AFT sues MOHELA, alleging student loan servicer ‘misleads and misinforms’ borrowers

Dive Brief:

• The American Federation of Teachers sued a major loan servicer on Monday in Washington, D.C. superior court, accusing the organization of harming borrowers, particularly around the federal Public Service Loan Forgiveness program.
• In its complaint, the union alleged that the Missouri Higher Education Loan Authority, or MOHELA, has been “cutting corners, prioritizing its bottom line, and deliberately ignoring its responsibilities to borrowers.” As a result, AFT said it has spent tens of thousands of dollars and more than 2,000 hours of staff time to help its members navigate the resulting “mess.”
• In an emailed statement, MOHELA said it would “vigorously defend” itself against the lawsuit. “Providing support to student loan borrowers is the utmost priority to MOHELA, and any claims to the contrary are false,” the organization said.

Dive Insight:

In its 50-page complaint against MOHELA, the teachers’ union rattled off a laundry list of allegations around the loan servicer’s operations and lack of capacity. 

Toward the top of that list was a failure to deliver timely bill notices to 2.5 million borrowers, which led to 800,000 becoming delinquent on their loans, the U.S. Department of Education said last fall. In response, the department withheld a $7.2 million payment to MOHELA as punishment. 

The complaint also said 280,000 borrowers were overcharged for their loan payments because MOHELA used incorrect guidelines to make calculations.

“MOHELA misleads and misinforms borrowers, fails to process applications for [public service loan forgiveness and income-based repayment plans] in a timely manner or entirely, fails to provide refunds, miscalculates balances, over-charges borrowers, fails to respond to borrower inquiries, and denies borrowers information to which they are entitled,” the complaint alleges. 

This year, the Education Department opted to transfer potentially over 1 million student borrowers from MOHELA to another loan servicer. MOHELA, which says on its website that it has helped over 8 million borrowers in repayment, requested the transfers to better support borrowers, the department said. 

Following last year’s billing issues, MOHELA has come under attack from student borrower advocates and progressive lawmakers. MOHELA’s name was mentioned dozens of times in an April report compiled by several Democratic senators, including Elizabeth Warren, about issues with student loan servicers during the return to repayment.

In May, those lawmakers and others called on the Education Department to “hold MOHELA accountable for its failures using the full extent of your authority.”

MOHELA has maintained that it is a nonprofit entity focused on supporting borrowers. In April, it sent and published a cease-and-desist notice to the nonprofit Student Borrower Protection Center after the advocacy group published a critical report about MOHELA.

The report grew out of a yearslong investigation the center conducted with AFT. The findings accused MOHELA of creating a “call deflection scheme” that diverted borrowers away from customer service representatives — who were needed to perform critical functions such as correcting informational errors — and to sometimes nonoperational parts of the organization’s website.

In its cease-and-desist, MOHELA said the report made “false, misleading and sensationalized claims and insinuations regarding MOHELA and its business activities,” arguing that many of its practices are common in the business world. MOHELA also said it “dramatically increased its staffing” to meet servicing needs for loan programs, hiring nearly 3,000 staff between September 2021 and February 2024. 

Threatening a libel suit, MOHELA called on the group to take the report off its website and stop further distribution of it. The report remains available and publicized through SBPC’s website.

AFT took up the alleged bureaucratic issues at MOHELA in the new lawsuit, which described a “Kafkaesque experience” that made it “practically impossible for borrowers to correct account errors, make important decisions to protect their economic well-being, or even confirm basic information about their student loans.”

The union largely highlights the impact on the Public Service Loan Forgiveness program, saying in the complaint that 75% of its 1.8 million educator members are eligible. AFT alleged that this gives the union “a front-row seat to MOHELA’s unlawful conduct, particularly as it affects public service workers.”

The union requested a jury trial and is seeking injunctive relief against the organization to “remedy the systemic deficiencies” as well as monetary damages.