Student-loan behemoth tightens its ties to Trump and DeVos
The company that rejected all but 1 percent of applicants for a popular federal student-loan forgiveness plan — and that manages nearly a third of the nation’s $1.6 trillion of student loan debt — is beefing up its already close ties to President Donald Trump and Education Secretary Betsy DeVos as it competes for a new contract.
The company, FedLoan Servicing, an arm of the Pennsylvania Higher Education Assistance Agency, has been at the center of the growing dispute over why tens of thousands of teachers, public-sector employees and nonprofit charity workers who expected to have their loans wiped out are being denied the benefit. The company has drawn the ire of government watchdogs, state attorneys general and congressional Democrats. And a trove of documents obtained by POLITICO show that Education Department officials, too, have raised serious questions about its performance over the years.
Nonetheless, as its $1.3 billion, 10-year contract expires in December, the loan servicing behemoth will be able to draw on unusually close ties to the administration as it seeks more government business — a fact that has its critics crying foul and citing it as a symbol of revolving-door abuses in the federal government.
“It’s been very clear from day one that Secretary DeVos is only interested in stacking the Department with industry lobbyists and offering a free pass to companies that are ripping off students and families all over this country,” said Massachusetts Attorney General Maura Healey, who has sued the company for allegedly mistreating student loan borrowers in the public-service forgiveness program and others.
FedLoan and its parent firm’s ties to Trump’s political organization and DeVos’ Education Department are significant.
A company now led by one of Trump’s most trusted supporters, David Urban, who oversaw his victorious campaign in Pennsylvania, has been its Washington lobbying firm since at least 1999, and Urban was personally listed as its lobbyist until last year, according to federal lobbying disclosure records.
Then, in April, amid growing public scrutiny of the loan-servicing company, PHEAA hired Kathleen Smith, a former top DeVos aide, as senior vice president and director of federal relations.
Perhaps one of the biggest developments for FedLoan’s parent company, though, was the Trump administration’s decision in mid-August to appoint Robert Cameron, a PHEAA executive, as the top student loan official at a federal agency that supervises and regulates the company.
Cameron previously oversaw PHEAA’s legal compliance and takes over an office at the Consumer Financial Protection Bureau that was sharply critical of how the Public Service Loan Forgiveness program was being executed. A 2017 report criticized loan servicers, including PHEAA, for bungling payments of borrowers who were supposed to be on track for loan forgiveness.
Cameron fills the vacancy left last year by the departure of Seth Frotman, who resigned in protest of what he said was the Trump administration's efforts to undermine the bureau's oversight of student loan companies.
“PHEAA spent a decade cheating students, borrowers and taxpayers and is now cozying up to the Trump administration to escape the consequences of its mismanagement and illegal practices,” Frotman told POLITICO. “This is corruption, plain and simple.”
On the campaign trail, where Democrats have criticized the failure of the loan-forgiveness program, the company’s close ties to the Trump administration have provoked scorn.
Sen. Elizabeth Warren (D-Mass.) blasted the company’s “utterly abysmal” track record of “failing student loan borrowers and mishandling” the loan forgiveness program. Warren said in a letter addressed to the Trump administration that it was “outrageous” to select a former company executive as a government watchdog for the industry.
“A former PHEAA executive’s appointment to the role represents the worst form of revolving door corruption and conflict of interest, and it epitomizes industry capture of our government,” Warren wrote, urging the administration to rescind the appointment.
PHEAA insists that, as a contractor, it takes its cues from the Education Department and federal rules.
“As a federal servicer, we are contractually required to service programs in compliance with federal rules and legislation,” said Keith New, a PHEAA spokesperson, in an email. “We lack the authority to change program rules without falling out of compliance with our contracts and jeopardizing earnings that are used to fund student aid programs” in Pennsylvania.
Nonetheless, PHEAA’s performance has come under sharp criticism by regulators and government watchdogs.
The Education Department’s inspector general earlier this year faulted the agency for not taking action against PHEAA, as well as other loan servicers, when they make errors. And a trove of internal Education Department reviews of PHEAA obtained by POLITICO also shows that the department, dating back to the Obama administration, has long had concerns with the performance of the company.
Education Department reviewers identified a range of deficiencies in how PHEAA calculated and counted borrowers’ progress in making 10 years of payments, which could mean borrowers end up paying more than needed before having their loans forgiven. In one memo, dated October 2017, department officials wrote that their review of PHEAA found it was “not currently counting payments correctly” for all borrowers in some circumstances.
The documents cited loan servicing problems in which borrowers who overpaid their monthly bill lost out on progress toward loan forgiveness. The department also found discrepancies that led to mathematically impossible payment counts for thousands of borrowers with consolidation loans.
