AFT Sues Betsy DeVos over Mismanaged, Deceptive Public Service Loan Forgiveness Program

The federal Public Service Loan Forgiveness program has denied 99 percent of borrowers who—with the expectation their student loans would be forgiven after a decade—have worked for ten years in public service professions.

In May, Politico‘s Kimberly Hefling described  the depth of the problems in the federal Public Service Loan Forgiveness program: “The nation’s student loan forgiveness program for public servants is a disaster, it’s widely agreed. The numbers are mind-boggling. Only about 1 percent of the teachers, nurses, public defenders, military personnel and other public servants applying for student loan relief under the Public Service Loan Forgiveness program are succeeding. That leaves tens of thousands of frustrated borrowers with student loans they thought would be forgiven after they worked a decade on the job… In fall 2017, after the first wave of borrowers hit the 10-year mark of service for eligibility in the program, the chaos started to publicly unfold.”

Hefling reports that the program has been politically divisive since its inception in 2007: “When the program was signed into law in 2007, Democrats controlled both chambers of Congress. President George W. Bush threatened to veto the legislation, but ultimately signed it.”

The Washington Post‘s Danielle Douglas-Gabriel reports that last Thursday, the American Federation of Teachers (AFT) sued Education Secretary DeVos, “alleging gross mismanagement” of the program.

Earlier lawsuits have been filed against the companies with which the U.S. Department of Education contracts to manage the program—Navient, FedLoan Servicing and others. Douglas-Gabriel describes the lawsuit filed last week by the American Federation of Teachers, which, “claims the Education Department ignored borrower complaints about loan servicers providing inaccurate information and making administrative mistakes. The alleged mismanagement of the loan forgiveness program violates federal law and the Constitution according to the lawsuit.”

One problem, writes Douglas-Gabriel, is that the program’s tangled rules have evolved over the recent decade even while borrowers thought they were enrolled in a well-established program: “Because there are so many requirements, some of which were fully fleshed out only in later years, few people could reasonably be expected to qualify for forgiveness at this point.  Nearly three-quarters of processed applications were denied because borrowers did not meet at least one program requirement.”  “As of March (2019), more than 73,500 federal student loan borrowers had turned in nearly 86,006 applications to have their loans canceled under Public Service Loan Forgiveness. Only 864 of those applications have been approved, and 518 people have received debt forgiveness….”

Douglas-Gabriel continues: “The rules are complex. They require borrowers to have loans made directly by the federal government, but until 2010 most federal loans were originated by private lenders. Applicants must also be enrolled in certain repayment plans—primarily those that cap monthly loan payments to a percentage of borrowers’ income. But most of those plans emerged only in recent years. A recent Government Accountability Office audit said the Education Department never provided a written instruction manual to FedLoan, the company managing the program. The company has had to interpret guidance that was contradictory or poorly explained… Investigators said poor communication between FedLoan and other servicing companies about borrowers’ accounts results in miscounting payments eligible for the program.”

AFT filed the lawsuit last week with several co-plaintiffs who have been misled by the program. One plaintiff, a ten-year New York public school teacher, expected that her debt would be forgiven. Today she finds herself $88,000 in debt after being rejected by the program.

It would appear that staff in the U.S. Department of Education have made little effort to accommodate borrowers who were misled.  Douglas-Gabriel quotes another of the plaintiffs in the recent lawsuit: “When I asked why I was denied, I heard all kinds of reasons… I was told I pulled down the wrong application from the official website… one of my forms had the wrong date… They claimed they couldn’t read the forms. All told, I turned in 10 different applications. Denied. Denied. Denied was all I heard.”

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DeVos Again Protects For-Profit Colleges and Federal Loan Servicing Contractor at Expense of Vulnerable Students

Betsy DeVos once announced: “Government really sucks.”  She doesn’t like government regulation, and she prefers to free up the marketplace.  One of the best places to observe her penchant for deregulation is in higher education, where she has regularly done everything she can to protect the investors in for-profit colleges and trade schools, where she has tried to step back from protecting students with federal loans, and where she has done little to oversee the giant government contractors who process federal student loans. Over the years, the issue of government regulation of these practices has been understood as necessary because almost all the money that props up the too-often-unscrupulous, for-profit colleges comes from the government, and because millions of students who borrow in good faith end up with huge debts run up for programs that have left them unemployable.

