MOHELA made borrowers delinquent. Now the student loan servicer is being penalized

The federal Education Department is penalizing one of the country’s largest student loan servicers for failing to send 2.5 million borrowers their billing statements on time.

The move against the Missouri Higher Education Loan Authority, or MOHELA, comes amid an unprecedented shift in federal student loans, with tens of millions of borrowers returning to repayment after a more than three-year hiatus during the pandemic. The process has been messy, with widespread reports of borrowers struggling to reach their servicer – which in many cases changed during the hiatus – or receiving misleading information.

Because of MOHELA’s delays in getting borrowers their billing statements, according to the department, more than 800,000 borrowers were delinquent on their loans. The servicer could not immediately be reached for comment.

Now, the Education Department will permanently withhold a $7.2 million October payment to MOHELA. The servicer is also being instructed to place all the borrowers affected by the lapses in forbearance pending a solution. The time those individuals spend in forbearance will count toward any relief they’ve signed up for through Public Service Loan Forgiveness or Income-Driven Repayment plans. Any interest that accrues will be adjusted to zero.

“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,” said Rich Cordray, the chief operating officer of Federal Student Aid, in a statement.

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Student loan borrowers whose debt was forgiven were billed

Other mistakes the department identified: Some borrowers received inaccurate billing amounts, while some who applied for forgiveness through a process called borrower defense were marked as back in repayment. Borrowers pursuing that forgiveness believe they were defrauded by their schools.

"MOHELA's failure has caused significant stress and financial harm for borrowers," said Eileen Connor, president and director of the Project on Predatory Student Lending. Her organization represents borrowers whose loans were forgiven because they were misled by their institutions, their colleges closed suddenly, or they were otherwise defrauded.

In April, the Supreme Court approved $6 billion in loan forgiveness for these 300,000 borrowers, but some of them were still hit with student loan bills, Connor's organization said.

“Our oversight efforts have uncovered errors from loan servicers that will not be tolerated,” said Education Secretary Miguel Cardona 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. We are committed to fixing our country’s broken student loan system, and that includes strengthening oversight and accountability and taking every step possible to improve outcomes for borrowers.”

Michelle Dimino, the deputy director of education for the nonpartisan think tank Third Way, said this is the first time the department has issued this kind of financial penalty for a servicer. And the decision to penalize by withholding a payment is a "complicated" one.

"It's certainly important for the department to be able to hold servicers accountable for providing good customer service and reliable information and billing to the borrowers in their portfolios," she said. "At the same time, I think at its core, this is a resource issue."

Dimino said she isn't surprised by the chaotic return to repayment given underfunding of the Federal Student Aid office by Congress. "It's kind of this unfortunate and challenging feedback loop that everyone's in. ... Withholding resources, to that extent, could be concerning to their ability to continue to maintain their staff."

In a series of papers released through the Student Borrower Protection Center earlier this month, student loan borrower advocates highlighted the hourslong wait times, which cause many borrowers to give up before they get help. Those who do manage to connect with a representative often leave with incorrect or conflicting information, according to the research. Paperwork sometimes gets lost or delayed too.

Student Borrower Protection Center Executive Director Mike Pierce in a statement Monday said the news "should mark the beginning of the end of MOHELA's place at the center of the student loan system.” He also stressed that the issues being addressed with this penalty "represent only some of the illegal servicing practices borrowers are facing in the return to repayment."

On Friday, the Wall Street Journal reported that the Consumer Financial Protection Bureau is leading a federal investigation into multiple student loan servicers over their alleged mishandling of repayments in the past couple of months. The probe, according to the Journal's reporting, will look into the companies' customer service delays and flawed − often automated − guidance.

A department spokesperson said officials are "still researching the details of these limited issues including all the servicers this may involve."

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Contact Alia Wong at (202) 507-2256 or awong@usatoday.com. Follow her on X at @aliaemily.

This article originally appeared on USA TODAY: MOHELA punished by Education Dept. for student loan servicing errors