Student-loan borrowers could take legal action against their servicers or the Biden administration if repayment mistakes aren't fully fixed, a new federal memo says
An internal memo from Federal Student Aid said that if repayment mistakes for student-loan borrowers aren't remedied, lawsuits could arise.
Demetrius Freeman/The Washington Post via Getty Images
- The Education Department released a memo detailing mistakes it found student-loan servicers are making with repayment.
- It pushed for the mistakes to be remedied for borrowers to avoid legal action.
- Earlier this week, the department fined MOHELA for failing to get on-time bills to 2.5 million borrowers.
President Joe Biden's Education Department is concerned student-loan borrowers could turn to legal action if issues with their accounts aren't fully resolved.
The Education Department on Wednesday released an internal memo from Federal Student Aid requesting that Under Secretary of Education James Kvaal approve remediation efforts for borrowers following a range of errors servicers have made surrounding repayment.
The memo was dated October 29, one day before the department announced it would be withholding pay from student-loan company MOHELA after it failed to deliver on-time billing statements to 2.5 million borrowers. The memo dug deeper into the errors the department has uncovered:
about 78,000 borrowers faced incorrect monthly bills due to errors converting to the new SAVE income-driven repayment plan;
153,000 borrowers did not receive any information on their new monthly payment until after it became due;
and 21,000 borrowers got statements with very high and incorrect amounts, including a few over $100,000 per month.
FSA noted in its memo that if it "does not fully remediate" those mistakes, "borrowers who were financially harmed due to servicing errors would seek a legal remedy against their servicers and/or the Department."
"Federal and state regulators who are currently conducting supervisory examinations of FSA's loan servicers to monitor return to repayment have already indicated that if FSA does not fully remediate these borrowers, they will likely find violations of their consumer protection laws and require servicers to remediate the problems experienced by borrowers themselves and impose monetary fines against the servicers, while not fully fixing the problems caused for borrowers," the memo said.
The memo noted that the Education Department is protected from "certain types of borrower claims related to servicing," but legal action against the servicer itself could still pose challenges to the department's ability to facilitate and collect loans in the future.
The department's approved remediation efforts include placing impacted borrowers on administrative forbearance, without any interest accrual, until the errors with their accounts are fixed, along with counting those months in forbearance toward loan forgiveness on income-driven repayment and Public Service Loan Forgiveness.
FSA said it already instructed servicers to offer borrowers a refund on any payments they made while their account statements were incorrect, along with reprocess income-driven repayment applications to ensure accurate bills.
Insider has previously spoken to borrowers who have experienced the issues FSA detected. One borrower, for example, was billed about $100 more than she was told her SAVE payment would be, and another borrower paid off his remaining balance over the summer — but delays processing that payment left him with a monthly bill he did not owe.
"I've been trying to find an answer or solution, and it's crossed my mind to take legal action," he said.
The Education Department said it will continue enforcing oversight over servicers to ensure borrowers are not further harmed by mistakes to no fault of their own.
"Our top priority is to support borrowers as they return to repayment and fix the broken student loan system, and we will not tolerate errors from loan servicers that cause confusion and unwarranted financial instability for borrowers and families," FSA Director Richard Cordray said in a statement.
"Through vigorous monitoring of borrower accounts, we were able to detect these mistakes and take swift action to remedy them," he continued. "We are committed to making things right for borrowers and holding our contractors accountable for errors when they do occur."