In her 2014 book, Degrees of Inequality: How the Politics of Higher Education Sabotaged the American Dream, Cornell University professor Suzanne Mettler tells us why we should worry about DeVos’s relaxing regulation of the for-profit higher education sector:  “Defenders of for-profit universities champion them as belonging to the private sector, but in recent years as in the past, they receive nearly all of their revenues from the U.S. federal government… Notably, these institutions, with only one exception, earned between 60.8 and 85.9 percent of their total revenues in 2010 from Title IV of the Higher Education Act, meaning predominantly student loans and Pell grants. The Apollo Group, owner of the University of Phoenix, gained between 85 and 88 percent of income from these sources in each of the past three years. Most received an additional 2 to 5 percent from military educational programs, including the Post-9/11 GI Bill…  In short, the for-profit schools are almost entirely subsidized by government.” (Degrees of Inequality, p. 168)

DeVos loses one battle on “Borrowers’ Defense to Repayment”

Earlier this fall, court challenges successfully blocked Betsy DeVos’s attempt to relax Obama-era rules designed to protect student borrowers. DeVos had attempted for over a year to delay imposition of a rule called “borrowers’ defense to repayment.” She had intended to replace it with her own more lenient regulation.  In mid-October, DeVos lost her bid to replace and weaken this regulation.  Michael Stratford reported for POLITICO: “A federal court cleared the way for Obama-era student loan borrower protections to take effect, handing a defeat to Education Secretary Betsy DeVos after she fought for more than a year to stop the rules.” The Obama-era rule, now in effect after the court challenge, protects students’ rights to petition to have their loans forgiven if they are able to prove their college knowingly deceived them about its programming or if, like Corinthian Colleges and ITT Technical Institute, the college suddenly shuts down.  It also permits students who believe they have been defrauded to join together in class action lawsuits to have their debts forgiven.

DeVos Rescues Federal For-Profit College Accreditor Deemed Ineffective and Denied Standing During Obama Years

But despite her one failure to vanquish “borrowers’ defense to repayment,” DeVos persists in her attempt to protect the for-profit colleges, the loan servicing companies, and their investors.  The first of her recent actions was reinstating an agency whose role has been accrediting or denying accreditation to for-profit colleges, which cannot qualify to receive federal grants and loans unless they are accredited by a Department-approved agency. The Obama Department of Education had cracked down. The Washington Post‘s Laura Meckler explains: “In December 2016, the Obama administration ruled that the Accrediting Council for Independent Colleges and Schools, known as ACICS, should no longer be allowed to serve as a gatekeeper between colleges and billions of dollars in federal financial aid. It concluded that the agency was incapable of rectifying years of lax oversight and ‘exhibited a profound lack of compliance’ with the ‘most basic’ responsibilities of an accreditor.”

ACICS was the agency that maintained accreditation for Corinthan Colleges and ITT Tech until the day they went under.  Inside Higher Education‘s Andrew Kreighbaum reports that many of the other institutions it once accredited were so shaky that they have shut down or now teeter on the edge: “The accreditor oversaw 245 colleges as of 2016.  But roughly 70 ACICS institutions who receive Title IV funds haven’t yet found recognition from another accreditor… And the largest chain of schools still overseen by the accreditor, Education Corporation of America, looks to be facing serious questions about its financial viability.”

DeVos left her decision up to Diane Auer Jones, a principal deputy undersecretary at the Department of Education.  Auer Jones once served as a senior vice president at Career Education, which operates for-profit colleges.  Meckler reports that last year career staff in the Department of Education conducted a review of ACICS and uncovered 57 findings of noncompliance, but it is not clear whether this review was considered in Auer Jones’ decision to reinstate ACICS.  ACICS, of course, claims it has corrected past practices.

Department of Education Refuses to Force Its Contractor for Loan Processing—Navient—to Disclose Cheaper Repayment Options to Student Borrowers

In a stunning expose, the Associated Press‘s Ken Sweet reports: “One of the nation’s largest student loan servicing companies may have driven tens of thousands of borrowers struggling with their debts into higher-cost repayment plans.  That’s the finding of a Department of Education audit of practices at Navient Corp., the nation’s third-largest student loan servicing company.”

The problem has arisen when students encounter financial problems and need to restructure their payment schedules. In a 2017 audit, the Department of Education discovered that Navient had boosted profits by “steering some borrowers into high-cost plans without discussing options that would have been less costly in the long run.” While the Department of Education uncovered the problem in its own 2017 audit, federal officials did not share the results of its investigation with plaintiffs in lawsuits filed against Navient in five states by student borrowers.

Here is how the review was conducted: “As part of their inquiry, DoE auditors listened in on about 2,400 randomly selected calls to borrowers from 2014-2017 out of a batch of 219,000.  On nearly one out of 10 of the calls examined, the Navient representative did not mention other options, including one type of plan that estimates the size of a monthly payment the borrower can afford based on their income.  Auditors wrote that many customer service representatives failed to ask questions to determine if such a plan known as an income-driven repayment plan might be more beneficial to the borrower.”

