One of the nation's largest student loan servicers has settled a lawsuit that was filed by Massachusetts' attorney general Maura Healey.

The lawsuit was filed in 2017 against Pennsylvania Higher Education Assistance Agency (PHEAA). This semi-federal agency services roughly $355 billion in federal student loans. However, the servicer has been under scrutiny for the way it handled thousands of student loan accounts.

According to the lawsuit, PHEAA did not give borrowers adequate information about the Public Service Loan Forgiveness program (PSLF). Under this federal program, borrowers have to follow strict eligibility requirements to have their loans forgiven.

The servicer is also accused of accidentally converting TEACH Grants into student loans. Borrowers who fell into this category were left paying for a student loan that should have been covered under this federal debt repayment program. For other borrowers, PHEAA is under scrutiny for the way it processed their applications. Because some applications were not processed correctly, borrowers overpaid for their student loans.

Teachers and Public Servants Impacted the Most

The allegations of mishandling accounts primarily focus on two federal student loan forgiveness programs. The TEACH Grant program focuses on teachers and allows prospective teachers to take advantage of federal grants that forgive a borrower's loan. The TEACH Grant requires that borrowers teach in what is considered a low-income school for at least four years.

The second program, PSLF, focuses on giving student loan relief to individuals who go into public service. The relief is offered after 10 years of work in fields including law enforcement or non-profit agencies.

The lawsuit accuses the PHEAA of mishandling student payments resulting in losses for borrowers. These results were especially harmful to borrowers who intended to use the TEACH Grant or the PSLF program. The lawsuit highlights that many of these borrowers who fall into either of the two loan servicing programs were “deprived” by PHEAA of the financial assistance promised by the government, especially considering that many of these borrowers intentionally went into low-paying fields because of the benefits they were expected to have with the two student loan programs.

The PHEAA was also accused of "burdening" borrowers and made it difficult for them to manage their student loans by charging them more than they owed every month. The suit argues that PHEAA did this by “misprocessing their applications for Income-Driven Repayment ("IDR") plans that make borrowers' monthly payments more affordable.” Borrowers were also deprived of having their monthly payments being counted towards loan forgiveness. This caused borrowers to remain in debt for longer.

The lawsuit explains, “Rather than fulfill its responsibilities to borrowers as the exclusive servicer of the PSLF and TEACH Grant programs, PHEAA has positioned itself as a barrier to borrowers' chances of long term financial success.”

The Attorney General accuses PHEAA of being aware of the problems that existed with account mismanagement but avoiding responsibility. Instead, the Attorney General accuses the loan servicer of blaming the loan servicing system as well as borrowers themselves for the mishandling of accounts.

As a result of the lawsuit, the accounts of at least 250,000 borrowers will be re-examined to see if there was any wrongdoing. Borrowers will have their accounts corrected and some may even see a payment from PHEAA if overcharging occurred. PHEAA maintains that there was no wrongdoing on their part. However, they highlight that re-examining the accounts of their customers further emphasizes their dedication to helping student borrowers with their loans.

In 2018, former President Trump publicly announced his support of PHEAA. The Justice Department under his administration argued that the Massachusetts Attorney General did not have the authority to pursue the lawsuit as it conflicted with federal law; however, a judge dismissed Trump's claims and allowed the lawsuit to continue.

Healey's lawsuit is not the first of its kind against the loan servicer. In 2019, New York's attorney general Letitia James also filed a similar lawsuit against the loan servicer.