Sen. Elizabeth Warren (D., Mass.) has targeted a key Pennsylvania agency that handles student debt, saying that its leader lied to her committee and that other firms can do better servicing federal student loans.
“We are dealing right now with … a CEO that came before the subcommittee and lied,” Warren said in a recent interview about James H. Steeley, who runs the Pennsylvania Higher Education Assistance Agency (PHEAA). Known nationally as FedLoan, the agency services about 8 million federal student borrowers.
At issue are Steeley’s comments before the subcommittee, in which he said that PHEAA had not been “penalized” for loan-servicing errors even though the agency has been fined twice in 2020, totaling $244,000. Steeley denied misleading Warren, but added that in “hindsight, I see that certain of my responses were not as clear as they could have been.”
Hundreds of job losses are also coming to PHEAA following its decision to stop its FedLoan unit this fall from servicing a contract that includes the Public Service Loan Forgiveness program. Politicians, union leaders and borrowers have labeled the program a failure while two state attorneys general have sued FedLoan over its federal loan servicing.
PHEAA’s loss of the Education Department contract will cause this once-nationally-known outfit to lose about 70% of the student loans it services.
“Some staff reductions will be inevitable,” PHEAA spokesman Keith New said. But he added that “we are not looking at any immediate reductions. We also expect normal employee attrition, especially in our call centers, to soften any impact over time.”
PHEAA has eliminated about one-third of its workers in the last five years — even as federal fees from the Department of Education went up. Its number of employees fell from 3,600 in 2016 to 2,300 now in calls centers and administrative offices, mostly in Harrisburg, records show.
The AFSCME local union that represents PHEAA employees did not respond for comment. On Glassdoor, an employee posted this month that PHEAA is “not a bad place but currently a sinking ship.” The employee added that since the agency “lost [its] fed contract, seniority is very important.”
PHEAA cited lower profitability in its decision and will focus on other lines of business, including licensing its software and servicing loans for other clients.
State Sen. Art Haywood, D-Montgomery/Philadelphia, said it was time for the state agency to relinquish the federal contract as it had become a hassle.
“There’s a long history of PHEAA being blamed for implementing program rules that came from Congress,” said Haywood, a PHEAA board member since 2018. Warren’s accusation “wasn’t the straw that broke the camel’s back. I would say it was another example of how difficult it is to work with the federal government in this contract. It was disappointing how he [Steeley] was treated” in testimony.
Haywood said the business opportunity of bidding for the contract “was much worse than ending the relationship.”
Even before the showdown at Warren’s April hearing, PHEAA faced rising legal and political pressures. A long-running lawsuit by a federal whistle-blower had stripped PHEAA of its legal immunity as a government entity, opening the agency to lawsuits.
Massachusetts Attorney General Maura Healey sued PHEAA in 2017 on behalf of borrowers in her state, claiming PHEAA made errors. PHEAA settled the case in early 2021 without admitting wrongdoing but agreed to audit the account statements of Massachusetts borrowers.
New York Attorney General Letitia James also is suing the Pennsylvania agency.
Former Education Secretary Betsy DeVos, a Trump appointee, was viewed as friendly toward student loan servicers. But with the Biden administration, new appointees with different views assumed positions of power at the Education Department.
Richard Cordray, the first director of the Consumer Financial Protection Bureau, the agency created after the subprime mortgage crisis, was appointed as the chief operating officer of Federal Student Aid at the Education Department.
Among its responsibilities, PHEAA has been the exclusive loan servicer for the Public Service Loan Forgiveness program that wipes out student debt for college graduates in lower-paying public service jobs if they meet certain criteria.
Unions, teachers, political leaders, and reformers say that the forgiveness program failed many of those whom it promised to help.
Between Nov. 9 and April 30, student loan borrowers submitted 391,333 applications for the program. But PHEAA accepted only 3,458 for student debt forgiveness, federal data show.
PHEAA officials blame errors by other loan servicers, bureaucratic federal rules, and the borrowers themselves for failing to make 10 years of payments as required.
Steeley was responding to a question during the economic policy subcommittee hearing on April 13, chaired by Warren, when he said that PHEAA had not been penalized over its handling of the forgiveness program.
A month later, Cordray informed Warren of the multiple reviews of PHEAA’s performance. .
The department instituted four corrective actions to fix problems and fined PHEAA twice, one for $108,000 and one for $136,000 in June and October of 2020.
In addition, Cordray noted that Education Department officials found that the PSLF program had a 20% error rate in the forgiveness applications from members of the military.
The military personnel had not been completed the PSLF applications and Education Department rules required that FedLoan reject them, PHEAA officials said.
Warren and the ranking Republican on the subcommittee, U.S. Sen. John Kennedy, R-La., wrote Steeley that it was “incomprehensible that you would have subjected yourself to criminal penalties by ‘knowingly and willfully’ providing false information to Congress.”
Steeley responded on July 2 that he did not “willfully provide false testimony” and that he was nervous as he had not previously testified before Congress.
“I did my best to accurately respond to your questions in real time,” testified Steeley, who makes $334,950 a year.
About a week later, PHEAA announced that it would not seek an extension of the education department contract to service student loans. The agency had the contract for a dozen years. Steeley declined to be interviewed for this story.
Warren said that the education department has “stepped up and said the old days, when student loan debt servicers could do whatever they wanted and rake in profits, those days are over. PHEAA decided they would leave the field.”
As for PHEAA’s contention that servicing student loans had become less profitable, Warren said that other companies can bid on the contract. “This is how markets work. There is a lot of profit.”