Federal student loans are made by the Department of Education. But the day-to-day relationship a borrower has with their debt — receiving statements, making payments, enrolling in repayment plans, requesting deferments — is handled by a loan servicer. Servicers are private companies paid by the federal government to manage the federal loan portfolio on its behalf. For decades, the history of that arrangement has been one of inadequate oversight, documented failures, and borrowers who paid significant and sometimes irreversible costs as a result.
Who Servicers Are and How They’re Paid
A loan servicer is a financial services company that administers student loan accounts. The Department of Education contracts with these companies to handle billing, repayment plan enrollment, income-driven repayment (IDR) recertification, deferment and forbearance requests, and general borrower assistance. Servicers are paid per-account fees — a set amount for each borrower whose account they manage.
The fee structure creates a structural problem. Servicers are paid whether the borrower is doing well or poorly, whether they are enrolled in the right repayment plan or the wrong one, and whether they ultimately repay the loan or default. There is no strong financial incentive for a servicer to invest time in helping a struggling borrower navigate a complex income-driven repayment enrollment process when placing that borrower in forbearance — which is simpler and faster — keeps the account active and the fees flowing.
The major servicers over the history of the direct loan program have included FedLoan Servicing (operated by the Pennsylvania Higher Education Assistance Agency, or PHEAA), Navient (spun out of Sallie Mae in 2014), Great Lakes Educational Loan Services, MOHELA, and Nelnet. These companies have collectively managed tens of millions of accounts and have each been the subject of regulatory actions, lawsuits, or congressional investigations.
PHEAA and FedLoan Servicing
PHEAA, operating under the brand name FedLoan Servicing, was designated by the Department of Education as the sole servicer for Public Service Loan Forgiveness accounts — meaning it was responsible for tracking progress toward the 120 qualifying payments required for PSLF forgiveness. This was a critical function: an error in tracking could cost a borrower years of progress toward forgiveness.
In 2017, the Massachusetts attorney general sued PHEAA, alleging that the company had systematically misprocessed PSLF applications, steered borrowers into the wrong repayment plans, and incorrectly converted some Teacher Education Assistance for College and Higher Education (TEACH) grants into loans — meaning teachers who believed they were receiving grants were instead accumulating interest-bearing debt they owed back. In 2021, PHEAA settled the Massachusetts lawsuit without admitting wrongdoing, agreeing to review cases and provide remediation.
The New York attorney general filed a similar suit in 2019, also alleging failures in PSLF administration and income-driven repayment processing. The pattern of complaints was consistent across states: borrowers who had done everything right, or thought they had, were finding that their progress toward forgiveness had not been correctly tracked.
PHEAA announced in 2021 that it would not renew its federal servicing contract. The transition of its accounts — including all PSLF accounts — to MOHELA was accompanied by processing delays, missing payment histories, and extended call wait times that left borrowers unable to get accurate information about their accounts during a period when the payments were critical to their forgiveness timelines.
Navient
Navient was spun out of Sallie Mae in 2014, taking on the government loan servicing business while Sallie Mae retained the private loan portfolio. By the time of the split, Navient was managing approximately $300 billion in student loans for more than 12 million customers.
The Consumer Financial Protection Bureau sued Navient in 2017, alleging that the company had systematically steered struggling borrowers into forbearance rather than income-driven repayment plans. The practical effect was significant: a borrower in forbearance accumulates interest but makes no progress toward IDR forgiveness or PSLF. Over multiple years, steering borrowers away from IDR and toward forbearance could cost a borrower thousands of dollars in unnecessary interest and delay or eliminate their eligibility for forgiveness programs they had been paying toward.
The CFPB’s lawsuit also alleged that Navient had misapplied payments on multiple-loan accounts, allocating excess payments in ways that maximized interest charges rather than reducing principal, and that it had provided false information about income-driven repayment enrollment requirements.
A bipartisan coalition of 39 state attorneys general settled a separate lawsuit with Navient in 2022 for $1.85 billion. The settlement included $1.7 billion in private loan cancellation for former borrowers of certain for-profit colleges and $95 million in restitution payments to federal loan borrowers who had been steered into extended forbearance. Navient admitted no wrongdoing.
In 2024, the CFPB concluded its years-long federal case against Navient, permanently banning the company from engaging in federal student loan servicing and ordering it to pay $100 million to borrowers it had harmed. Navient had by that point already exited the federal servicing market, having transferred its government loan portfolio to Aidvantage (Maximus) in 2021. The ban applied to a company that had already left the business it was barred from.
The Forbearance Trap
The pattern documented in the CFPB and attorney general lawsuits — servicers steering borrowers into forbearance rather than income-driven repayment — deserves particular attention because of its scale and consequences.
Forbearance is a suspension of required payments. It does not require verifying income, completing forms, or re-certifying annually. For a servicer operating under time pressure and paying staff by call volume, forbearance is the fastest resolution for a borrower who says they cannot afford their payments. The borrower’s immediate problem — the payment due — is resolved, and the call is closed.
The problem is that forbearance solves the short-term problem by making the long-term problem worse. Interest continues to accrue. It capitalizes. The borrower makes no progress toward IDR forgiveness or PSLF. A borrower who might have qualified for forgiveness after 20 years of IDR payments instead accumulates interest for years in forbearance and then faces a larger balance on a longer repayment timeline.
Federal analysis found that millions of borrowers had been placed in forbearance when they should have been enrolled in income-driven repayment — a systemic failure that affected the finances of individual borrowers and the overall cost of the loan portfolio.
CFPB Complaints and the Accountability Gap
The CFPB has received hundreds of thousands of complaints about student loan servicers since it began tracking them. Recurring themes include: incorrect billing amounts, payments applied to the wrong loans, failure to process income-driven repayment applications, lost documentation, inaccurate payment counts toward PSLF, and conflicting information provided by different servicer representatives.
The fundamental accountability gap is structural. The Department of Education contracts with servicers and is ultimately responsible for their conduct, but oversight has been inconsistent across administrations. The agency’s contracting and monitoring systems were not designed to catch the kinds of systemic errors — misapplied payments, improperly counted payments, systematic IDR steering — that the enforcement actions revealed.
Borrowers who experience servicer errors face the burden of documenting and contesting those errors themselves. The legal remedies available to federal loan borrowers are more limited than those available in most consumer credit contexts. States have attempted to fill the gap through their own enforcement, but servicers have argued — unsuccessfully in most courts — that federal law preempts state consumer protection claims.
The result is a system where the people most likely to be harmed by servicer errors are also the least likely to have the time, knowledge, and resources to contest them successfully. The borrower rights article explains what legal tools are available and what the process of contesting errors actually looks like.
This article was researched and drafted with AI assistance under human review. See our full AI and editorial practices.