A month into the restart of federal student loan payments, the U.S. Department of Education is punishing one of the nation’s largest student loan servicers for delayed billing notices.
The department announced on Monday it would be withholding $7.2 million in payment to the Missouri Higher Education Loan Authority (MOHELA), from the month of October for failing to meet its “basic obligation” by not sending billing statements on time to 2.5 million borrowers. The department had promised that borrowers will receive their monthly payment amount at least 30 days before the first payment is due.
As a result of the error, more than 800,000 borrowers were delinquent on their loans, the department said.
According to the department, MOHELA has been directed to place all impacted borrowers on forbearance until the issue is resolved. Those months in forbearance will count as credit toward loan forgiveness through the Public Service Loan Forgiveness program and income-driven repayment plans. The PSLF program allows those working for the government and certain nonprofits to have their remaining debt discharged after 10 years of payments and work in these fields.
In the meantime, the affected borrowers’ interest rates will be adjusted to zero as part of the administrative forbearance.
“These accountability measures will help ensure that future borrowers are not harmed and servicers understand that there are consequences to their actions when they do not meet the terms of their contracts,” Rich Cordray, the chief operating officer of Federal Student Aid, said in a statement.
The department also noted it has identified errors from loan servicers resulting in a “small number of borrowers receiving incorrect payment amounts on their billing statements,” and borrowers who have pending Borrower Defense claims incorrectly placed back in repayment status. Under federal Borrower Defense to Repayment rules, those who believe they were defrauded by their schools may file a claim seeking relief and potentially have their loans erased.
All borrowers affected by these errors will be placed in forbearance as well, according to Education Secretary Miguel Cardona.
“Our oversight efforts have uncovered errors from loan servicers that will not be tolerated,” he said in a statement. “The actions we’ve taken send a strong message to all student loan servicers that we will not allow borrowers to suffer the consequences of gross servicing failures.”
Earlier this month, the department said about 305,000 borrowers received billing statements with the incorrect amount. The mistakes affect about 1 percent of the 28 million borrowers starting to pay bills for the first time since the federal government put loan repayments on a pause in March 2020, when the COVID-19 pandemic hit America.
MOHELA didn’t immediately respond to a request for comments.
A non-profit corporation created by the state of Missouri, MOHELA drew national attention this summer as it became the center of one of the U.S. Supreme Court cases determining the fate of President Joe Biden’s $400 billion student loan cancellation plan. When former Missouri Attorney General Eric Schmitt went looking for a standing to bring the case, he relied on the state’s relationship with MOHELA, arguing that the president’s plan will hurt the company’s revenue.
The district court dismissed the case, saying MOHELA could have sued on its own. But the Supreme Court reversed that decision, finding that MOHELA is an “instrumentality” of Missouri, which gives the state legal standing.
“We have concluded that an instrumentality created by Missouri, governed by Missouri, and answerable to Missouri is indeed part of Missouri,” Chief Justice John Roberts wrote for the majority opinion that struck down the student debt relief plan.
“The [Education] secretary’s plan will cut MOHELA’s revenues, impairing its efforts to aid Missouri college students,” Mr. Roberts wrote. “This acknowledged harm to MOHELA in the performance of its public function is necessarily a direct injury to Missouri itself.”
In her dissenting opinion, Justice Elena Kagan argued that MOHELA isn’t an arm of the Missouri government, but a third-party entity that can represent itself in litigation.
“If MOHELA had brought this suit, we would have had to resolve it, however hot or divisive. But Missouri?” Kagan wrote. “In adjudicating Missouri’s claim, the majority reaches out to decide a matter it has no business deciding. It blows through a constitutional guardrail intended to keep courts acting like courts.”
