The U.S. Department of Education has taken the unusual step of punishing the largest federal student loan servicer for failing to send on-time billing statements to 2.5 million borrowers.

The department said on Monday that it would withhold $7.2 million in payment owed to the Higher Education Loan Authority of the State of Missouri, better known as MOHELA, for the month of October. It announced that, of those 2.5 million borrowers, more than 800,000 failed to make an on-time loan payment in October, the first month that payments are due since the pandemic pause began in March 2020.

"The actions we've taken send a strong message to all student loan servicers that we will not allow borrowers to suffer the consequences of gross servicing failures," Education Secretary Miguel Cardona said in a statement. "We are committed to fixing our country's broken student loan system, and that includes strengthening oversight and accountability and taking every step possible to improve outcomes for borrowers."

MOHELA did not respond to a request for comment.

The department's announcement comes amid widespread reports of loan servicing errors and of borrowers waiting on hold for hours before reaching servicer workers who can explain and ultimately fix those mistakes. In fact, the department itself cataloged these errors — extensively — in a recent internal memo obtained by NPR and first reported by The Washington Post.

In that memo, dated Oct. 17, the office of Federal Student Aid (FSA) listed multiple large groups of borrowers who have been hurt by servicers' errors during the return to repayment.

In addition to those 2.5 million borrowers who did not receive timely billing statements from MOHELA, some 16,000 borrowers who had petitioned the department to cancel their loans because they had been defrauded by a for-profit college were erroneously returned to repayment, the memo says. These borrowers should have been placed into a special payment-free forbearance until their claims could be reviewed and, potentially, their loans discharged.

And then there's what happened to Dan Szyman.

"This is crazy!"
Szyman, a 43-year-old father of three, works as an outpatient mental health nurse in an opioid addiction treatment program near St. Louis.

He was previously enrolled in the REPAYE income-driven repayment plan and was automatically enrolled in the Biden administration's new, more generous repayment plan, known as SAVE. At summer's end, Szyman remembers logging in to his student loan account and seeing that his new monthly payment, beginning in October, would be $99.

"That's so doable," he remembers thinking. "You know, I've got three kids. Any little bit helps."

But then, in September, Szyman received a notice from his servicer, MOHELA, "saying that my bill was going to be $633. And I was like, 'This is crazy!' So I called them right away."

A MOHELA call center worker told Szyman there had been a "system glitch." He remembers being told: "'We'll get it fixed for you.'"

But it wasn't fixed. When he called again, a different call center worker told Szyman that his loan would be put into forbearance until the "glitch" could be sorted out. And there it remains.

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The internal Education Department memo suggests Szyman is in good company: 78,000 borrowers experienced something similar. All had their accounts transferred from one servicer to another and were shifted from an old income-driven repayment plan to the new SAVE plan.

What was the glitch? According to the memo, "their monthly payments were incorrectly calculated based on incorrect family sizes, family income and spousal loan balances." It's unclear which of these factored into Szyman's six-times-larger payment.

"You know, I can deal with the bureaucracy and, you know, sit on the phone for four hours," says Szyman, who told NPR his calls to MOHELA lasted between two and four hours. "But there's so many people out there that can't ... and those people are probably struggling."

The Education Department announced on Monday that it has instructed servicers to place all borrowers affected by these mistakes into forbearance, for any interest that accrued to be zeroed out and for that forbearance time to count as credit toward Public Service Loan Forgiveness. That's good news for Szyman, who says he is just 17 payments away from having his debts forgiven under the program.

"You know, that's what I've seen from this administration — that they are really trying hard to help people like me," says Szyman, who says he is frustrated with his servicer but appreciates the Education Department's moves to address the mistakes.

Sharing the blame
While borrowers welcomed the Education Department's announcement, Rep. Virginia Foxx, R-N.C., who chairs the House Education Committee, made clear that she believes the department deserves much of the blame for these failures.

"Servicers need to be performing at their best. Period. But this doesn't mean the Department is off the hook," Foxx said in a statement. "For more than three years the Department has known it would need to return borrowers to repayment. Yet, the Department failed to provide any evidence that it had an actual plan to do so. Congress, servicers, borrowers, and taxpayers have all been left in the dark. But now the Department is suddenly shocked that there were errors?"

Congress too bears some responsibility for these mistakes, voting to flat-fund the office of Federal Student Aid and its loan servicing contractors this year, as congressional Republicans battled with the White House over Biden's broader student loan relief plans.

That means FSA and its servicers were given the same amount of money for 2023 as they received in 2022 even though, as the FSA memo makes clear, "28 million borrowers now owe payments for the first time in at least three and a half years, more than 20 times greater than the number of borrowers who would typically enter repayment in a single month."

"It sure would help if the government would actually provide more resources to get the work done," says Scott Buchanan, head of the Student Loan Servicing Alliance, an industry trade group. "FSA is backlogged on SAVE applications and servicers are having challenges with all the system changes we had to make in a rushed fashion, but we are all working together to identify those and fix them quickly."

Not only are an unprecedented number of borrowers returning to the system all at once, but the memo says the questions they're asking call center workers are unusually complex. That's because, as Buchanan says, the student loan system has changed dramatically in recent years.

As a result, the time spent on hold for borrowers needing help averages 58 minutes, according to the memo. Call lengths are 70% longer than they were in 2019. It's little surprise, then, that more than half of borrowers, 52%, who called for help gave up before they ever got through.