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Student loan servicer censured over 'what appears to be false' congressional testimony

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Senators Elizabeth Warren (D-MA) and John Kennedy (R-LA) sent a letter to a key student loan servicer CEO over "what appear to be false and misleading" statements during a congressional testimony on April 13, Yahoo Finance has learned.

“We write to seek information on what appears to be false and misleading testimony that you provided at a hearing before the Committee on Banking, Housing, and Urban Affairs’ Subcommittee on Economic Policy on April 13, 2021," they wrote. 

Warren, the chair of the committee, and Kennedy, a ranking member, sent the letter to Pennsylvania Higher Education Assistance Agency (PHEAA) CEO James Steeley on Wednesday evening.

"This is a serious matter," the senators stressed. "Our hearing was held in part to understand the role of student loan servicers and the extent to which they bear responsibility for the myriad failures of the student loan program. But it appears that you have failed to provide accurate information about your company, undermining the Subcommittee's fact-finding role and potentially misleading committee members and the public."

Warren and Kennedy are asking Steeley to respond to their letter by July 7 and are planning a follow-up hearing on the matter.

PHEAA CEO James Steeley. (screenshot/PHEAA Facebook)
PHEAA CEO James Steeley. (screenshot/PHEAA Facebook)

PHEAA administers the Public Service Loan Forgiveness (PSLF) program, which operates as FedLoan Servicing. During the April testimony, Steeley stated that he didn't believe the Department of Education (ED) had penalized or fined the company regarding its servicing.

The senators pointed to a letter from ED's Federal Student Aid from May 10, which stated that since 2016, the federal government had in fact found nine issues with how PHEAA managed the PSLF program, issued four corrective action plans, and two big fines.

"This new information provided .. by the Education Department reveals that nine Department reviews conducted since 2016 revealed problems with PHEAA's implementation of the program," resulting in multiple fines and corrective action plans, the senators stated.

They added that if the testimony was false "knowingly and willfully," then that subjected him to fines and criminal charges. The letter added that there will also be a follow-up hearing on that matter.

"PHEAA respects the Senate subcommittee’s interest in ensuring the presentation of truthful and accurate testimony but categorically denies that the testimony offered by PHEAA’s CEO was anything other than a truthful and good-faith effort to answer the multi-part questions posed by Senator Warren at the April 13 hearing," a PHEAA spokesperson told Yahoo Finance in a statement. "PHEAA will respond to the letter appropriately but will not engage in further public debate through the media."

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PSLF has a dismal rate of approval

Designed by Congress to help public servants — from teachers to firefighters — the PSLF program has been a major problem the federal government has been grappling with for years.

The PSLF program enables government and non-profit employees with federally-backed student loans to apply for forgiveness after proof of 120 monthly payments under a qualifying repayment plan.

The denial rates for the PSLF program have been steep: Recent data revealed that out of more than 390,000 PSLF forms submitted between November 2020 and April this year, only 3,458 met the requirements for PSLF. 

The data also revealed that only around 5,500 have had their loans discharged via PSLF, as of April 30.

Even though more than 175,000 active-duty service members with federal loans are eligible for PSLF, only 124 members had their applications approved, a recent report found.

SAN FRANCISCO, CALIFORNIA - APRIL 09: Bryant Elementary School kindergarten teacher Chris Johnson sets up his classroom on April 09, 2021 in San Francisco, California. The San Francisco Unified School District is preparing to gradually return students back to classrooms next week. (Photo by Justin Sullivan/Getty Images)
Bryant Elementary School kindergarten teacher Chris Johnson sets up his classroom on April 09, 2021 in San Francisco, California. (Photo by Justin Sullivan/Getty Images)

'Inexplicable' contradiction

During the April hearing, Warren asked PHEAA's Steeley to confirm the fact that based on audits by ED since 2016, PHEAA's automated system created "errors" and "mistakenly disqualifie[d] payments."

