The program requires borrowers to make 120 loan payments while working in the public sector for 10 years to have their remaining balance forgiven. James alleges that FedLoan, which runs the program for the Education Department, has miscounted payments, provided inconsistent information and failed to inform borrowers of their right to appeal mistakes.
Those breakdowns in the administration of the program, she said, have contributed to a large number of rejected applications for loan forgiveness, the complaint said. Fewer than 900 of the more than 90,000 applicants had their discharges approved and processed as of June, according to the Education Department.
“Despite a decade of honorable public service to our state and this nation, hard-working New Yorkers have been left with nothing but the runaround and broken promises,” James said in a statement Thursday. The company’s “abuses have not only denied these dedicated public servants the benefits they have earned, but have undermined the goals of the loan forgiveness program."
The lawsuit, filed in U.S. District Court for the Southern District of New York, seeks restitution for state residents it says were harmed by the loan servicer and to stop the continuation of those practices.
The loan-servicing company disputes the claims made in the case. Spokesman Keith New said the company was informed of the attorney general’s intentions to sue last week and made several unsuccessful attempts to meet and discuss the accusations. The attorney general’s office said it was willing to meet with the company but refused to delay the lawsuit.
New said the company has over the years cooperated with the New York Attorney General’s Office and other state regulators to review borrower concerns and find resolutions.
“We believe that the NY AG’s Office’s allegations are without merit, and while we continue our efforts to engage with the NY AG’s Office to facilitate positive outcomes for all borrowers, PHEAA intends to vigorously defend itself in this suit,” New said in an email.
This is not the first time FedLoan Servicing has come under fire for its management of the loan forgiveness program. In 2017, Massachusetts filed a similar lawsuit against the company, resulting in a failed attempt by the Education Department to quash the case on the grounds that its federal oversight of the company preempted state regulation.
Advocacy groups have also blamed the Education Department for lax oversight of the forgiveness program. Earlier this year, the American Federation of Teachers, one of the country’s biggest teacher unions, sued the department, alleging it ignored borrower complaints about loan servicers providing inaccurate information and making administrative mistakes. The department has said it is administering a complex program created by Congress.
The rules of the public service program are complex. They require borrowers to have loans made directly by the federal government, but until 2010 most federal loans were originated by private lenders. Applicants must also be enrolled in certain repayment plans — primarily those that cap monthly loan payments to a percentage of borrowers’ income. But most of those plans emerged only in recent years.
With all of those requirements, few people could reasonably be expected to qualify for forgiveness at this point. The vast majority of processed applications were denied because borrowers did not meet at least one program requirement, which some critics say is a reflection of poor communication on the department’s part.
A recent Government Accountability Office audit said the Education Department never provided a written instruction manual to FedLoan. Instead, the company has had to interpret guidance that was contradictory or poorly explained, according to the audit. Investigators said poor communication between FedLoan and other servicing companies about borrowers’ accounts results in miscounting payments eligible for the program.