Department of Education, DeVos, PHEAA Face Class Action Over Alleged Student Loan Mismanagement

A proposed class action filed in Pennsylvania federal court this week claims the agencies entrusted with helping students manage and eliminate their student loan debt haven’t exactly upheld their end of the bargain.

According to the 107-page complaint, the Pennsylvania Higher Education Assistance Agency (PHEAA), a student loan servicer tasked with managing federal loan assistance and forgiveness programs, has put the interests of its 7.5 million student loan borrowers on the back burner. Instead of helping borrowers put their debt behind them, the agency, the suit says, has intentionally worked to extend the length of borrowers’ loans in order to boost its own revenue through added interest and fees.

Also named in the lawsuit are the U.S. Department of Education and Secretary of Education Elisabeth DeVos, who the case says failed to properly oversee PHEAA’s servicing responsibilities and looked the other way despite being fully aware that the agency was not acting in students’ best interests.

PHEAA Extended Student Loans, Suit Says

According to the lawsuit, PHEAA attempted to keep student loans active “for as long as possible” in order to continue collecting interest and monthly servicing fees. If a student loan borrower finished paying off a loan or had the debt forgiven, PHEAA would no longer be compensated for that account, the suit points out. Therefore, the lawsuit argues, helping borrowers pay off their loans “directly conflicts” with PHEAA’s own financial interests.

Although PHEAA was tasked with managing several federal programs designed to assist borrowers with their loan payments and provide opportunities for debt forgiveness, the case alleges the agency mismanaged these programs in order to maximize profits.

More specifically, the lawsuit claims the agency failed to properly complete or delayed processing paperwork for the Teacher Education Assistance for College and Higher Education (TEACH) grant program, the Public Service Loan Forgiveness (PSLF) program, and income-driven repayment (IDR) plans in order to thwart borrowers’ ability to close out their accounts.

According to the case, PHEAA’s alleged processing errors caused borrowers to have to pay more in the form of added interest, processing fees, grants that were converted into loans, and additional payments that otherwise would have been forgiven.

Let’s break it down by program.

TEACH Grant Program

According to the complaint, the TEACH program awards grants of up to $4,000 per year to cover education costs for students who agree to teach in “high-need fields”—such as bilingual education, foreign language, math, reading, science, and special education—in schools located in low-income areas for at least four school years during the eight years after their education is completed. As part of the agreement, the case explains, grant recipients must submit certification of their employment at the end of each year of service. If they fail to complete the service obligation, the TEACH grant can reportedly be converted into a federal direct unsubsidized loan that must be paid back with interest.

The lawsuit argues that the Department of Education converted a “remarkable” number of TEACH grants into loans, mostly due to students’ difficulties submitting annual certification paperwork. PHEAA, for its part, allegedly failed to inform or remind students of their annual certification requirements, the case claims, and converted some grants into loans based on “hyper-technical” errors on certification forms.

As a result, grant recipients, through no fault of their own, were forced to pay back the amounts they were awarded, plus interest, the lawsuit argues.

PSLF Program

PHEAA was also designated as the sole administrator of the Public Service Loan Forgiveness (PSLF) program, the lawsuit explains, through which eligible public service workers may be granted loan forgiveness after making 120 qualifying payments.

According to the case, PHEAA approved a mere 1.2 percent of the 102,051 PSLF applications that were submitted as of June 2019. The lawsuit argues that the drastic disapproval rate was caused in part by the defendants’ failures to properly inform applicants of the program’s requirements, accurately calculate their number of qualifying payments, and correctly process applications. In fact, 15 percent of PSLF applications were denied because the applicants did not even have the correct type of loan, the case says.

Income-Driven Repayment Plans

Income-driven repayment (IDR) plans, such as the Income-Contingent Repayment, Income-Based Repayment, Pay-As-You-Earn (PAYE), and Revised Pay-As-You-Earn (REPAYE) plans, were set up to allow borrowers experiencing financial hardship to afford their monthly loan payments, which are determined based on their income. Several of the plans allow for the rest of the borrower’s balance to be forgiven after he or she makes a certain number of qualifying payments under the plan, the case states.

According to the lawsuit, PHEAA dragged its feet when processing initial IDR applications and therefore delayed borrowers’ loan forgiveness by pushing back the date when their qualifying payments could begin.

Further, the defendants allegedly failed to properly notify enrollees in IRD plans of their annual deadline for recertifying their eligibility, which the case says caused many borrowers to be pushed out of a plan they could afford.

PHEAA Steered Borrowers Toward Forbearance, Case Says

The lawsuit further argues that PHEAA, despite representing itself as an “advisor,” improperly steered borrowers into forbearance when they would have been eligible for an IDR plan or another program that could have helped them afford their loan payments. When a loan is in forbearance, the case states, borrowers cannot make qualifying payments toward loan forgiveness, and interest and fees continue to accrue on the loan.

Thus, the suit argues, it is in PHEAA’s best interests for a loan to remain in forbearance or deferment status because the agency can still profit off the account, and the borrower will likely take longer to pay it off.

Lawsuit Claims PHEAA’s Strategy Was ‘Hugely Successful’

According to the complaint, PHEAA’s revenue has continued to increase every year as a result of its alleged scheme and at the expense of those the agency was supposed to serve. From the complaint:

As a result, Plaintiffs and the Class have either: lost out on months or years of qualifying loan payments that would have brought them closer to loan forgiveness under the PSLF, TEACH, and IDR programs; incurred thousands of dollars in additional student debt when their TEACH Grants were converted into loans; been overcharged; or otherwise disadvantaged when they were unable to utilize federal programs designed to make their education more affordable.”

How Do the DOE and Secretary DeVos Fit into This?

The Department of Education and its secretary are responsible for overseeing the country’s federal education programs and contract with third-party student loan servicers, including PHEAA, to manage federal student aid.

According to the lawsuit, the Department “maintains ultimate responsibility” for PHEAA’s actions and, as part of its contract with the agency, must provide “clear, sufficient and consistent guidance” for managing student loans.

The lawsuit argues, however, that the DOE and Secretary DeVos were well-aware of PHEAA’s failures yet failed to impose penalties on the agency and hold it accountable for its “widespread and pervasive instances of non-compliance.”

Who’s Covered by the Lawsuit?

The case is looking to cover three groups of people:

How Do I Sign Up?

Typically, you don’t need to do anything to join a class action lawsuit. If the case settles and you’re covered by it, you should receive notification (usually by mail) with instructions on what to do next. 

Keep in mind that it often takes months or years for a lawsuit to reach resolution, so in the meantime, sit tight and check back for updates.