Sweet reports: “Navient disputed the audit’s conclusions…One point the company makes in its defense is that its contract with the education department doesn’t require its customer service representatives to mention all options available to the borrower.” “‘We are not aware of any requirement that borrowers receive all of their repayment options… on each and every call,’ the company said, adding that if the Department of Education chose to require all servicers to discuss income-driven repayment plans with all borrowers, the Department of Education needs to redo its contract with Navient.” Navient points out that its greatest business expense is paying its customer service agents.  The company’s profits depend on hiring the smallest possible number of service agents,.

Sweet describes Seth Frotman who quit in disgust last August as the highest-ranking Department of Education official in charge of student loans. Frotman  believes Betsy DeVos’s Department of Education’s refusal to push back against Navient’s practices is “outrageous.”  Frotman says, “In short, Navient, when confronted with evidence of its bad practices, is telling the government, ‘Pay us more money or take a hike.’  And it looks like the Department of Education took a hike.”

Rep. Bobby Scott (D-VA) is expected to become the Chairman of the U.S. House of Representatives Committee on Education and the Workforce. Scott commented last week on Betsy DeVos’s decision to reinstate the ineffective Accrediting Council for Independent Colleges and Schools. But his comment also more broadly describes the the entire hands-off approach of Betsy DeVos’s Department of Education to regulating for-profit higher education in the public interest: “This decision will expose hardworking people across the country, including many service members and veterans, to schools that routinely leave students with crippling debt, non-transferable credits and no degree, while leaving taxpayers to foot the bill.”

Student Loan Debacle: What Will Be Response from DeVos Department of Education?

The Obama administration had planned to revamp completely the system by which the U.S. Department of Education administers and collects $1.3 trillion in college loans. The service has been terrible and confusing, say consumer advocates, and some of the contractors have been overcharging borrowers with big fees.

Last week the NY Times editorialized: “Education Secretary Betsy DeVos is inexplicably backing away from rules that are meant to prevent federal student loan borrowers from being fleeced by companies the government pays to collect the loans and to guide people through the repayment process. On Tuesday, she withdrew a sound Obama administration policy that required the Education Department to take into account the past conduct of loan servicing companies before awarding them lucrative contracts—and to include consumer protections in those contracts as well.”  What this all means is that the federal government, as the enormous provider of loans to help students pay for college, contracts out the servicing of those loans to for-profit companies, which can charge fees for their services. The Obama administration had planned to restructure this process, but the Trump administration has now abandoned the Obama administration’s plan.

The NY Times has been investigating, and here is one of its reports on DeVos’s recent action: “With the stroke of a pen… Betsy DeVos, President Trump’s new education secretary, thrust the future of the government’s system for managing federal student loans into confusion. It was a high-stakes move: Her department administers $1.3 trillion in loans on behalf of nearly 43 million student borrowers.  At issue is which companies will handle the bulk of those loans in the future, and how they will do it. Under the Obama administration, the Education Department was on the verge of selecting a single vendor to build a new system for servicing its student loans, in what was expected to be one of the largest federal contracts outside of the military.”

The NY Times reporters, Stacy Cowley and Jessica Silver-Greenberg, provide the background for what is the complicated and poorly understood operation of federal college loans.  Nine different companies have been billing and collecting payments on student loans, but borrowers have complained about poor service: “The Obama administration sought to replace this labyrinthine system with a single entry point—a sea change in how student loan servicing would work. Instead of dealing directly with private vendors, all federal borrowers would gain access to their accounts through an Education Department portal, with standardized forms and processes.”

The Obama administration’s plan was to choose a single contractor, and the Department had been accepting bids. Three finalist companies had emerged from the bidding competition, Navient, the Pennsylvania Higher Education Assistance Agency, and a joint proposal from Nelnet and Great Lakes.  A primary condition for the selection of the provider was supposed to be the company’s past performance.

This is an enormously complicated story, and it is unclear to me whether we are headed in a worse or better direction. We must watch closely to see whether the DeVos education department improves oversight. It wasn’t entirely clear, however, that the Obama administration’s plan would have eliminated serious abuses by loan collectors. One of its finalists seems questionable.

It is likely that DeVos and her staff are caving in to pressure from the loan companies’ lobbyists.  Bloomberg reporter Shahien Nasiripour reports: “DeVos formally withdrew the Obama memos. The previous administration’s approach, DeVos said, was inconsistent and full of shortcomings.  She didn’t detail how the moves fell short…. DeVos’s move comes a week after one of the student loan industry’s main lobbies asked for Congress’s  help in delaying or substantially changing the Education Department’s loan servicing plans. In a pair of April 4 letters to leaders of the House and Senate appropriations committees, the National Council of Higher Education Resources said there were too many unanswered questions….”

