Student-loan companies have made a range of errors with borrowers' accounts over the past month.
The Education Department is strengthening oversight by withholding pay from one servicer, MOHELA.
But it might not fully address the issues borrowers have when funding is already tight.
President Joe Biden's Education Department made one thing very clear this past week: Student-loan companies cannot get away with bad behavior.
But it might not fully solve the issues plaguing borrowers as they transition back into repayment.
On Monday, the Education Department announced it would be withholding over $7 million in October pay from student-loan company MOHELA after the company failed to deliver on-time billing statements to 2.5 million borrowers, causing 800,000 of them to fall into delinquency.
The department made clear this was an oversight action to prevent servicers from making mistakes in the future, with a spokesperson telling Insider in a statement that MOHELA's "failure to meet their basic obligation to borrowers and the Department will not be tolerated without consequence."
"While we continue to fight for additional funding to support servicers and ensure better experience for borrowers, borrowers should be able to count on receiving timely and accurate information from their servicers, which is what this action aims to accomplish," the spokesperson said. MOHELA has not publicly commented on the error.
However, funding, or lack thereof, has been central to the conversation surrounding repayment errors and delays borrowers have been experiencing. MOHELA previously blamed the lack of additional funding from Congress for Federal Student Aid to facilitate repayment operations, telling lawmakers in an August letter that "the immediacy of return-to-repayment amid ever-increasing changes to the contract administration requirements and expanded training needs, combined with the lack of sufficient funding from FSA, means extensive servicing delays are a likely outcome."
It's unclear at this point how withholding pay from a servicer would impact its operations, and whether the impact would trickle down to borrowers. Scott Buchanan, executive director of the Student Loan Servicing Alliance — a group that represents federal servicers — told Insider that he "doesn't understand the logic" of withholding MOHELA's pay at a time when resources are already strained.
"You cut millions of dollars out of someone's budget, there will be consequences," he said. "They either won't be able to add more reps that they wanted to do, have to cut staff time, you know, you're going to have to make cuts, and those cuts are going to impact borrowers."
With Republicans holding a majority in the House, it's unlikely Federal Student Aid will see boosted funding in the upcoming year. Biden's budget request included $2.7 billion in funding for FSA — a $620 million increase from the 2023 level — but Republicans on the House Appropriations Committee released a funding bill that would fund FSA $265 million below its current level.
Jared Bass, senior vice president for the Education department at the think tank Center for American Progress, told Insider that "the federal government needs to pay for the type of servicing it wants to see."
"I certainly believe that we should hold servicers to a standard and make sure that they're providing quality services," Bass said. "But if there's only so much money that the federal government is going to pay the servicer, that also is going to impact the quality of work that the servicer can do."
So when it comes to bolstering oversight over servicers by withholding their pay, Bass said, it's "a catch 22."
"We want quality servicing, we have to hold people accountable," he said. "But at the same time, we also want servicing and that costs money since we want people to do the job well. I think it's just darned if you do, darned if you don't."
'What happens to servicing should be a main concern for everyone'
A Federal Student Aid internal memo outlined the wide range of problems borrowers have been facing since they entered repayment. For example, 78,000 borrowers faced incorrect monthly bills when converting to the new income-driven repayment plan, and 153,000 borrowers did not receive any information on their monthly payments until after they became due.
The Education Department is working on remedying those errors and has instructed servicers to place all impacted borrowers on administrative forbearance, without any interest accrual, and vowed to continue oversight over servicers as repayment progresses.
Buchanan noted that he's still determining how exactly withholding pay would impact operations and added that he's "not making any excuses for the mistakes here."
"Our incentive is to get this thing right, but when you're resource- constrained, this is what happens," he said.
It's an issue only Congress can solve. Lawmakers need to pass government funding legislation before a government shutdown after November 17, and Bass said it'll be critical to see how appropriations bills take into account student aid funding.
"There is a very significant cut to student-loan servicing in that bill, and so what happens to that account, what happens to servicing, should be a main concern for everyone, not just to those who have student loans," Bass said. "Because when we care about government systems, when we care about social trust and trust in government, we should be thinking about institutions and how we are maintaining them, how we are making sure that they thrive."
Read the original article on Business Insider