July, 2021
Washington — So PHEAA, the student-loan lender and servicer, is collapsing its organization. I join with many others who are cheering its demise as a federal student-loan servicer, for I have been pointing out for most of the past two decades that the organization, also known as American Education Services and FedLoan servicing, has engaged in fraud against taxpayers and abuse of student-loan borrowers.
With a great legal team behind me, we won an important victory over PHEAA when federal courts, affirmed by the U.S. Supreme Court in 2017, determined that PHEAA did not have sovereign immunity from borrower and other lawsuits.* Unfortunately, Secretary Betsy DeVos tried to protect PHEAA by coming up with rules that substituted for immunity, but federal courts across the nation have struck them down and the Biden administration has appropriately withdrawn them.
This surely influenced PHEAA's decision to depart federal student-loan servicing as a contractor. No longer can it brush away litigation against it. Let me put it this way: PHEAA has ruined many borrowers' lives, and justice will be sought.
Another reason for PHEAA's departure is a potential perjury charge against its CEO for giving false and misleading information to a U.S. Senate student-loan oversight committee. On the day he was to explain himself to the committee, July 7, PHEAA announced that it would no longer be a federal contractor. I only hope that the committee will begin looking into all the other instances of fraud and perjury committed by PHEAA over the years.
There is a reason, however, to temper any celebration of PHEAA's departure as a federal contractor. Millions of borrower accounts will have to be transferred to other servicers, potentially even to Navient (formerly Sallie Mae), which has also had its problems and has been the target of lawsuits by state attorneys general and the federal Consumer Financial Protection Bureau. This comes at a difficult time because the temporary federal student-loan repayment reprieve, granted by Congress during the pandemic, is set to expire soon.
All of which is to say that it is even more important for the U.S. Department of Education to cancel as many student loans as possible immediately, under powers given to the Secretary in 20 U.S.C. 1082. In a previous blog post, I recommended several ways this could be done, and the reasons for it.
This also could prompt the U.S. Department of Education to widen its circle of servicers, to look to experienced credit card and mortgage loan organizations to service student-loans. The department, long beset by a revolving door relationship between its administrators and the student-loan industry, needs to free itself from industry capture. This might also be the time to adopt an entirely different student-loan model, such as Australia's or other countries' models that handle student-loans through their tax systems.
PHEAA's departure as a federal contractor is a silver cloud with a dark lining. It should be a catalyst for bold action to address the nation's student loan mess.
_______________________
* U.S. ex rel. Oberg v. PHEAA, 4th Circuit (2015)
