More on PSLF fail

The US Education Department is assigning the complex task of monitoring the employment and the on-time payments of Public Service Loan Forgiveness aspirants to its worst-performing servicer. USED has contracted with servicing company FedLoan, affiliate of the Pennsylvania Higher Education Assistance Agency (PHEAA), to administer the Public Service Loan Forgiveness program. PHEAA/FedLoan has performed its contract obligations poorly. At the end of 2017 the Department ranked FedLoan 9th out of 9 servicers based on a combination of delinquency rates and customer satisfaction survey results.  Based on this poor performance, US Ed will allocate only 3% of new loan servicing to FedLoan. However, all public servants who are applying for Pubic Service Loan Forgiveness are assigned to FedLoan for loan servicing.

FedLoan's application of the Department's "every month by day 15" payment rule has led to truly absurd impediments to public servants qualifying for PSLF. Borrowers who make an extra monthly payment, and therefore cause all subsequent payments to be posted to the month AFTER the payment was made, are told those payments don't count, because they are not made in the month they are due. Other borrowers find that while they continue making on-time payments and are trying to correct FedLoan's recordkeeping errors, FedLoan will place their account in administrative forbearance. Administrative forbearance means that no payments are due, so that even if the borrower continues making a payment called for by their income-based repayment plan, the payment will not count towards the 120 needed to qualify for forgiveness.

The servicers are paid for each month they continue to service a loan (more for a performing loan, less for a delinquent loan.) While this makes some sense as a contract design, it does create a disincentive for servicers to approve public service loan forgiveness and other discharges (like permanent disability.)  Servicing contracts also create incentives for servicers to put borrowers into forbearance rather than income-based repayment. The PSLF fail comprises a combination of regulatory failure, contract design failure and contract supervision failure.