The Education Department’s financial aid unit, which hires loan servicers like PHEAA to manage the payments of the roughly 45 million Americans who owe federal student loans, has long been a place where officials move between private industry and government. For instance, Mark LaVia, the career department official who oversees PHEAA and other student loan servicing companies, was a longtime PHEAA employee before he was hired during the Obama administration.
But the company’s ties to the Trump administration have grown stronger over the past several years, as has scrutiny over how it manages student loan payments. And the Trump administration has also actively taken steps to help the company.
The Justice Department last year urged a Massachusetts judge to block the state’s attorney general from pursuing a lawsuit against PHEAA — an effort that was unsuccessful. The suit by the Massachusetts attorney general alleges that PHEAA overcharged some borrowers and improperly counted monthly payments in a way that caused public servants to miss out on the loan forgiveness to which they were entitled.
Emails released by the department in response to a Freedom of Information Act lawsuit showed that attorneys for the company and the administration were in close contact about the case.
In addition to Massachusetts, two other states — Washington and Kentucky — have opened investigations into the company relating to its servicing of private student loans. Both state attorneys general are fighting with PHEAA in court over whether it must turn over records as part of the inquiries into allegedly unfair and deceptive business practices.
PHEAA’s current contract with the Education Department expires in December, though it could be extended. The company has separately bid on aspects of a new loan servicing platform, called NextGen, the Trump administration is in the process of developing.
Smith, the former top aide to DeVos, joined PHEAA in April. During her time at the Education Department, Smith was involved in developing the legal guidance that DeVos signed last year to declare companies like PHEAA off-limits to state regulators when they are collecting federal student loans — which was a top priority for the company. She also helped lead the office that manages PHEAA’s federal contract.
New, the PHEAA spokesperson, said Smith “was hired to provide strategic and policy input while also representing our agency in many different and complex facets of our business.”
Jeff Hauser, executive director of the Revolving Door Project, called Smith’s hiring a particularly “brazen” move. While many executive branch officials have left government for jobs in which they seek to influence their former colleagues or trade on their connections, he said, fewer have registered to lobby the agency they left just months earlier.
“It just blows my mind,” Hauser said. “It shows her confidence that there will be no repercussions. There’s obviously a breakdown in the ethics enforcement at the Education Department.”
Smith signed a lobbying disclosure form in July that outlines a wide range of lobbing activity involving the Trump administration. The disclosure lists lobbying of Education Department and CFPB on the “oversight issues surrounding” PHEAA — as well as the “implementation and administration” of its federal contract.
Yet Smith and the Education Department said in statements to POLITICO that she has not lobbied the agency since joining PHEAA earlier this year. The lobbying disclosure names both Smith and her predecessor at the company.
Under Trump’s 2017 ethics executive order, political appointees are, with some exceptions, not allowed to lobby their former agencies for five years after leaving the administration. “Like all appointees, Kathleen Smith signed the ethics pledge,” an Education Department official said in an email to POLITICO. “Because she is lobbying Congress and not lobbying us, she’s not in violation of the pledge.”
Smith said she had conversations with other entities besides the Education Department about federal student loan servicing contracts, but said she had “not lobbied the Department of Education since taking on my role at PHEAA on that or any other issue.”
“I am proud of the work I have done and more importantly how I have done that work — treating people with respect and dignity, working honestly and openly and in the best interest of students and families,” Smith said in the statement. “I have worked with and for people of all different ideological positions and policy priorities.”
American Continental Group, whose president, Urban, was Trump’s former Pennsylvania co-chairman, is PHEAA's longtime lobbying firm. Until last September, Urban was personally listed on federal disclosures last year as having lobbied Congress, the White House and Justice Department on behalf of PHEAA. During that time, the Justice Department sought to block the Massachusetts lawsuit brought against the company.
New, the PHEAA spokesperson, said that the organization has “a long relationship” with American Continental Group “that spans several administrations and relates to the complex and always changing parameters of student aid programs that are rooted in federal legislation.” Urban did not respond to a request for comment.
The Public Service Loan Forgiveness program, which PHEAA exclusively manages, was the brainchild of congressional Democrats, who wanted to create incentives for young people to pursue public-service jobs — like teachers, nurses and other public-sector and private charity workers — without being held back by student loan debt.
“This legislation will open up or help us take advantage of that idealism that is out there,” then-Sen. Ted Kennedy (D-Mass.) explained as the program was debated on the Senate floor in 2007. “We are giving them a pathway to making a difference in terms of the future of our country.”
Many conservatives objected to the program, citing its budgetary costs and the notion that the government would promote some types of careers over others. President George W. Bush also opposed the program, but he signed it into law as part of a broader bill negotiated between his administration and a Democratic-controlled Congress that also expanded student aid and Pell Grants.
