Student Loan Servicing Under Scrutiny as Widespread Problems Continue

Millions of federal student loan borrowers returned to repayment in October 2023 following the end of the Covid-era forbearance, which had been in effect since March 2020. The transition back to normal billing has not been going well.

Facing the unprecedented simultaneous return to repayment of more than 30 million borrowers, coupled with the implementation of new Biden administration student loan relief initiatives such as the new Saving on a Valuable Education (SAVE) plan, loan servicers are understaffed, overwhelmed and making mistakes. 

Borrowers have been reporting extremely long call hold times, miscalculated student loan payments (particularly for IDR plans like SAVE) and untimely or erroneous billing statements. 

Both the Biden administration and some members of Congress have been stepping up efforts to address these loan servicing issues. However, the problems are persisting. Here’s the latest. 

Student loan borrowers put into administrative forbearances

Last month, the Biden administration instructed loan servicers to place millions of borrowers into administrative forbearance to address problems related to miscalculated payments and erroneous billing. The administration also levied a financial penalty on MOHELA, one of four major loan servicers contracted with the Education Department. 

During the administrative forbearance — which should last from October 2023 to either December 2023 or January 2024 for impacted borrowers — no payments will be due. 

Student loan forgiveness credit

The administration also ordered loan servicers to waive interest during that period and to treat the months as qualifying months for student loan forgiveness under the income-driven repayment (IDR) and Public Service Loan Forgiveness (PSLF) programs. Borrowers who made payments during the forbearance period can potentially get a refund by contacting their servicer.

However, loan servicers are also placing borrowers into lengthy administrative forbearances for routine processing requests, such as applying for an IDR plan. Neither the Education Department nor loan servicers have been consistently clear in communicating to borrowers which forbearance periods qualify for an interest waiver or student loan forgiveness credit and which don’t.

Related: Does Forbearance Count Toward PSLF? Yes, Here’s How to Maximize It

Senators call on the Education Department to take action

Earlier this month, four U.S. Senators – Elizabeth Warren (D-MA), Bernie Sanders (D-VT), Richard Blumenthal (D-CT), and Chris Van Hollen (D-MD) – sent a letter to Secretary of Education Miguel Cardona raising concerns about widespread student loan servicing problems.

 “The chaotic resumption of federal student loan payments has raised questions about the extent of errors and the measures being taken by the Department to address these concerns and provide assistance to affected borrowers,” wrote the senators. They called on the Education Department to:

• Audit student loan borrower accounts for missed payments and loan servicing errors.
• Review administrative forbearances and determine whether interest has been waived and whether borrowers have received appropriate credit toward student loan forgiveness.
• Provide details on measures the department is implementing to “prevent borrowers from incurring penalties due to servicer errors and the process for issuing refunds for borrowers who overpay.”

At least one loan servicer — Aidvantage — now includes a message on its main landing website page that borrowers who made payments on their student loans during an administrative forbearance can request a refund. 

Education Department raises concerns about student loan credit reporting

In addition to issues related to student loan billing and payment calculation errors, student loan borrower advocates and Biden administration officials are also raising concerns about negative credit reporting.

When the student loan pause ended, borrowers entered a 12-month “on-ramp” transitionary period, during which the administration promised that borrowers would not be penalized for missing payments. 

“To help borrowers successfully return to repayment, we created a temporary on-ramp period through Sept. 30, 2024. This prevents the worst consequences of missed, late, or partial payments, including negative credit reporting for delinquent payments for twelve months,” says Education Department on-ramp guidance.

Borrowers could still face negative credit consequences

However, there is rising concern that borrowers who miss payments could still experience adverse credit consequences. Even if the Education Department does not report the account as delinquent to national credit bureaus, credit scores could still take a hit due to interest accrual or lack of an on-time payment. 

This week, Federal Student Aid Chief Operating Officer Richard Cordray sent a letter to credit reporting agencies urging them not to ding student loan borrowers’ credit reports due to missed payments.

“I strongly urge you to abstain from making negative assumptions about missed student loan payments, including based on periods of forbearance and the corresponding tradeline information, in your credit scoring models.” 

Federal Student Aid Chief Operating Officer Richard Cordray

Citing widespread student loan servicing errors related to payments and billing, he asked the credit agencies to hold borrowers harmless while the errors are corrected. “As a result of these servicer errors, a borrower’s lack of payment does not necessarily reflect their ability or intention to repay their loan.”

Related: What Happens if You Don’t Make Your Student Loan Payments This Fall?

Congressional Democrats propose Student Loan Borrower Bill of Rights

Meanwhile, Senate Democrats have reintroduced a bill to establish a national “Student Loan Borrower Bill of Rights.” 

The bill, modeled on state-level bills that have become law during the last several years, “creates consistent servicing and disclosure standards across private and federal student loans and allows the Secretary of Education to adjust those standards for federal servicers through regulation to benefit federal student loan borrowers,” according to a statement. 

The bill would also limit late fees and negative credit reporting, and create specialized units tasked with helping borrowers avoid default.

“Student loan debt is a crushing weight on the backs of American students and families, and repaying student loans can be a difficult and confusing process.  The Student Loan Borrower Bill of Rights Act sets out basic rights that I believe all student borrowers are entitled to, and that can protect them from falling behind in payments,” said Sen. Richard Durbin (D-IL), one of the lead cosponsors, in a press release earlier this month.

Even if the bill passes the Senate — which is no sure thing, given that Democrats hold only a slim majority — it would likely fail in the Republican-controlled House.