Student-loan companies gave public servants inaccurate information about Public Service Loan Forgiveness, delaying or preventing them from having their student loans forgiven.
That’s one conclusion of a report released this week by the Consumer Financial Protection Bureau.
The watchdog agency found that student-loan servicers, the companies the government contracted to manage the repayment process, left public servants with the impression their loans didn’t qualify for Public Service Loan Forgiveness, even though borrowers could take steps to become eligible.
The CFPB’s report comes as the Biden administration is facing pressure to fix the challenges plaguing the PSLF program. Advocates called on the Department of Education to forgive the debt of public servants who have been repaying their loans for at least 10 years. Members of the military are, for example, just one group that’s struggled to access PSLF.
Seth Frotman, the executive director of the Student Borrower Protection Center, an advocacy group, said the agency’s findings mirror what public servants have been saying for years: That their progress towards forgiveness has been slowed or even stymied by misinformation from student-loan companies.
“Clearly, there is a whole generation of student-loan borrowers who gave back to their communities for a decade or more only to find themselves ripped off by the student-loan industry,” said Frotman, who served as the CFPB’s student loan ombudsman.
Latest indication of challenges for the Public Service Loan Forgiveness program
The report is the latest indication of the challenges plaguing PSLF, a program signed into law in 2007, which allows government workers and certain nonprofit employees to have their federal student loans discharged after 120 monthly payments.
A small share of applicants who have applied for relief — and likely an even smaller share of the overall population of public servants who have been paying their loans for at least 10 years — have actually had their debt discharged through the program.
That’s in part because even though the promise of PSLF seems relatively straightforward, its requirements are complex. Advocates have said for years that servicer misinformation is exacerbating the challenges borrowers face navigating the program — a claim the CFPB report echoes.
Even though the promise of Public Service Loan Forgiveness seems relatively straightforward, its requirements are complex.
To be eligible for relief under PSLF, borrowers need to be working in the right type of job — government and nonprofit work qualify — have the right type of repayment plan; make at least 120 on-time, monthly payments and have the right type of federal student loan.
Public Servants with Federal Family Education Loans — the type of debt that made up the bulk of federal student loans before 2010 — aren’t eligible for PSLF. But they can consolidate their debt into Direct Loans to qualify. In calls with FFEL loan borrowers, servicers made it seem as if these borrowers “had no potential course of action to become eligible for PSLF,” the CFPB found.
In addition, servicers instructed borrowers with FFEL loans to seek a determination on whether they were working in a qualified job before consolidating their debt into a Direct Loan. That’s even though borrowers who request to have their employment certified, but don’t have the right type of loan, will have the form rejected.
The misinformation may have caused public servants to make payments on an ineligible student loan while they waited for a determination — sure to be a rejection — on whether their employer qualified for the program, the CFPB found.
That could have delayed eligible public servants’ access to relief. Indeed, recent data on PSLF indicates that the consolidation issue may be holding borrowers back from having their loans discharged.
Consolidation issue holding PSLF borrowers back
Almost all of the applications for Public Service Loan Forgiveness processed by the Department of Education between November and April came from borrowers with the right type of loan and the right type of job to qualify for relief, according to government data released in June.
Roughly 82% of those borrowers have made less than 120 payments on their loans. Of that 82%, about half consolidated their loans and so didn’t get credit towards the 120 months for working in public service and paying down their loans prior to consolidation.
Scott Buchanan, the executive director of the Student Loan Servicing Alliance, a trade group, said that the PSLF’s myriad requirements — in particular that it treats two types of federal student loans differently — can put servicers in a tough position as they try to provide counsel to borrowers.
“It’s very challenging when Congress intentionally creates these barriers,” Buchanan said. “This was not by accident, this was by Congressional design to reduce the cost of the program when they passed it into law.”
When a borrower consolidates their loan they may lose out on a lower interest rate and any payments made towards forgiveness under other student-loan repayment plans.
— Scott Buchanan, the executive director of the Student Loan Servicing Alliance
In some cases, Buchanan added, it may not make sense for a borrower interested in PSLF to consolidate their debt until they’re sure their employer is eligible. When a borrower consolidates their loan they may lose out on a lower interest rate and any payments made towards forgiveness under other student-loan repayment plans — benefits borrowers may not want to give up if their loans ultimately don’t qualify for PSLF, he said.
But to advocates like Frotman, the misinformation stems from an economic incentive — once borrowers become eligible for PSLF their loan is moved to a specific servicer, meaning that the organization they’re calling for counsel will no longer benefit financially from it.
Despite this dynamic, a 2020 report from Frotman’s organization and the American Federation of Teachers found that the Department of Education hadn’t provided specific guidance to the organizations financially involved in the FFEL program about how to counsel public servants with FFEL loans who inquire about benefits.
That “created this massive vacuum” in which misinformation could flourish, he said. “There’s such a tremendous obligation on the Department to right these wrongs.”
Department of Education, CFPB partnering on oversight
Kelly Leon, the Department of Education’s press secretary, wrote in an emailed statement that the agency “welcomes this kind of oversight” from the CFPB. She added that the Department is forging partnerships with the CFPB and state attorneys general to hold servicers accountable.
“The latest CFPB report raises serious concerns about the treatment of federal student-loan borrowers and the quality of service provided by loan servicers,” Leon wrote in the email. “All borrowers should receive the benefits to which they are entitled — and if servicers are blocking borrowers from receiving those benefits, the government must take steps to address it.”
Secretary of Education Miguel Cardona also told a Senate panel in June that the high rate at which PSLF applicants are getting rejected is “unacceptable.”
The agency has started to dig deeper into obstacles public servants face accessing forgiveness. Richard Cordray, the chief operating officer of Federal Student Aid, said in a statement in June that the agency was looking at the data on PSLF with an eye towards ensuring borrowers access the relief they’re entitled to.
Cordray, who also served as the director of the CFPB during the Obama administration, told the Washington Post in June that the agency plans to set “rigorous” benchmarks that servicers will have to meet or risk having their contracts terminated.
“We are going to create specific and clear measurable ways of assessing performance,” he said. “And the servicers are either going to meet those or not. And if not, there will be consequences.”