One of the nation’s largest student loan servicers plans to cut ties with the Education Department

WASHINGTON - Pennsylvania Higher Education Assistance, a state financial aid agency that manages student loans and grants for the Education Department, said Thursday that it will no longer handle federal loans after this year.

The decision arrives as the department overhauls the management of its $1.6 trillion student loan portfolio, a payment and collection system that liberal lawmakers and advocates say is poorly run.

Servicing companies like PHEAA, Navient and Nelnet have been accused of providing inaccurate information and flawed payment processing and mishandling paperwork. The contractors refute those charges and say servicing problems are rooted in the convoluted design of the payment system.

"In the 12 years since PHEAA accepted the terms of its federal servicing contract, the federal loan programs, as managed by the U.S. Department of Education, have grown increasingly complex and challenging while the cost to service those programs increased dramatically," Keith New, a spokesman for PHEAA, said in a statement.

New said PHEAA will not seek or accept another extension of its contract with the Education Department. The 10-year agreement initially expired in 2019 but was extended through December as the department works to reform its servicing platform.

New anticipates the decision will result in layoffs of some of the company's 2,250 employees, but could not provide an exact number as the transition process could minimize employee impact. The quasi-state agency, created in 1963 to administer Pennsylvania's financial aid programs, will focus on its core mission to serve the state and continue to service commercial loans.

Education Department and PHEAA are working toward a smooth transition for the 8.5 million borrowers whose loans are managed by the servicer. New anticipates the transition will extend into next year.

PHEAA, which also operates as FedLoan Servicing, began managing federal education debt in 2009 as the government phased out its role and that of other private companies in student lending. It has come under fire for its administration of Public Service Loan Forgiveness, a federal program in which borrowers must make 120 on-time monthly payments on their loans for 10 years to have the remaining balance canceled.

A 2017 Consumer Financial Protection Bureau investigation accused PHEAA of miscounting borrowers' qualified payments and giving them a hard time as they fought to have the error corrected. Borrowers complained of the servicer placing them in ineligible payment plans, a misstep that delayed their ability to obtain forgiveness.

New York and Massachusetts sued FedLoan for mismanaging the loan forgiveness program and blamed the Education Department for lax oversight. A 2019 Government Accountability Office audit said the department never provided a written instruction manual to FedLoan. Instead, the company has had to interpret guidance that was contradictory. Poor communication between FedLoan and other servicing companies about borrowers' accounts results in miscounting eligible payments, according to the audit.

The forgiveness program is not the only point of contention.

A group of teachers also sued PHEEA over its management of the Teacher Education Assistance for College and Higher Education Grant, a federal program that provides money to students willing to work in high-needs schools or teach high-needs subjects for four years. The educators claimed the servicer converted their grants to loans in error and refused to right the wrong.

Other teachers complained of having their grants converted as a result of paperwork snags, missed certification deadlines or receiving incorrect information from FedLoan. The Education Department assigned much of the blame to PHEAA's predecessor ACS, which ran the grant program until 2014. Still, the growing consumer complaints about PHEAA have sowed seeds of distrust among liberal lawmakers.

At a Senate Banking hearing in April, Sen. Elizabeth Warren (D-Mass) lit into PHEAA chief executive James Steeley, accusing his organization of widespread miscounting of payments in the public service program and insisting that the department should terminate its contract. Steeley denied the allegations.

On Thursday, Warren said PHEAA's decision to leave willingly is a win for borrowers.

“Millions of loan borrowers can breathe a sigh of relief today knowing that their loans will no longer be managed by PHEAA, an organization that has robbed untold numbers of public servants of debt relief and was recently caught lying to Congress about its atrocious record of fines and penalties,” Warren said.