"I do not believe that that is correct," Steeley responded, adding that he wasn't familiar with the audits.

Warren later pressed Steeley again, asking if ED had "terminated your contract or penalized your company in any way for its errors and mismanagement" of the PSLF program.

Steeley responded: "No, they have not."

Based on a letter from ED's Federal Student Aid's Richard Cordray, who heads the student loan program, between February 2016 and March 2021, PHEAA had indeed been fined and/or told to correct its behavior by the federal government.

As the CEO of the company, the letter from the senators added, it is "inexplicable that you were not aware of this series of ... findings."

Senator Elizabeth Warren (D-MA) speaks during a Senate Finance Committee hearing on the IRS budget request on Capitol Hill in Washington,DC on June 8, 2021. (Photo by EVELYN HOCKSTEIN / POOL / AFP) (Photo by EVELYN HOCKSTEIN/POOL/AFP via Getty Images)
Senator Elizabeth Warren (D-MA) speaks during a Senate Finance Committee hearing on the IRS budget request on Capitol Hill in Washington,DC on June 8, 2021. (Photo by EVELYN HOCKSTEIN / POOL / AFP)

Cordray's letter to the senators, which was obtained by Yahoo Finance, found: 

  • ED said between February and April 2016, ED found that PHEAA had made errors in counting payments of 28%. The errors were reduced to 3% in October 2016, after PHEAA implemented ED's recommendations, and the company automated payment counts.

  • In 2017, ED said it found problems with how PHEAA did employment certifications and again, counting qualifying payments. Both reviews found issues with how it handed consolidation loans, and found incorrect valuations for loan accounts where the borrower paid more than what was required. The government told PHEAA to correct the accounts.

  • In 2020, again, ED conducted three reviews, on TEPSLF and PSLF. On TEPSLF, it found issues regarding denials, resulting in the government asking PHEAA to correct its errors and "requiring FedLoan to repay $108,000 to the Department in June 2020." 

  • On PSLF, ED found that there was a 20% error rate when it came to CARES Act denials (i.e. during this period, the government made PSLF payments on the borrowers' behalf). ED told PHEAA to fix this matter. 

  • In September 2020, ED started looking into how PHEAA was handling qualifying payments for consolidation loans.

  • In October 2020, ED fined PHEAA $136,000 and asked the company to fix its errors for "failure to properly apply automatic forbearance for income-driven repayment ... applications, affecting over 65,000 borrowers." 

  • In March 2021, ED found a 20% error rate in how PHEAA handled military PSLF applications.

  • Finally, ED also revealed that it is looking at drafting new corrective action plans to address recent issues, such as the CARES Act and PSLF denials.

Consumer Financial Protection Bureau Director Richard Cordray testifies before House Financial Services Oversight and Investigations Subcommittee hearing on
Former Consumer Financial Protection Bureau Director Richard Cordray testifies before House Financial Services Oversight and Investigations Subcommittee hearing in Washington, July 30, 2014. REUTERS/Yuri Gripas

'They’re making buckets of money'

Some lawmakers and advocates have long blamed servicers for poor implementation.

"Rampant breakdowns across the student loan market harm every type of borrower, with every type of loan, at every stage of repayment," former Consumer Financial Protection Bureau (CFPB) official Seth Frotman said in a testimony in Congress in September 2019. "Lost paperwork, mishandled payments, deceptive disclosures, and the routine denial of borrowers’ repayment rights all add up to billions of dollars in additional debt for millions of borrowers."

In an interview with Yahoo Finance in April, Warren said: "We’ve got these middlemen, these student loan debt servicers that were with us today, who can’t seem to keep straight."

Warren has also called on ED to stop working with Navient and PHEAA.

"These student loan debt servicers, they’re making buckets of money to help their bottom line but not to help the students who are really in trouble trying to repay their loans," she said.

Aarthi is a reporter for Yahoo Finance. She can be reached at aarthi@yahoofinance.com. Follow her on Twitter @aarthiswami.

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