Federal class-action lawsuits target practices of Pennsylvania-based student loan agency
Arianne Gallagher knew attending law school at the University of Pittsburgh would require taking on a lot of debt.
The native of Chicora, a tiny borough in Butler County, already had borrowed for her undergraduate education from Pitt but believed she could handle more debt and tap the federal government’s income-based loan repayment plan to repay the money. The plan allows borrowers who work public service jobs to pay a percentage of their income every year and then forgives any remaining debt after a decade.
Like thousands of others, Gallagher counted on student loan payments being akin to paying rent or car payments.
That is not the case.
Today, she is a plaintiff in one of 10 class-action lawsuits filed against the Pennsylvania Higher Education Assistance Agency that have been bundled in federal court in Philadelphia. The plaintiffs — borrowers from 10 states — say they represent tens of thousands who have been saddled with additional debt because PHEAA cannot or will not properly process their payments.
The agency, which conducts its federal loan business as FedLoan Servicing, does not comment on pending litigation, spokesman Keith New said. But he maintains PHEAA is living up to the terms of its contracts with the U.S. Department of Education. The federal agency hired PHEAA to process payments on 7.6 million student loans, which represents about a quarter of the $1.3 trillion in federal student loan debt owed by 44 million Americans.
The consolidated PHEAA suit is the latest sign of trouble in the student loan arena.
Both PHEAA and Navient, the nation’s largest student loan servicer, are awash in lawsuits filed by state attorneys general and angry borrowers who claim the agencies make it difficult for them to remain current in payments.
In 2016, the federal direct student loan program, one of several federal loan programs, saw 1.1 million defaults — which equals about 3,000 a day, or one every 28 seconds.
Rohit Chopra, a U.S. Federal Trade commissioner and former student loan ombudsman for the federal Consumer Financial Protection Bureau, analyzed the numbers and said they bear “an uncanny resemblance” to problems in the mortgage servicing market that set off the recession a decade ago.
“The default rates on student loans are alarmingly high,” Chopra said. “And there are some serious questions about how student loan servicers might be responsible for many of these defaults. Importantly, in the federal student loan program it is easy to avoid default if you get the right information because all borrowers are entitled to repay their loans based on income.”
Chopra said PHEAA, the nation’s second-largest student loan servicer, at the end of last year had the lowest percentage of borrowers in current repayment status, the highest percentage of those considered severely delinquent and highest percentage who had defaulted.
“Ultimately, we need to wake up to the fact that our student loan system is badly broken,” Chopra said. “We are overdue for an overhaul because today too many people are worse off by going to college and college should be about getting ahead, not getting pushed behind.”
Gallagher hasn’t defaulted and insisted she intends to repay her debt. But PHEAA has made that increasingly difficult and has added $13,000 to the total of what she owes, which now stands at $160,000, she said.
Today, Gallagher, 32, works for the federal government in Washington, D.C.
She always hoped to land there. She knew she’d never earn the kind of money made by attorneys in high-profile private practices. But that was OK.
“I thought I could have an opportunity to help people working public service or advocacy,” said Gallagher, who earned an undergraduate degree from Pitt in 2008.
Gallagher hoped to work at a job she loved, make ends meet and be debt free in 10 years through income-based repayments in the public service loan forgiveness program.
Participants in the plan must certify their income to PHEAA every year. The agency then recalculates monthly payments based on the borrower’s adjusted income.
That’s where things went awry, Gallagher said.
Every year, she would certify her paperwork to PHEAA In January. But the agency failed to process her paperwork in time in 2014, 2016 and 2017. In 2014, PHEAA placed Gallagher in forbearance — a kind of financial limbo — while it resolved her account. She wasn’t permitted to make a payment that February while loan servicers recalculated her payments.
That added an extra month onto her payment plan.
The agency placed her into forbearance again in 2016 for two months, which added another two months of payments for Gallagher. PHEAA then capitalized the interest she owed, adding another $13,000 to what she owed — a move that meant interest began ticking up on even more debt.
