Student Loan Servicer Errors Leave Borrowers Scrambling

In response to a FOIA request, the U.S. Department of Education has released an internal memo that details numerous recent servicing errors by federal student loan servicers.

These servicing errors have affected about 10% of student loan borrowers during the restart of repayment of federal student loans.

The errors range from missing loan statements and disclosures, to actually calculating the wrong monthly payment amount! These servicing errors have caused pure chaos and confusion for millions of borrowers. 

Numerous Student Loan Servicer Errors

After the payment pause and interest waiver ended, interest began accruing on federal student loans on September 1, 2023, and repayment restarted for more than 28 million borrowers in October 2023. 

However, servicing errors have caused 2.5 million borrowers to receive late loan statements. An estimated 305,000 borrowers received loan statements with the wrong payment amount, according to the U.S. Department of Education. 

The servicing errors included: 

Problems with Servicing Transfers and Income-Driven Repayment Plans

24 million borrowers experienced a change in loan servicer when several student loan servicers dropped out of the federal student loan programs prior to the start of the pandemic. The new loan servicers did not receive correct information from the old loan servicer, including income, family size, spousal loan balances and tax filing status. This caused the wrong monthly loan payment to be calculated for at least 78,000 borrowers in income-driven repayment plans. 

Wrong Poverty Line Figures

Several loan servicers used 2022 federal poverty line figures instead of the 2023 poverty lines, causing monthly loan payments to be more than $100 higher for single borrowers with no dependents and almost $300 higher for a family of four. 

Incorrect Repayment Plan

Some borrowers received loan statements with very high monthly payments, due to the incorrect repayment term being reported or the loan servicer switching them into standard repayment.

In some cases, the monthly payments were as high as $100,000. This was due to the repayment term being set at one or two months instead of 120 or 240 months, effectively making the entire debt due immediately. In some cases the borrower’s income was “fat fingered” with extra digits added by the loan servicer or the borrower. These errors affected more than 21,000 borrowers.

Late Or Missing Monthly Loan Statements

One servicer did not send the loan statements on time to 2.5 million borrowers. Borrowers are supposed to receive their loan statements at least 21 days before the payment due date.

Some borrowers received their loan statements within only 7 days of the due date. The late statements caused more than 830,000 borrowers to become delinquent on their loans. 1.9 million borrowers (79%) were sent loan statements within 15-20 days of the due date, 499,000 borrowers (20%) were sent loan statements within 8-14 days of the due date and 16,000 borrowers (1%) were sent loan statements within 7 or fewer days of the due date.

Borrowers With Pending Discharges Returned To Repayment Status

Some borrowers were supposed to be in a forbearance while their borrower defense to repayment discharges or applications were still pending, due to a court order in the Manriquez v. Cardona case or due to the Sweet settlement. About 16,000 of these borrowers were incorrectly returned to an active repayment status and sent a student loan bill. 

Lost Interest Subsidy

Borrowers in the SAVE repayment plan qualify to have excess interest above the required payment waived, ensuring that their loan balances do not increase. If a borrower was not correctly transferred to the SAVE plan, or they were unable to make the payment because of payment amount errors, they would miss out on the interest subsidy. 

Failure To Send Required Disclosures

When a borrower’s repayment plan is switched from the REPAYE plan to the SAVE plan, the loan servicer is supposed to send the borrower a new disclosure with the new monthly payment amount at least 30 days before the due date. This is in addition to the monthly loan statement. The monthly loan bills also did not identify the repayment plan for each loan. 153,000 borrowers did not receive the required disclosures prior to the due date. 

Could These Problems Have Been Anticipated?

Some of these problems could have been prevented by using a "sanity check" of comparing payment amounts now with payment amounts prior to the pandemic. If the new payments were drastically different from the previous payments, it could have prompted a review. But, the loan servicers did not have this data when the servicer changed, even though the U.S. Department of Education had (or should have had) this data.  

These problems count have been anticipated. Historically, changes in loan servicers have led to problems, since borrower data and payment histories aren’t always transferred properly. The Next Gen servicing platform is supposed to fix this, but there have been many false starts since it was first proposed in 2014 and it still isn’t online. Next Gen will maintain a single database with all borrower information, so that there is no transferring of data when a borrower’s loan servicer changes. 