The legislation promised loan forgiveness to public servants who made payments on their debt for 10 years. But it would take the first group of borrowers nearing eligibility for that loan forgiveness at the beginning of 2017 for the problems with the program to become widely known.
The law outlined a complicated set of criteria for when borrowers could obtain loan forgiveness: Borrowers must be in the correct repayment plan, must have a certain type of federal loan and must work for an eligible public-service employer, for instance.
The most recent set of federal data, from April, revealed that 75,138 out of 76,002 applicants had been rejected for public-service loan forgiveness.
Trump administration officials, including DeVos, have said they are faithfully carrying out the Public Service Loan Forgiveness law as it was passed by Congress even as they seek to eliminate it. The administration blames the high denial rate for the program on the complex requirements in the law.
“Congress set up a program that's hard to qualify for,” DeVos told the House education committee in April. “We are continuing to address every application — and for those who do qualify, we are proceeding with their loan forgiveness.”
DeVos testified that the administration wants to phase out the program “because we don’t think that one type of a job, one type of role, should be incentivized over another.” She cited the example of a nurse working at a nonprofit hospital, who would be eligible for loan forgiveness, as opposed to a nurse employed by a for-profit hospital, who would not.
But the program also has significant bipartisan support on Capitol Hill. Even a Republican-controlled Congress in the first two years of the Trump administration rejected efforts by some conservatives and the White House to eliminate the program.
In response to questions for this story, the Education Department provided a statement from Mark Brown, whom DeVos appointed earlier this year to lead the office that oversees loan servicing companies.
The companies should “efficiently and promptly serve” student loan borrowers, Brown said in the statement. He said he sent letters to all of the companies earlier this year and “followed up these letters and traveled to meet in-person with the servicers including PHEAA.”
PHEAA was “not meeting” the Trump administration’s expectations for performance, Brown wrote in his April letter to the company, which was obtained by POLITICO. He cited increasing call wait times, among other problems, that "resulted in borrowers being unable to have their concerns or questions resolved in a timely manner.”
“This level of performance is wholly unacceptable,” Brown wrote to PHEAA. His letter did not note any specific problems with the Public Service Loan Forgiveness program.
Democrats have been strong proponents of the loan forgiveness program, which benefits key constituenicies for the party: public-sector workers and teachers, among others. One of the nation’s largest teachers unions, the American Federation of Teachers, earlier this year filed a class-action lawsuit against DeVos over what it says were improperly rejected applications of teachers seeking public-service loan forgiveness.
More recently, the problems with the program have also made it onto the 2020 campaign trail.
Even as progressive candidates like Sen. Bernie Sanders (I-Vt.) and Warren propose sweeping debt cancellation plans for all borrowers, nearly every Democrat running for president has called for keeping Public Service Loan Forgiveness or even expanding it.
During a Democratic presidential primary debate in July, South Bend, Ind., Mayor Pete Buttigieg pitched the program as a fairer and more realistic alternative to the one-time massive debt cancellations sought by more progressive candidates.
“For those of us who do have a lot of debt, we can make it more affordable,” he said. “And we can expand a Public Service Loan Forgiveness program, which is an excellent program that is almost impossible to actually get access to right now.”
Sen. Amy Klobuchar (D-Minn.) similarly called for bolstering the existing program rather than adopting more sweeping free college plans. “I would make sure that we improve those student loan repayment programs for our teachers and expand them,” she said, calling for loan forgiveness “over five, 10 years” for borrowers who “go into occupations where we don't have enough workers.”
And former Rep. Beto O’Rourke of Texas has also pitched expanding the program during campaign appearances, framing the program as a way to solve shortages in public-service jobs like nurses.
A handful of 2020 contenders have also signed onto legislation led by Sen. Kirsten Gillibrand (D-N.Y.) to make the benefits of the program more generous to borrowers: Warren, Sanders, Klobuchar, Kamala Harris (D-Calif.) and Cory Booker (D-N.J.). Former Vice President Joe Biden has called on fixing the bureaucratic problems with the program.
Congressional Democrats negotiated hundreds of millions of dollars in the past two government funding bills that were meant to provide a “fix” to the high rate of denials for borrowers. That new program, however, has similarly been plagued by widespread rejections — and has led to loan forgiveness for few borrowers.
The new, temporary program was designed for borrowers who thought they were on track to receive loan forgiveness but were enrolled in the wrong repayment plan. But that program itself is also a complicated maze of requirements that most borrowers who apply for it are not meeting.
A Government Accountability Office report last week criticized the Education Department for failing to create a “borrower-friendly” process to accept applications. The GAO analysis found that only 661 of the 54,184 applications reviewed by the department have been approved — which, like the original program, means it has a 1 percent acceptance rate.
