Student Loan Nightmare: Millions See Payment Errors

The return to student loan repayment is not going smoothly. The Biden administration revealed massive billing problems this week that are even more widespread than previously known. And the Education Department is asserting its oversight by imposing a penalty on a key federal student loan servicer.

The billing problems are just the latest issue in a cascading series of problems borrowers have been facing after the student loan pause ended this summer.

Millions Of Student Loan Borrowers Experience Billing Issues

The Education Department announced on Monday that over two millions borrowers were not properly billed this month. October is the first official billing month after the three-year, Covid-era student loan pause ended in August, forcing over 30 million borrowers back into repayment simultaneously.

The department discovered that MOHELA, a key federal student loan servicer that also handles Public Service Loan Forgiveness — a popular student loan forgiveness program — “failed to meet its basic obligation by failing to send billing statements on time to 2.5 million borrowers,” according to a statement on Monday. Some borrowers received billing statements within only a few days of their official due date. Federal law requires that borrowers receive bills weeks before their due date. MOHELA’s actions resulted in at least 800,000 borrowers being delinquent on their student loans, according to the department.

The billing issues occurred as hundreds of thousands of other borrowers had their student loan payments miscalculated by MOHELA and other loan servicers earlier this month. “The Department also identified errors from loan servicers resulting in a small number of borrowers receiving incorrect payment amounts on their billing statements,” said the administration in its statement.

Biden Administration Will Penalize Student Loan Servicer For Errors

The Education Department indicated that as a result of the billing issues, “the Department is withholding $7.2 million in payment to MOHELA for October.” This effectively punishes the loan servicer for the billing irregularities.

“Our top priority is to support borrowers as they return to repayment and fix the broken student loan system, and we will not tolerate errors from loan servicers that cause confusion and unwarranted financial instability for borrowers and families,” said Federal Student Aid Chief Operating Officer Rich Cordray in a statement. “Through vigorous monitoring of borrower accounts, we were able to detect these mistakes and take swift action to remedy them. We are committed to making things right for borrowers and holding our contractors accountable for errors when they do occur.”

What Student Loan Borrowers Should Expect If They Experienced Billing Errors

Federal student loan borrowers who are returning to repayment following the conclusion of the student loan pause are now entering the “on-ramp” transition period. During this 12-month period, the Biden administration has indicated that borrowers will not be considered delinquent if they miss a payment, and will not go into default. However, missed payments will not count toward student loan forgiveness under key programs like PSLF and income-driven repayment.

The Education Department announced that it will establish an exception to this rule as a result of MOHELA’s errors, as it places borrowers into an administrative forbearance while the problems are sorted out. Payments are not due during a forbearance period.

“All borrowers affected by these errors will be placed in forbearance by their servicer until the issues are resolved and any months in forbearance will count as credit towards loan forgiveness through Public Service Loan Forgiveness or Income Driven Repayment,” said the department. “The latest actions will both ensure borrowers are held harmless by these servicer errors and that servicers are held accountable for their actions.”

The Biden administration warned loan servicers that additional errors may lead to further penalties. “The Department will continue to monitor servicer performance and ensure they are meeting their basic contractual obligations to the Department and to borrowers. If a servicer fails to meet these basic obligations, additional action may be warranted by the Department.”