Massachusetts accuses PHEAA of unfair student loan servicing practices

By Nate Raymond
FILE PHOTO: Massachusetts Attorney General Maura Healey answers a question during an interview with Reuters at her office in Boston, Massachusetts, U.S., July 26, 2017. REUTERS/Brian Snyder

By Nate Raymond

BOSTON (Reuters) - Massachusetts' attorney general on Wednesday sued one of the largest federal student loan servicers in the United States, accusing it of undermining a program that forgives borrowers' debts if they work in public service for 10 years.

Massachusetts Attorney General Maura Healey filed the lawsuit against Pennsylvania Higher Education Assistance Agency, which manages over a fourth of the nation's $1.4 trillion student loan debt on behalf of various lenders.

The complaint, filed in Suffolk County Superior Court, claimed PHEAA caused teachers and other public servants to lose benefits and financial assistance under two federal programs.

"This company's actions have jeopardized the financial futures of teachers and public servants across the country," Healey said in a statement.

PHEAA, which does business as FedLoan Servicing, in a statement said it disagrees with the allegations but will work with the U.S. Department of Education to resolve any issues Healey has identified.

"We remain committed to working with the Massachusetts Attorney General's Office to assist all borrowers located in Massachusetts," PHEAA said.

The lawsuit follows a report by the U.S. Consumer Financial Protection Bureau in June that spotlighted borrower complaints about student loan servicers mishandling the debt-forgiveness program, Public Service Loan Forgiveness.

The program allows for loans of borrowers working for government, non-profits or the military to be wiped out after 10 years of consistent payments. It started in 2007, making this the first year of forgiveness for many loans.

The U.S. Department of Education in 2012 picked PHEAA to manage that program and the Teacher Education Assistance for College and Higher Education Grant program, which provides grants to borrowers pursuing careers at teachers in low-income schools for at least four years.

According to Healey's lawsuit, PHEAA has prevented borrowers from making qualifying monthly payments that count toward loan forgiveness and also overcharged students.

She claimed PHEAA has failed to fix these servicing failures despite knowing of the problems.

The lawsuit seeks restitution to borrowers, penalties and an injunction.

The Education Department, led by Secretary Betsy DeVos, announced on Aug. 1 its intention to change student-loan servicing in May and to award a contract to one company for a user platform and a standardized process for handling consumer calls.

That would mean abandoning the current system of having four companies, including PHEAA, service outstanding loans.

(Reporting by Nate Raymond in Boston; Editing by Dan Grebler)