, said the company took immediate action to rectify and prevent a reoccurrence of the billing error once it identified the issue.

“Our goal in service to the Department of Education and nearly 9 million borrowers is to provide excellent service that respects and protects the rights of borrowers,” said Eileen Cassidy Rivera, a spokesperson for Maximus. “We take all our contractual obligations seriously and are transparent and accountable for our performance.”

EdFinancial did not immediately respond to requests for comment.

Nelnet spokesman Ben Kiser said less than 0.04 percent of the company’s 14.5 million borrowers had missing or late statements, including some borrowers who moved their due date up to better meet their financial situation. Borrowers could set their due date for over a decade but in light of today’s actions, Nelnet expects to remove this option going forward.

“While we are confident the number of borrowers with Nelnet-caused billing statement errors is less than the number released, we do take seriously our responsibility to borrowers and regret any mistakes made during the extraordinary circumstances of return to repayment,” Kiser said.

Congressional Republicans have said the Education Department is scapegoating servicers for its failure to prepare for the restart of student loan payments. Servicers, they say, were barred from communicating with borrowers and given ever-changing timelines from the Biden administration, but no clear guidance. Republicans accused the department of going after servicers now to divert attention away from the troubling launch of the Free Application for Federal Student Aid, which families struggled to access over the weekend.

“Biden’s Education Department is using servicers as scapegoats to deflect blame from its disastrous FAFSA rollout and inability to plan for a smooth transition to repayment, despite having over two years to do so,” Rep. Virginia Foxx (R-N.C.), the chairwoman of the House Education and Workforce Committee, said Friday.

Industry proponents say some errors were inevitable.

“We asked permission to communicate earlier. We warned about the impacts of last-minute decisions by the government. We asked for more resources to better serve borrowers. All were denied or ignored,” said Scott Buchanan, executive director of the trade group Student Loan Servicing Alliance.

The late statements are among the many mishaps that are fast defining the return to repayment.

The Washington Post reported in October an internal memo at the Education Department detailing some errors, including servicers sending borrowers monthly bills for $100,000, setting repayment terms at one to two months, instead of 120 to 240 months. The Post alsoreported that servicers produced inaccurate payment amounts for 420,000 people enrolled in the Saving on a Valuable Education, or SAVE, payment plan, which bases monthly bills on income and family size. In that case, some account files transferred between loan servicers contained incorrect or missing data.

On Friday, the Consumer Financial Protection Bureau highlighted the errors in a report on the challenges borrowers are facing in the resumption of student loan payments. It said average call wait times to speak to a servicing representative have risen from 12 minutes in August to more than 70 minutes in October. As a result, nearly 30 percent of calls were abandoned in October, compared with 10 percent in August — leaving borrowers unable to get answers or enroll in an affordable repayment plan, according to the bureau.

After Congress refused to give the Federal Student Aid office more money in late 2022, the Education Department told servicers to scale back the minimum number of customer service hours they provide and end Saturday call center hours. Servicers warned that would lead to longer wait times as unprecedented tens of millions of people entered repayment all at once.

The CFPB report argues that even with strained budgets, some servicers are doing a much better job than others in helping borrowers, which suggests that servicers can mitigate adverse borrower outcomes with appropriate operations.

“The resumption of student loan payments means that borrowers are making billions of dollars of payments each month,” CFPB Director Rohit Chopra said in a statement. “If student loan companies are cutting corners or sidestepping the law, this can pose serious risks to individuals and the economy.”

The CFPB report also takes servicers to task for the backlog of applications to enroll in Biden’s new SAVE repayment plan. When the bureau reviewed servicer data in late October, more than 450,000 applications were pending for more than 30 days with no resolution. Processing times vary across servicers, with some taking five times as long as others to process applications.

Buchanan at the Student Loan Servicing Alliance argues that the processing delays are partly the result of the Education Department telling people to apply to SAVE through their website. Whereas servicers can automatically process applications filled out on their websites, those submitted through the department’s portal require the added step of getting documentation.

Buchanan said servicers must also wait for the department to hand over its applications, and delays in that transmission led some anxious borrowers to submit multiple applications. Those forms have to be manually reviewed for any discrepancies, adding more time to the process.

“This was all eminently avoidable,” he said.

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