NEW YORK (Reuters) - New York state on Thursday sued one of the largest federal student loan servicers, whose practices the U.S. government singled out for criticism earlier this year, saying it abusively treated borrowers working in lower-paying public service jobs.
The lawsuit by state Attorney General Letitia James adds to a growing list of complaints by borrowers and regulators against the Pennsylvania Higher Education Assistance Agency, which operates as FedLoan and American Education Services.
James said FedLoan has “failed miserably” as the sole servicer since 2012 for the federal Public Service Loan Forgiveness program, which excuses borrowers who work in public service for 10 years from repaying their loans, provided they make some qualifying payments.
She said FedLoan has saddled borrowers with more debt for longer periods by being too slow to process applications, mishandling payments, steering borrowers toward less beneficial repayment options, and even failing to tell borrowers with cancer they could defer repayments.
Such abuses “have undermined the goals of the loan forgiveness program,” James said.
The lawsuit seeks restitution and damages for borrowers, and a $1 million fine for each day PHEAA broke the law.
PHEAA serviced $454 billion of student loan debt as of June 30, roughly 28% of the $1.61 trillion nationwide. (here)
A spokesman, Keith New, said James’ allegations had no merit, and PHEAA intended to vigorously defend itself.
He also said PHEAA has cooperated with many regulators to address borrower concerns, and James rebuffed its offers to meet after threatening to sue.
James accused PHEAA of fraud, and violating the federal Dodd-Frank finance law through its abusive practices.
Her lawsuit came two years after Massachusetts sued PHEAA for mistreating borrowers, and on the heels of litigation by borrowers themselves.
It also followed a report in February from the U.S. Department of Education’s inspector general which criticized that agency for not taking action against PHEAA and other servicers for their mistakes.
The report said that in calls with borrowers that department employees monitored in April and May 2017, PHEAA’s “fail” rates were 10.6% and 8.8%, higher than any other servicer and more than double the respective monthly averages.
In March 2018, the Education Department issued guidance that states should not be regulating federal student loan servicers.
PHEAA is a quasi-governmental agency created in 1963 by Pennsylvania’s general assembly.
In August, the U.S. Consumer Financial Protection Bureau named Robert Cameron, a former top PHEAA compliance official, as its private education loan ombudsman, or industry watchdog.
The case is New York v. Pennsylvania Higher Education Assistance Authority, U.S. District Court, Southern District of New York, No. 19-09155.
Reporting by Jonathan Stempel in New York; Additional reporting by Nate Raymond in Boston; Editing by Richard Chang