The problems have been compounded by clogged call centers, with 20 times more borrowers entering or re-entering repayment than ever before. At the same time, call center hours have been cut, eliminating weekend hours and laying off staff, because Congress did not provide enough funding for the restart of repayment. Borrowers have had trouble contacting their loan servicers to get problems resolved. 

Everybody is pointing fingers at each other, but there's plenty of blame to go around between the loan servicers, the U.S. Department of Education, and Congress.

U.S. Department Of Education Penalizes MOHELA

The U.S. Department of Education penalized one of the federal student loan servicers, MOHELA, by withholding $7,209,735 in payments to the loan servicer for October 2023. This is one of the first times the U.S. Department of Education has ever withheld a payment from a loan servicer. 

The U.S. Department of Education said that MOHELA failed to send on-time loan statements to 2.5 million borrowers, causing more than 830,000 to be delinquent on their loans. About a third of MOHELA’s 7.8 million borrowers were affected by servicing glitches, more than any other loan servicer. 

Sending out billing statements and collecting payments are fundamental aspects of the work by a loan servicer. 

MOHELA may have also been disproportionately affected by the change in loan servicers, since they took over management of Public Service Loan Forgiveness (PSLF) from FedLoan Servicing. Most PSLF borrowers are in income-driven repayment plans. 

Loan servicers are paid as much as $2.85 per borrower per month for borrowers who are in repayment and current on their loans. The withheld payment is the same as the servicing revenue MOHELA would have received for the 2.5 million borrowers who received their loan statements late. 

Remedies For Affected Borrowers

The U.S. Department of Education will address the harm to affected borrowers by implementing several accommodations. 

• All affected borrowers will be placed in a retroactive administrative forbearance which will continue until the problems are resolved.
• The interest will be set to zero for the duration of the forbearance.
• The months in forbearance will count toward forgiveness through Income-Driven Repayment (IDR) and Public Service Loan Forgiveness (PSLF).
• If an autopay borrower was charged an insufficient funds fee by their bank because the wrong payment amount was transferred from their bank account, the loan servicer will be required to refund the bank fee to the borrower. 

These remedies are intended to make the borrowers whole.

The cost to the U.S. Department of Education from wiping out the interest for one month far exceeds the savings from withholding payment to MOHELA.

Tips For Borrowers

Here are a few tips for borrowers who are concerned about possible problems with their loan statements.

• Check Loan Status. Borrowers should check on the status of their loans on StudentAid.gov and the loan servicer’s website. These websites should also include information about the loan payment amount.
• Check Bank Statements. Borrowers who signed up for autopay should check their bank statements to make sure the correct amount has been transferred to the loan servicer. If the incorrect amount has been transferred, the borrower should demand an immediate refund and for the loan servicer to cover any late fees from bounced checks and any overdraft fees. 
• Check If Payments Match. Borrowers should compare their new loan payments with the loan payment amounts from before the pandemic. The loan payments should be the same unless the borrower is among the one-third of borrowers who are in an income-driven repayment plan. If the borrower is in an income-driven repayment plan, the payments may have increased or decreased, depending on whether the borrower’s income has increased or decreased. Borrowers who have switched into the SAVE repayment plan often qualify for a lower monthly loan payment. 
• Compare Payments with Calculator Results. Borrowers should compare their student loan payment with the payments calculated by StudentAid.gov’s Loan Simulator.
• Beware of student loan scams. Some scammers are taking advantage of the difficulties borrowers have had in reaching their loan servicers by offering to solve their problems, for a fee.

If there are problems, the borrowers should contact their loan servicer. They should use the secure email on the loan servicer’s website and print out a copy of their messages and the response. This will give them a written record of their communications with the loan servicer. It also prevents them from being placed on infinite hold when contacting the loan servicer’s call center. 

If a borrower is unable to reach the loan servicer or is not satisfied with the loan servicer’s response, they can contact the FSA Ombudsman at the U.S. Department of Education or file a complaint with the U.S. Department of Education’s feedback system at StudentAid.gov/feedback. 

Borrowers shouldn’t worry too much about their credit being ruined. Late payments on federal student loans aren’t reported to credit bureaus until they are 90 days late. Also, late payments will not be reported during the 12-month on-ramp after the restart of repayment. But, borrowers should plan on checking their credit reports for free on AnnualCreditReport.com in 2024, just to be sure that there are no errors.