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FedLoan’s board needs student advocates, finance experts, Pa. auditor say in new PHEAA report

Little-known agency PHEAA, the student loan servicer called FedLoan, needs outsiders on its board, and a student loan ombudsman.

Pennsylvania Auditor General and Democratic congressional candidate for Pennsylvania's 10th District Eugene DePasquale in midtown Harrisburg on Saturday, Sept. 19, 2020. KRISTON JAE BETHEL for the Inquirer
Pennsylvania Auditor General and Democratic congressional candidate for Pennsylvania's 10th District Eugene DePasquale in midtown Harrisburg on Saturday, Sept. 19, 2020. KRISTON JAE BETHEL for the InquirerRead moreKRISTON JAE BETHEL / For the Inquirer

Auditor General Eugene DePasquale says Pennsylvania’s student loan servicing agency — one of the nation’s largest — stands out for more than its size: Sixteen of its 20 board members are state legislators, ranking it among the most politician-heavy public boards in the nation, and it is lacking in outside financial experts.

“No other state has public boards composed so heavily of legislators or state-related members with such a small percentage of private-sector board members,” said DePasquale, whose agency issued an audit Thursday of the Pennsylvania Higher Education Assistance Agency (PHEAA).

DePasquale also is recommending that the state create an independent ombudsman or office of student rights to help families and borrowers make informed choices about paying for college.

“In the midst of a pandemic, students need more resources to help them make sound financial decisions,” said DePasquale, who is running for Congress in Dauphin County near Harrisburg as a Democrat.

PHEAA is one of the nation’s largest servicers of student loans — servicing $1 out of every $10 of nonmortgage consumer debt in America. Its $450 billion loan portfolio is a big chunk of the nation’s $1.6 trillion in student debt, and borrowers commonly pay their loans under its brand FedLoan.

PHEAA is also controversial: It faces lawsuits from the New York and Massachusetts attorneys general, alleging that it misled borrowers about repayment options and mishandled the Public Services Loan Forgiveness program, which provides breaks for nonprofit workers, teachers, and public defenders, among others.

PHEAA’s FedLoan employees also had the nation’s highest call fail rate — which meant that they failed to give good information on repayment options to struggling student borrowers — when they were were monitored in April and May 2017, concluded the U.S. Department of Education’s watchdog last year.

“For too long millions of student loan borrowers have been forced to bear the brunt of PHEAA’s incompetence, mismanagement, and illegal practices,” said Seth Frotman, executive director of the Student Borrower Protection Center in Washington. The new report “calls for sweeping changes within the agency to protect the teachers, public servants, and student loan borrowers across the country who need real accountability, not political patronage.”

Besides its Harrisburg headquarters PHEAA operates call centers around the state — in Chester, Pittsburgh, Harrisburg, Mechanicsburg, and State College.

Board chairman and State Rep. Michael Peifer, a Republican from Pike and Wayne Counties, could not be reached.

Communications director Keith New said “PHEAA shares the auditor general’s goal of helping students make informed choices before, during, and after college, and we welcome all perspectives on how to do this more effectively.

In the report, DePasquale cited increases in tuition and widespread student loan debt in Pennsylvania, as well as how students are being forced to leave college or risk going deeper in debt. Pennsylvania also ranks among the top states for total student loan debt, with the average burden at more than $37,000.

PHEAA remains governed by a 20-member board of directors, with 80% of those directors being legislators. The board make-up consists of 16 state legislators, three members appointed by the governor, and the Pennsylvania secretary of education.

Pennsylvania is an “outlier” among most other states, which largely have boards that are composed of voting members from diverse sectors of state legislatures, finance, education, banking, students, and other areas, said DePasquale.

The report is available on the auditor’s website, . DePasquale can only make recommendations.

He called on Harrisburg lawmakers to monitor expenses as well. Financially, PHEAA is not in great shape.

The federal government’s shift away from commercial lending and toward servicing hurt PHEAA, the report said. The agency experienced a steady and dramatic decline in net operating income, from $222 million in 2014 to $21.5 million in 2018.