As Alan White reported in Credit Slip yesterday, the U.S. Department of Education assigned the complex task of monitoring the Public Service Loan Forgiveness (PSLF) program to its worst-performing student-loan servicer--FedLoan Servicing (Fedloan). In 2017, DOE ranked FedLoan last among 9 student-loan servicers "based on delinquency rates and customer satisfaction survey results."
PSLF, created by Congress in 2007, is a federal program designed to make it easier for student-loan borrowers in public service jobs to pay off their loans. And it is a very big program. Almost 1.2 million people have applied to have their student loans certified for PSLF participation; and 890,000 borrowers have been approved so far.
PSLF borrowers are entitled to have their student loans forgiven after 120 on-time loan payments. The first PSLF participants became eligible for debt relief in September of last year. As of last month, 28,000 borrowers had applied for debt relief, but DOE had approved less than 100.
What's going on?
According to a federal lawsuit filed in Pennsylvania earlier this year, FedLoan has fraudulently administered the PSLF program to enrich itself at the expense of student borrowers (paragraphs 80-91). Plaintiffs in the suit claim FedLoan penalized borrowers who made extra payments by posting all subsequent payments as being paid late. Since late payments don't qualify toward the 120 on-time payments, student debtors who made extra payments in good faith actually increased the number of months they would have to make loan payments. Since FedLoan gets a service fee for managing student loans, the longer a borrower makes payments, the more money FedLoan earns in fees.
In addition, FedLoan reputedly made bookkeeping errors while administering the PSLF program; and when borrowers tried to straighten out these mistakes, FedLoan put their loans into forbearance. Student debtors whose loans are in forbearance do not get credit for loan payments they make, and this practice also extended the time borrowers are obligated to make student-loan payments.
Plaintiffs in the federal lawsuit allege FedLoan engaged in these activities to increase its revenues. And indeed, FedLoan is making a bundle of money in the debt collection business. According to the plaintiffs' complaint (paragraph 33), FedLoan earned net revenues of more than $220 million in 2014 and owns assets worth $700 million!
But here is a question the Pennsylvania plaintiffs did not ask: Why did DOE permit FedLoan to allegedly defraud student debtors?
After all, DOE must have known something was wrong based on the sheer volume of complaints that student borrowers were filing against FedLoan. All DOE would had to have done to bring FedLoan into line was write a letter telling it not to interpret the PSLF program in a way that harms PSLF participants.
I think DOE intentionally allowed FedLoan to operate the PSLF program so unfairly because DOE knows the PSLF program will cost the government billions if every PSLF applicant gets the debt relief the program promises. In other words, DOE knew exactly how FedLoan would behave if it got the PSLF servicing project, and that's why DOE chose FedLoan.
I hope a federal court ultimately finds FedLoan liable for defrauding PSLF participants. And if it does, then DOE should be named as a co-conspirator in a scandalous fraud.
Danielle Douglas-Gabriel. Watchdog agency blasts government contractor for mishandling student loan forgiveness program. Washington Post, June 27, 2017.