Massachusetts Attorney General Maura Healey is suing one of the nation’s largest federal student-loan servicing companies, saying it overcharged borrowers whose debts would be forgiven if they held public service jobs for 10 years.
In a complaint to be filed in Suffolk Superior Court Thursday, Healey alleges that Pennsylvania Higher Education Assistance Agency, which operates under the name FedLoan Servicing, violated federal and state laws by preventing student borrowers, including hundreds in Massachusetts, from making monthly payments that would have counted toward their obligations under the federal Public Service Loan Forgiveness program.
The state also alleges that PHEAA overcharged student borrowers.
Borrowers participating in another federal loan-forgiveness program, the Teacher Education Assistance for College and Higher Education (TEACH) Grant, were also allegedly affected.
“This company’s actions have jeopardized the financial futures of teachers and public servants across the country,” Healey said in a statement. “These federal programs allow Americans from all backgrounds to dedicate their careers to serving others. My office will protect PSLF and hold PHEAA accountable for forcing these students further into debt.”
According to the suit, the US Department of Education in 2012 awarded Pennsylvania Higher Education an exclusive contract to manage the two programs. It allegedly did not properly or in a timely way process borrowers’ applications, causing them to miss deadlines in the loan-forgiveness programs.
To make up for the delays, the state says, PHEAA put borrowers’ accounts into forbearance status, which is not an approved payment plan under the loan-forgiveness programs. As a result, it says, borrowers will have to make payments on loans for longer than required, delaying the forgiveness of their loans.
A billing-system error resulted in PHEAA allegedly overcharging hundreds of Massachusetts borrowers, allowing it to collect tens of thousands of dollars in payments that were not due, according to the suit.
Keith New, a spokesman for PHEAA, said in an e-mail that the company disputes Healey’s allegations but is “committed to appropriately resolving any outstanding borrower issues while following the US Department of Education’s policies, procedures, and regulations as mandated by the Agency’s federal contracts.”
The Public Service Loan Forgiveness and TEACH programs were created by Congress to address the disconnect between the rising cost of higher education and the need for skilled workers in public-sector jobs, which tend to have lower salaries. The programs give students who graduate with significant loan debt an incentive to pursue public-service jobs.
The PSLF program allows public employees such as police officers, military personnel, nurses, social workers, and government workers to receive loan forgiveness after 10 years of employment in approved positions.
Under TEACH, students who wish to pursue teaching careers in low-income schools for at least four years in fields such as math, science, or foreign languages are given financial grants. Students receive up to $4,000 per year to help pay for the education required for their teaching careers.
PHEAA manages more than a quarter of the nation’s $1.4 trillion student loan debt on behalf of various lenders nationwide. That includes hundreds of thousands of Massachusetts borrowers with a total outstanding principal balance of more than $5 billion.