To understand why so many college graduates loathe the giant student loan servicer FedLoan, consider the experience of Megan Gammill.
The special-education teacher qualified for a $4,000 grant for tuition by teaching math in a poor public schools in Prince George’s County, Md., and Baltimore.
But when Gammill sent her grant recertification paperwork into FedLoan, as required, it was rejected. And as Gammill, 35, scrambled to fix it with calls and emails, the Harrisburg-based agency converted her TEACH grant into a $4,000 loan and told her the decision was irreversible.
Not willing to accept another $4,000 in debt, Gammill pleaded with the servicer, speaking to about 40 call-center employees and noting many of their company identification numbers over two years to get her grant recertified. Nothing worked. Gammill prevailed only after engaging a free attorney at the advocacy group Public Citizen.
“They are effectively stealing from teachers,” she said.
That’s been the experience of many borrowers dealing with FedLoan, part of the state-run monolith Pennsylvania Higher Education Assistance Agency (PHEAA) that services about 7.5 million federal student borrowers. The agency faces investigations from state attorneys general and a flood of complaints and lawsuits from disgruntled customers who believe that its customer service has cost them big bucks.
But now the giant loan collector is facing its own financial reckoning.
PHEAA’s profits have plummeted by 90 percent over the last four years. And the agency could soon start to lose money, in part because its servicing business has gotten so much harder, with new Congress-mandated loan options requiring more attention over the phone. The new CEO, James Steeley, who took over in January, has warned lawmakers that the river of cash that PHEAA has historically sent to Pennsylvania’s college grant program — about half a billion dollars over the last four years alone — is drying up and won’t be available in the future.
The tarnished agency now needs to reinvent itself, Steeley says, and the 41-year-old former bank comptroller has an audacious plan. He wants the loan servicing agency to become a loan originator, lending money directly to students as it did in the past. Steeley also has plans to reduce customer-service calls by using more smart-phone technology and upgrading IT systems.
State lawmakers — and PHEAA’s board, which is composed mostly of elected officials and governor appointees — are cautiously optimistic.
"We have to pivot and get it right,” said State Sen. Vincent J. Hughes, a Democrat who represents Philadelphia and Montgomery County and is a PHEAA board member. “I am hoping that over the next several months we really dive into this.”
But others predict more consumer angst and risk for taxpayers.
PHEAA will now borrow $50 million in 2019 to enter a crowded lending field with entrenched competitors. And its track record with such customers as Gammill makes it wholly unsuitable to be a lender, said Seth Frotman, the former student loan watchdog at the Consumer Financial Protection Bureau who now runs the nonprofit Student Borrower Protection Center in Washington.
“Every family should be worried about taking a loan from a company that claims it is above the law," Frotman said, referring to PHEAA’s legal strategy that, as a state agency, it should be immune to lawsuits. “It’s not just that PHEAA is struggling to service federal student loans, like those in the Public Service Loan Program program. It also has a horrendous track record as a servicer for private student loans. A decade ago it got in bed with the biggest banks to create ‘the worst batch of student loans Wall Street ever bundled’ and, since then, as defaults have skyrocketed, it has routinely been accused of failing to produce basic documentation showing borrowers owe the debts being collected.”
Wayne Bremser, accounting professor at Villanova University, also expressed concerns after evaluating PHEAA’s finances at the Inquirer’s request.
“You look at how much risk the organization has, and it has increased a lot,” said Bremser, noting the declining income and the agency’s $50 million opening bet on lending. “They are facing some difficult challenges that will require resources for them to get [new loans to students] up and running. If you lose credibility with customers, they might stop coming back to you. Reputational risk makes people wary of you.”
Americans owe about $1.5 trillion in college student loans. And as the Inquirer’s Debt Valley series has shown, the federal student loan system is rich in cash but poorly run, the default rate among students is growing, and the harm is especially apparent in Pennsylvania, where students graduate with some of the highest debt in the nation. State-supported colleges, such as Pennsylvania State University and Temple, charge tuition higher than those in other states, and the loan servicer PHEAA is a major cog in the nation’s byzantine college lending system.
Based out of a gray-stone, six-story mid-rise, a short walk from Harrisburg’s Capitol Building, PHEAA was created in 1963 to originate and service loans for the state’s students. It financed its own operations like a bank: borrowing money at prevailing interest rates and lending it to Pennsylvania students at higher ones.
But that changed drastically with the 2008 financial crisis.
Like most commercial borrowers, PHEAA found itself frozen out of debt markets. The U.S. government helped bail out banks by taking over responsibility for lending to college students through the U.S. Department of Education. But the federal government lacked a key function as the key student lender: how to service loans for millions of American borrowers with loan statements, calculating interest charges, principal reductions, tracking documentation, and many other tasks.
PHEAA presented itself as an answer. It services its loans for Pennsylvania students and those in other states.
It offered to do the same on a massive and more complex scale for the Department of Education. PHEAA bid and won the first of its federal contracts in 2009, branding its service as FedLoan.
PHEAA’s payrolls swelled to 3,000 employees as it opened call centers around the state — Chester and Pittsburgh, joining Harrisburg, Mechanicsburg, and State College — while creating an outsourced call center in Florida last year.
PHEAA today services $320 billion in student loans, or $1 in $5 of the nation’s student debt, and graduates know the servicer as FedLoan.
But the contracts came with strings. As Congress and the Department of Education responded to concerns over student delinquencies and defaults, they devised an expansive menu of repayment options through FedLoan, which added to servicing costs without raising the per-borrower fee paid to PHEAA.