Education Department penalizes Missouri lender for error that made 800,000 student loan borrowers delinquent

The U.S. Department of Education will penalize student loan servicer Mohela, or the Missouri Higher Education Loan Authority, for its failure to send timely billing statements to 2.5 million borrowers.

As a result of Mohela's errors, more than 800,000 borrowers were delinquent on their loans, the Education Department said in a statement Monday.

The department is withholding $7.2 million in payment to Mohela for October and has directed the servicer to place all affected borrowers in forbearance until the issue is fully resolved, it said.

"Our top priority is to support borrowers as they return to repayment and fix the broken student loan system, and we will not tolerate errors from loan servicers that cause confusion and unwarranted financial instability for borrowers and families," said Rich Cordray, the chief operating officer of federal student aid.

Higher education expert Mark Kantrowitz said he believed this was one of the first instances of the government withholding payment from a student loan servicer.

"Borrowers are penalized for making late payments," Kantrowitz said. "It is only fair for the loan servicer to be penalized for mailing late statements."

Mohela did not immediately respond to a request for comment.

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Federal student loan payments were on pause since March 2020, due to the Covid pandemic, but resumed this month.

The Education Department contracts with different companies to service its federal student loans, including Mohela, Nelnet and EdFinancial. The government pays the servicers a total of more than $1 billion a year to do so, Kantrowitz said.

In a September letter to the student loan servicers, Sen. Elizabeth Warren, D-Mass., and other lawmakers wrote that they were "deeply worried about your preparedness for this unprecedented return to repayment."

In response, the servicers admitted that they were concerned, too.

Mohela wrote that when payments restart it is "anticipating extended wait times and servicing delays."

Yet the servicers had months to prepare for the transition, said Braxton Brewington, press secretary for the Debt Collective, an organization that advocates for debt cancellation.

And, long before the pandemic, the companies had a record of mishandling borrowers' accounts, Brewington said.

"At what point do you start to question why the Biden administration is still contracting with Mohela and servicers who have financial incentives to do the wrong thing?" he said in a recent CNBC interview.