But there is also a big problem with one of the companies the Obama administration had chosen as a finalist for the contract as sole loan collector.  Navient has a long history as the collector of sub-prime, disreputable loans made by the company which spun it off in 2014. An earlier investigation by the same two NY Times reporters—Cowley and Silver-Greenberg— surfaced serious problems: “In recent months the student loan giant Navient, which was spun off from Sallie Mae in 2014 and retained nearly all of the company’s loan portfolio, has come under fire for aggressive and sloppy loan collection practices, which led to a set of government lawsuits filed in January. But those accusations have overshadowed broader claims, detailed in two state lawsuits filed by the attorneys general in Illinois and Washington, that Sallie Mae engaged in predatory lending, extending billions of dollars in private loans to students… (loans) that should never have been made in the first place.”

Investopedia explains the history of Sallie Mae—once involved with government student loans, but today a private for-profit: “Sallie Mae is a private lender, so its direct loans are not federal loans. Basically federal student loans consist of money provided by the U.S. government, while private student loans come from entities such as banks and other financial institutions. There are also instances in which private entities work as loan servicers for certain federal loans on behalf of the government… Up until October 13, 2014, Sallie Mae, while generally known as a private lender, worked as a loan servicer for two federal student loans: the William D. Ford Federal Direct Loan Program and the Federal Family Education Loan (FFEL) Program. On that date, Sallie Mae split into two separate companies, and the portion of the company that was in charge of federal loan servicing became its own company, known as Navient.  From that point forward, Sallie Mae has only originated private student loans.” In 2014, when Sallie Mae spun off Navient—which is also a publicly traded, for-profit—Navient became the largest servicer of federal student loans and one of the nine loan collectors with a contract from the U.S. Department of Education.

Cowley and Silver-Greenberg raise serious concerns about subprime student loans originated by Sallie Mae, loans originated while Sallie Mae was fully aware that students would likely eventually default because the education programs for which students borrowed were not really preparing them for jobs: “New details unsealed last month in the state lawsuits against Navient shed light on how Sallie Mae used private subprime loans—some of which it expected to default at rates as high as 92 percent—as a tool to build its business relationship with colleges and universities across the country.  From the outset, the lender knew that many borrowers would be unable to repay, government lawyers say, but it still made the loans, ensnaring students in debt traps that have dogged them for more than a decade. While these risky loans were a bad deal for students, they were a boon for Sallie Mae. The private loans were—as Sallie Mae itself put it—-a ‘baited hook’ that the lender used to reel in more federally guaranteed loans, according to an internal strategy memo cited in the Illinois lawsuit.”  Remember that before 2014, Sallie Mae itself was a primary servicer of student loans.

Illinois and Washington are now suing Navient—still collecting as Fannie Mae’s spinoff—in an effort to get shady, subprime Sallie Mae loans forgiven: “The attorneys general in Illinois and Washington—backed by a coalition of those in 27 other states, who participated in a three-year investigation of student lending abuses—want those private loans forgiven.  In a pair of cases that could affect hundreds of thousands of borrowers, they have sued Navient. The lawsuits cover private subprime loans made from 2000 to 2009.”  The reporters add: “Navient, which is based in Wilmington, Del., has denied any wrongdoing and is fighting the lawsuits. It does not originate any loans itself, but when it split off from Sallie Mae, it kept most of Sallie Mae’s existing loans. It collects payments from some 12 million people—about one in four student loan borrowers.”

In a 2008 after a regulatory crackdown, according to the NY Times reporters,  Sallie Mae discontinued originating subprime student loans, but, Navient, the company it spun off in 2014, is still continuing to collect  money owed from decades old borrowing by students.  The reporters compare the student loan debacle to the subprime mortgage crisis: “These cases have parallels to the mortgage crisis that helped drive the American economy into recession, both in scope—borrowers in the United states owe $1.4 trillion on student loans—and in the details of the misdeeds claimed.  Working together, the lenders and (mostly for-profit) colleges were preying on a vital part of the American dream….”

Clearly the Obama administration’s effort to redesign loan collection and at the same time increase oversight was a very good thing. We should give the Obama U.S. Department of Education credit for pressuring Sallie Mae to spin off its division that processed government loans from Sallie Mae’s own private, for-profit origination of too-often predatory student loans. At the same time we should suspect that DeVos and her department are stepping back for all the wrong reasons from further regulating the private contractors who collect on student loans. It does seem, however, that Navient, one of the three finalists selected by the Obama education department, would have been the wrong choice to be the federal government’s sole federal student loan collector.