The Department of Education is penalizing one of its student loan servicing contractors for failing to send billing statements on time to 2.5 million borrowers earlier this month when payments resumed after a more than three-year pause.
More than 800,000 federal student loan borrowers were late making their payment as a result of the mistake made by the servicer MOHELA (Missouri Higher Education Loan Authority), the Department of Education said Monday.
The department is withholding $7.2 million from MOHELA’s October payment and has directed the student loan servicer to place all affected borrowers in forbearance – a period during which payments are not required and interest is frozen – until the issue is resolved.
MOHELA is one of several student loan servicers that the Department of Education contracts with to collect federal student loan payments from borrowers. Since 2022, MOHELA has been tasked with handling student loan payments from borrowers who are seeking debt cancellation from the Public Service Loan Forgiveness program, which wipes away remaining student debt after qualifying public-sector workers make 120 monthly payments.
“The Biden-Harris Administration is looking out for borrowers at every step throughout their return to repayment. Our oversight efforts have uncovered errors from loan servicers that will not be tolerated,” said Education Secretary Miguel Cardona in a statement.
As of August, MOHELA serviced nearly 7.8 million student loan borrowers – about 5.3 million new accounts compared with 2020, according to a letter the company wrote to some Democratic lawmakers about the resumption of payments. Since then, many accounts were transferred to MOHELA because several companies ended their loan servicing contracts with the federal government.
Earlier this month, the Department of Education said that an estimated 350,000 borrowers whose loans are serviced by several different companies initially received bills with the wrong amount. These affected borrowers have also been placed in a forbearance until the problems are resolved, the department has said.
About 28 million federal student loan borrowers entered repayment in October for the first time since March 2020, when payments were paused because of the pandemic. Many have encountered long wait times when calling their servicer with questions about their payments.
Complicating matters further is the launch of a new income-driven plan called SAVE (Saving on a Valuable Education). The new repayment plan offers the most generous terms and will likely offer the smallest monthly payment for the lowest-income borrowers – but it went into effect this summer, and some borrowers who applied in August or September are still waiting for their applications to be processed.
Borrowers whose bill is correct but who miss a payment will not face the normal financial consequences, thanks to a temporary on-ramp period created by the Department of Education.
Until September 30, 2024, a borrower won’t be reported as being in default to the national credit rating agencies, which can damage a person’s credit score. But because interest will still accrue, borrowers aren’t off the hook entirely.