ED Cracks Down on MOHELA for Loan Servicing Failures

The Higher Education Loan Authority of the State of Missouri (MOHELA), one of the largest federal student loan servicers, will face penalties from the U.S. Department of Education (ED) for failing to adequately perform its contractual servicing obligations—and harming borrowers in the process.

ED is accusing MOHELA of failing to process more than 460,000 applications for income-driven repayment plans, which could have helped borrowers access more affordable monthly student loan payments. The department also said that MOHELA continued applying interest to borrowers’ accounts, incorrectly marked some borrowers for negative credit reporting, and prolonged processing forgiveness for borrowers who qualified.

What’s next: ED will stop assigning new borrower accounts to MOHELA until it can demonstrate that it can meet its contractual obligations, which may result in financial losses for the servicer. ED will also require MOHELA to meet weekly with the Office of Federal Student Aid (FSA), who will evaluate the servicer’s performance.

Finally, ED requested MOHELA submit a plan for how it will correct its servicing issues within 10 business days of the original notice, delivered on October 15.

Repeat offender: This is the second penalty MOHELA has faced from ED this year, and one of a handful of recent controversies.

• In October 2023, MOHELA was slapped with a $7.2 million fine by ED for failing to send billing statements on time to 2.5 million borrowers, whose payments had just resumed after the COVID-era repayment pause and forbearance. This error resulted in 800,000 borrowers being wrongfully marked delinquent. [CNBC]
  
• In December 2023, a pair of borrowers sued MOHELA for mishandling the federal Public Service Loan Forgiveness (PSLF) program, which promises debt forgiveness to borrowers who entered public service fields (i.e., public education, law enforcement, public health) and made 120 on-time monthly payments for 10 years. The plaintiffs claim the servicer’s administrative failures resulted in them being forced to make extra loan payments. [The Washington Post, subscription model]
  
• In April, ED began transferring over 1 million borrowers from MOHELA to other servicers. This was requested by MOHELA, and FSA agreed that transferring these borrowers would improve their loan repayment experiences. [Forbes, subscription model]
  
• In July, the American Federation of Teachers (AFT), the second-largest teachers union in the country, filed a lawsuit against MOHELA, accusing the servicer of violating consumer protections. AFT alleged that MOHELA overcharged borrowers and unfairly “deflected” borrowers who needed help with loans from call centers to insufficient self-help options. [Higher Ed Dive]