Massachusetts threatens to sue PHEAA over student loans

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he Massachusetts attorney general’s office is threatening to file a consumer protection lawsuit against Pennsylvania’s quasi-public student loan agency over its handling of federal student loans, and may demand refunds.

Massachusetts Attorney General Maura Healey sent the Pennsylvania Higher Education Assistance Agency a letter last week informing officials the agency was the target of an investigation and a possible lawsuit, state Rep. Mike Peifer, R-Pike, the agency’s board chairman, confirmed. The letter dealt with “consumer protection” issues centered around federally backed loans, Peifer said.

The agency, commonly known as PHEAA, was founded in the 1960s to provide taxpayer-funded grants to needy Pennsylvanians attending colleges, universities, and trade and business schools. Over the last decade and a half, PHEAA has grown into one of the nation’s largest student loan servicing providers. PHEAA’s two corporate units process, manage and collect more than $392 billion in student loans issued by PHEAA, U.S. Department of Education, commercial banks, nonprofits, and private colleges and universities.

In an interview Wednesday, Peifer said the letter was sent shortly before the June 22 PHEAA board meeting and he read it in his Capitol office. Citing the litigious nature of the letter, Peifer said PHEAA’s solicitor advised him not to make it public, and he declined to share a copy with The Morning Call. Massachusetts’ allegations center around “several issues” related to PHEAA’s federal loan contracting services, and PHEAA is trying to determine how much money Healey’s office claims is owed, he said.

“Right now we are just working with them and trying to get our arms around it,” Peifer said. “We are trying to question and quantify [the dollar amount]. We are not going to write a blank check.”

PHEAA, he added, is a “complex entity” that manages a lot of loans offered by different federal programs as well as commercial banks. Paperwork errors sometimes occur, he said, but did not elaborate.

“We have 350 auditors, and we are constantly dealing with changes [in federal rules] and corrections,” Peifer said. “We are not trying to rip off anyone. At the end of the day there are no corporate shareholders looking at dividends. We look at ourselves as a state agency trying to fund higher education for students in the commonwealth.”

Healey’s office “cannot confirm or deny an investigation,” said Jillian Fennimore, communications director for the Massachusetts attorney general.

PHEAA was created in 1963 and now employs 3,600 in Harrisburg and four regional states offices. The day-to-day operations are run by an 11-member executive team led by President and Chief Executive Officer James L. Preston overseen by a 20-member board comprising 16 lawmakers, three gubernatorial appointees and the state Education Department secretary. Peifer chairs the board; the vice chairman is Sen. Wayne Fontana, D-Allegheny.

In a brief interview in the Senate chamber Wednesday, Fontana said a meeting is scheduled this week to discuss the Massachusetts allegations.

In the 2016-17 fiscal year, the Legislature and Gov. Tom Wolf allocated $321.3 million in taxpayer funds to nine grant, scholarship and work-study programs administered by PHEAA. PHEAA contributed another $103 million of its own profits to boost the overall pot of grant money to $424.3 million for Pennsylvania students who meet certain financial aid brackets. Grant funds also can be used at participating higher education institutions in Massachusetts, Delaware, Ohio, Vermont, West Virginia and Washington, D.C. Grants range from $500 to $4,378 depending on school costs.

The grant programs pale in comparison to loan servicing contracts administered by PHEAA’s two corporate units: American Education Services and FedLoan Servicing.

AES was formed in 2002 to handle loans for banks’ credit unions, secondary market loan owners, private education loan owners and the federal government. FedLoan was started in 2009 and services loans provided by and owned by the federal government.

Together, AES and FedLoan managed $392.2 billion in loans as of June 30, 2016, according to PHEAA’s most recent financial audit.

In 2016, the audit shows, PHEAA lost $52.3 million, dropping its total net position to $751.7 million, after subtracting personnel, operational and long-term liability expenses from revenue generated from loan and investment interest and fees.

FedLoan is one of four companies in the nation that handles the U.S. Department of Education’s Federal Family Education Loan Program, which covers Stafford, Unsubsidized Stafford, Federal PLUS and Federal Consolidation loans. FedLoan also handles the federal William D. Ford Federal Direct Loan Program, which includes four loans: Direct, Direct Unsubsidized, Direct PLUS and Direct Consolidation.

PHEAA also manages three major federal grants: Pell and Federal Supplemental Educational Opportunity Grant for low-income students; and the TEACH Grant Program, which reimburses teachers who teach a high-need course in a poor, troubled school.

The audit shows that on April 4, 2016, PHEAA put in a bid with the U.S. Department of Education to become the sole company that processes and manages all U.S. Department of Education loans and grants. The Trump administration is continuing the bidding process. A winner has not been announced.

 

 

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