Like most commercial borrowers, PHEAA found itself frozen out of debt markets. The U.S. government helped bail out banks by taking over responsibility for lending to college students through the U.S. Department of Education.
But the federal government lacked an important function as the key student lender: how to service loans for millions of American borrowers with loan statements, calculating interest charges, principal reductions, tracking documentation, and other tasks.
PHEAA offered to do all that on a massive and more complex scale for the Department of Education. PHEAA bid and won the first of its federal contracts in 2009, branding its service as FedLoan.
Last year, five federal lawsuits targeted PHEAA and FedLoan alleging a host of servicing problems that were consolidated in federal court before U.S. District Judge C. Darnell Jones II in Philadelphia.
The suits claim that PHEAA posts misleading information on its website, fails to respond to complaints and process forgiveness applications, puts borrowers into repayment plans without consent, or improperly places them in deferment, letting students temporarily stop or reduce federal loan payments.
The attorneys general in Massachusetts and Kentucky have also filed suits on behalf of borrowers against PHEAA and FedLoan.
PHEAA officials have warned that the agency's profits have declined substantially this year because of the costs of servicing federal loans. So now the agency is working to become a major loan originator, lending money directly to students as it did in the past and raising new risks for the agency's performance
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