The Department of Education has taken action against one of its student loan servicing contractors, MOHELA (Missouri Higher Education Loan Authority), for their failure to send billing statements on time to 2.5 million borrowers. This mistake caused over 800,000 federal student loan borrowers to make late payments when payments resumed earlier this month after a three-year pause.

In response to the error, the Department of Education has decided to withhold $7.2 million from MOHELA's October payment. Additionally, the servicer has been directed to place all affected borrowers in forbearance, a period where payments are not required and interest is frozen, until the issue is resolved.

MOHELA is one of the student loan servicers contracted by the Department of Education to collect federal student loan payments. Since 2022, the company has been responsible for handling loan payments from borrowers seeking debt cancellation through the Public Service Loan Forgiveness program.

Education Secretary Miguel Cardona expressed the administration's commitment to protecting borrowers during their repayment process and stated, "Our oversight efforts have uncovered errors from loan servicers that will not be tolerated."

As of August, MOHELA serviced nearly 7.8 million student loan borrowers, with approximately 5.3 million new accounts compared to the previous year. The increase in accounts was due to the transfer of loans from other companies that ended their loan servicing contracts with the federal government.

Earlier this month, the Department of Education acknowledged that approximately 350,000 borrowers whose loans are serviced by different companies received bills with incorrect amounts. These affected borrowers have also been placed in forbearance until the issue is resolved.

With around 28 million federal student loan borrowers entering repayment in October for the first time since March 2020, when payments were paused due to the pandemic, many have encountered difficulties, such as long wait times, when reaching out to their servicers for payment-related inquiries.

Adding to the complexity, a new income-driven repayment plan called SAVE (Saving on a Valuable Education) was introduced this summer. The plan offers favorable terms and lower monthly payments for borrowers with low incomes. However, some borrowers who applied in August or September are still awaiting processing of their applications.

Fortunately for borrowers, the Department of Education has implemented a temporary on-ramp period until September 30, 2024. During this period, missing a payment will not result in being reported as in default to national credit rating agencies. However, it is important to note that interest will continue to accrue, leaving borrowers not entirely exempt from financial obligations.

In light of these recent developments, the Department of Education remains vigilant in ensuring that student loan servicing entities adhere to their responsibilities, and borrowers are protected throughout the repayment process.