Education Department withholds $7.2M payment to loan servicer Mohela over errors

Dive Brief:

The U.S. Department of Education said Monday it will withhold a $7.2 million payment to one of its loan servicers, the Missouri Higher Education Loan Authority, as punishment for not sending some billing statements on time.
The contractor, known as Mohela, failed to deliver timely bill notices to 2.5 million borrowers, resulting in more than 800,000 of them becoming delinquent on their loans, the Education Department said. 
Agency officials ordered Mohela to place affected borrowers into forbearance until the administrative disruption is resolved. Mohela Executive Director and CEO Scott Giles did not respond to a request for comment Monday. 

Dive Insight:

The COVID-19 pandemic led the federal government to pause monthly student loan payments and interest accrual from March 13, 2020, until Sept. 1. Payments resumed in October. 

This three-year pause prompted concerns among borrowers and policymakers that the Education Department — and the servicers it works with to manage the federal $1.6 trillion portfolio — were ill-prepared to start collecting student loans again. The restart was further complicated by the Biden administration’s introduction of a new repayment program based on borrowers’ salaries and family size, a plan called Saving on a Valuable Education, or SAVE. 

Fears of a bumpy repayment rollout were well founded, as it has been plagued by administrative errors and long customer service wait times.

Top Education Department officials said Monday they want to hold loan servicers accountable for the mess. The department works with six servicers, including Mohela.

“Our top priority is to support borrowers as they return to repayment and fix the broken student loan system, and we will not tolerate errors from loan servicers that cause confusion and unwarranted financial instability for borrowers and families,” Richard Cordray, chief operating officer of the Office of Federal Student Aid, said in a statement. 

Borrowers that are delinquent on student loans normally would be reported to credit bureaus. However, the Education Department has instituted a grace period for borrowers restarting monthly payments. 

Through September 2024, the department won’t penalize borrowers that miss payments. However, interest will still accrue during the year, and the Education Department will push any missed payments into forbearance. 

Servicers may also bump up monthly payments to ensure the loan is paid off on time.

The Biden administration is working on other initiatives to relieve student debt burdens. It’s pursuing regulatory action on student loan forgiveness, which it began after the U.S. Supreme Court in June shot down the president’s mass loan cancellation effort. 

That program would have forgiven up to $20,000 in debt for borrowers earning less than $125,000 a year. Mohela was at the center of the lawsuit that successfully overturned the plan, as a collection of conservative states argued the loan forgiveness would have caused it to lose revenue.