Biden administration says it's penalizing three student-loan servicers over return to repayment

By Jillian Berman

The CFPB also released new evidence suggesting 450,000 borrowers were waiting for weeks to have paperwork processed

The Biden administration is withholding payment from three student-loan servicers amid new evidence of the challenges borrowers have faced following the resumption of payments after a more than a three-year freeze.

The Department of Education announced Friday it would withhold $2 million from Aidvantage, (MMS) $161,000 from EdFinancial and $13,000 from Nelnet (NNI), after finding that the three servicers failed to send timely billing statements to 758,000 borrowers. Aidvantage's role in the return to repayment was the subject of a recent MarketWatch story that cited challenges borrowers faced getting in touch with the company and receiving accurate payment information.

The penalties announced Friday follow the Department's announcement in October that it would withhold $7.2 million from MOHELA. Now, the Department is docking the pay of all four major student loan servicers over their handling of the return to repayment.

In addition to the penalties, the Biden administration also provided detail Friday about the challenges borrowers faced in the first month of repayment. The Consumer Financial Protection Bureau released a report describing long call wait times for borrowers phoning into their servicers, a relatively high rate of dropped calls and applications for affordable repayment plans that have been stalled for weeks.

The two announcements offer the latest evidence of the obstacles borrowers have faced successfully making payments in October, the first month bills were due after the pandemic-era pause. Logistical hurdles, like paperwork delays and struggling to connect with servicers, may be exacerbating financial challenges borrowers face repaying the loans. Roughly 40% of borrowers didn't make a payment in October, the Department said last month.

Both the Department and student-loan servicers have pointed to funding cuts as part of the reason why borrowers have struggled to get help with their loans. The Department pays servicers to manage the loan program on its behalf. Following a decision by Congress not to fulfill the Department's full funding request, servicers slashed staff and customer service hours.

Servicers have also said they've been asked to move 28 million borrowers into repayment at the same time the Department has launched other complex programs, a herculean task.

"It's a little challenging to be responding to issues that at the end of the day we warned about for months," said Scott Buchanan, the executive director of the Student Loan Servicer Alliance, a trade group. "I'm not excusing the issues, I'm saying that part of the challenge here is that structurally if you ask the system that's not designed to do resumption all at once to have that all happen and overlay that with last-minute decisions by the government ... you're going to have these sorts of issues crop up."

EdFinancial referred MarketWatch to the Department of Education for comment. Ben Kiser, a spokesperson for Nelnet, wrote in an email that 0.4% of Nelnet's customers had missing or late billing statements. "We do take seriously our responsibility to borrowers and regret any mistakes made during the extraordinary circumstances of return to repayment."

Eileen Rivera, a spokesperson for Maximus, Aidvantage's parent company, wrote in an email that the company takes all of its contractual obligations seriously.

"Our goal in service to the Department of Education and nearly nine million borrowers is to provide excellent service that respects and protects the rights of borrowers," she wrote. "Upon our identification of this issue, we took immediate action to rectify the error and prevent any risk of future occurrence."

But to borrower advocates the chaos of the first months of repayment were predictable. They've said for years that servicers often don't provide borrowers with enough or the right information to successfully manage their loans.

Mike Pierce the executive director of the Student Borrower Protection Center, an advocacy group, said the penalties and the CFPB's findings indicate that it was "a mistake" to rush to turn payments back on before borrowers who were promised forgiveness received it and before major fixes to the student loan system were implemented.

"Now the government is spending billions of dollars to make borrowers whole when these rogue companies screw up in a very predictable fashion," Pierce said, referring to the government's decision to place borrowers affected by servicing issues in a type of forbearance where interest doesn't accrue.

In a statement, Rohit Chopra, the CFPB's director, pointed to the broader harm that logistical hurdles to repaying loans successfully can create for borrowers. "If student-loan companies are cutting corners or sidestepping the law, this can pose serious risks to individuals and the economy," he said.

Most borrowers faced at least a 45 minute wait

The bureau found that in the last two weeks of October, borrowers waited an average of 73 minutes to speak to a representative at their servicer. Regardless of when they called, most borrowers faced a wait of at least 45 minutes, the CFPB said. One borrower waited 565 minutes, or more than nine hours, to speak with someone, according to the bureau's report. The long wait time meant that nearly 30% of calls were abandoned, the CFPB said.

Borrowers are also waiting for weeks to have their applications for an affordable-repayment plan approved, according to the CFPB. As part of a suite of protections to smooth the return to repayment, the Biden administration launched a new version of income-driven repayment, a program that allows borrowers to pay off their debt as a percentage of their income for decades and then have the remainder forgiven.

This new plan, called SAVE, is the most generous in history, but the CFPB report indicates paperwork backlogs at servicers may be delaying borrowers' ability to enroll. By the end of October, more than 450,000 applications for income-driven repayment were still pending with a borrower's servicer for more than 30 days.

As of the end of that month, more than 1.25 income-driven repayment applications were still pending, the bureau said. Across servicers, the average employee working on income-driven repayment applications had 1,335 outstanding, the bureau said.

In addition, borrowers entitled to have their student loans discharged because they've been scammed by their schools received billing statements, according to the CFPB.

The Biden administration has taken steps to protect borrowers from some of the worst consequences of not repaying their student loans. As part of an on-ramp, borrowers who default on their debt won't be reported to credit bureaus or to collections for a year following the start of the payment pause. In addition, Richard Cordray, the chief operating officer of Federal Student Aid, wrote to credit bureaus in December warning them against docking borrowers' scores over a missed payment.

The agency has also directed servicers to place borrowers affected by billing errors into an administrative forbearance - a pause where interest won't accrue and months count towards forgiveness under certain payment programs.

"We will not allow servicers to cause harm to borrowers as they resume making their monthly payments," Cordray said in a statement.

-Jillian Berman

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01-05-24 1257ET

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