In 2017, when she inquired about whether a different payment plan might be more advantageous, PHEAA changed her payment plan over the phone and more than doubled her monthly payment to $1,900.
By then, she began talking to lawyers at Carlson Lynch in Pittsburgh. They filed a lawsuit on her behalf late last year.
“I took on the debt, and I know I’m responsible for paying it. I just don’t want it to be this high,” Gallagher said.
‘All over it’
No one ever anticipated PHEAA would grow to what it has become. A judge on the U.S. Fourth Circuit Court of Appeals recently wrote that it now operates more like a private corporation than a state agency.
The Pennsylvania Legislature created PHEAA in 1963 to insure student loans issued through banks and tasked the agency with making higher education more accessible to Pennsylvanians.
Today, it makes most of its income processing and collecting payments on a portfolio of more than $400 billion in student debt — which is more than 10 times the annual budget of the state that created PHEAA. The agency’s board includes 18 state lawmakers, two appointees by Gov. Tom Wolf and the state secretaries of banking and education.
Pennsylvania lawmakers tapped $101 million of PHEAA’s profits this year to help underwrite a state grant program for 150,000 needy Pennsylvania college students. The grants capped out at $4,123 this year.
The agency usually wins when borrowers sue – but the cost of defending lawsuits is adding up, and officials have noticed.
Between January 2016 and this April, the PHEAA paid $2.5 million for outside lawyers to work on 32 cases alone. The agency also paid more than $1.8 million to settle 29 lawsuits between Jan. 1, 2015, and June 30.
As the tobacco and asbestos industries learned, there is a potential for hundreds of billions of dollars in payouts to those on the losing side in multidistrict class-action suits.
State Sen. Wayne Fontana, a Brookline Democrat and PHEAA board vice chairman, said the lawsuits often are discussed during closed-door executive sessions.
PHEAA officials maintain many of the lawsuits are frivolous, Fontana said.
“Sometimes it is just someone trying to get out of paying their loans, but I don’t just dismiss them. I ask about them. … They eat into what we have to pay for student grants,” Fontana said.
“The disturbing thing is everyone is suing these days, and the cost to defend those suits is high. We’re defending these things. Is it the case that somebody here is not being efficient or being unfair? I don’t know that that’s the case,” he said. “But if you think we’re not conscious of it, that’s not the case. We’re all over it and looking at the costs.”
Serve and collect
But the multidistrict litigation in Philadelphia is different.
Consolidation is a special process reserved for complex cases with numerous defendants. Tobacco and asbestos cases were handled similarly, as are cases involving deadly missteps by the pharmaceutical industry. Such filings can culminate in massive financial payouts.
PHEAA should be concerned, Chopra said.
He said PHEAA’s status as the sole servicer for the public service loan forgiveness program — the one into which Gallagher enrolled — focused a spotlight on the agency.
Congress predicted the program that began in 2007 would see the debts of many borrowers forgiven in 10 years. Yet, only a handful has made it through the maze of repayment. Chopra said he hears complaints almost daily about borrowers who have submitted paperwork to PHEAA repeatedly without success.
“There is not a day goes by that we don’t hear from borrowers struggling to navigate the public service loan forgiveness program,” Chopra said. “Some wonder whether the Department of Education is exercising adequate oversight on its servicers.”
Plaintiffs in the pending class-action suit in Philadelphia wonder whether it’s a matter of negligence on the part of the agency, or whether PHEAA’s contracts actually incentivize delays that increase borrowers’ debt and add months or years to payments PHEAA was hired to collect.
Borrowers enrolled in public service loan forgiveness tend to stay on top of payments and are vocal about such issues, said Persis Yu, a lawyer with the National Consumer Law Center. As additional data comes in, it may settle the argument once and for all. But Yu said it likely won’t go away anytime soon.
“PHEAA is an incredibly complicated organization in that it has incredibly aggressive collection tactics and that has it collecting from the people it was originally trying to serve,” Yu said.
Deb Erdley is a Tribune-Review staff writer. You can contact Deb at 412-320-7996, [email protected] or via Twitter @deberdley_trib.