PHEAA, explained. How an obscure Pa. state agency became one of the nation’s biggest student loan servicers.

For more than a decade, a glass and chrome building on Harrisburg’s Seventh Street has been at the center of America’s student debt crisis.  

The Pennsylvania Higher Education Assistance Agency, an independent state agency that distributes state-funded college scholarships, was created 50 years ago to give modest grants and loans to Pennsylvania students. It’s since morphed into one of the largest loan servicers in the nation, managing a portfolio worth more than $425 billion.

PHEAA, as it’s more widely known, has come under fire in the press and in the halls of Congress recently for its role administering the Public Service Loan Forgiveness program, a federal initiative that’s supposed to forgive student debt for nurses, teachers and other eligible professionals.

Borrowers across the country say PHEAA’s failure to accurately track their loan payments made them ineligible for loan forgiveness.

• Tell us More: Have you had an experience working with PHEAA or FedLoan, its loan servicing entity? We want to hear from you.

PHEAA’s operating costs are covered by revenue it earns as a loan servicer. But the agency still receives an annual line item in Pennsylvania’s state budget to fund scholarships for in-state students.

It’s also overseen by a board that includes 16 members of the state House and Senate, who said through a representative last week that they’re powerless to do anything to help borrowers seeking federal loan forgiveness.

Here’s how Pennsylvania got into the student loan business and what’s happened since. 

PHEAA’s origins

Pennsylvania’s Legislature created PHEAA in 1963 with a simple goal: to help students and their parents in the Commonwealth pay for higher education. 

The act signed by then-Gov. William Scranton included a $1.2 million appropriation to get the lending operation off the ground. From there, PHEAA operated much like a traditional bank, borrowing money and loaning it out to Pennsylvania students at higher interest rates, according to the Philadelphia Inquirer.

Its loan and grant programs have proliferated ever since.

To date, the agency has distributed 7 million scholarships totaling $11.4 billion through its PA State Grants Program, according to a handbook it published for Pennsylvania state lawmakers. 

Although PHEAA scaled back its lending programs after the 2008 recession, it recently began advertising a new loan program called PA Forward, aimed at undergraduate and graduate students and their parents.

The agency also offers targeted scholarship funds, including one for students at Pennsylvania’s historically black universities and another for blind and deaf students. 

Some of the funds for those grant programs come from annual appropriations in Pennsylvania’s state budget. In the 2018-19 fiscal year, PHEAA got a total of $369 million from state coffers. 

But the bulk of PHEAA’s budget comes from its work as a loan servicer for federal and private lenders.

In that role, PHEAA facilitates payments between borrowers and the financial organizations that lend them money. Its employees also counsel borrowers who fall behind on their payments.

PHEAA began ramping up its loan servicing operation after the Great Recession in 2008 froze many borrowers out of the debt market, the Philadelphia Inquirer reported.

In 2009, the agency landed one of its most lucrative gigs to date: a 10-year, $1.3 billion contract to service federal loan forgiveness applications for the U.S. Department of Education. 

‘Missteps, errors and mismanagement’

Every day, thousands of borrowers across the country interact with PHEAA as they try to take advantage of an imperiled federal program that offers to forgive their student debt.

The Public Service Loan Forgiveness program was created in 2007 to encourage more students to enter low-paying public service professions. It offers to wipe away debt for people who work as teachers, firefighters, public interest lawyers, or other qualifying professions, as long as they make 10 years’ worth of loan payments while working for the government or eligible non-profits.

A story published last month in the New York Times described the program as a beacon of hope for workers laden with student loans. But 99 percent of those who sought relief were rejected, the newspaper reported.

Borrowers and consumer advocates directed some of their ire at Congressional lawmakers who wrote the loan forgiveness legislation, and the Department of Education, which administers the program. 

But they reserved special criticism for PHEAA, which services loan payments as an entity called FedLoan.

Reviews dating back to 2015 found that PHEAA representatives lost track of loan payments and mistakenly told borrowers they were on track for forgiveness.

A report by a U.S. Department of Education watchdog found earlier this year that PHEAA provides some of the worst customer service among all of its private contractors.

Ten percent of calls to the FedLoan center in Harrisburg between May and June 2017 were considered “failed calls,” meaning that employees failed to give struggling borrowers good information on their repayment options, according to a summary of the report in the Philadelphia Inquirer. 

The U.S. Department of Education wrote a sternly worded letter to PHEAA in April demanding it improve wait times at the Harrisburg call center.

Congressional Democrats called on a federal consumer protection watchdog to investigate PHEAA in October, saying that its “missteps, errors and mismanagement” of loan forgiveness applications caused harm to “tens of thousands of public servants and their families.

PHEAA is currently fighting separate federal lawsuits from the Attorneys General of New York and Massachusetts, who say FedLoan miscounted loan payments and improperly rejected thousands of applicants who qualified for forgiveness. 

Elected officials in Pennsylvania have been silent as borrowers and consumer watchdogs railed against the state’s own publicly supported loan servicing corporation. 

State lawmakers who sit on PHEAA’s board deferred comment on the complaints to agency spokesman Keith New, who said FedLoan administers the program “in accordance with program rules and federal law.”

What’s the payoff?

New declined to say whether the agency will seek to renew its contract with the U.S. Department of Education after it expires this month.

If its leaders decide to wash their hands of the cumbersome loan program, they may soon be looking to replace more than a billion dollars of revenue, since PHEAA’S contracts constitute its largest source of income. 

Executives say those contracts are a win for Pennsylvania taxpayers and students.

Revenue from PHEAA’s loan-servicing business pays the agency’s operating costs, including executive salaries that are among the highest in state government. CEO James Steeley earns $330,000 per year, according PennWatch, a database of state employee salaries.

The revenue also funds scholarship programs for Pennsylvania students.

“We started making money and gave it all back to students,” New said. “We do not want to be a drain on taxpayer dollars.”

PHEAA’s critics say there’s a big problem with that defense, though. As the agency’s loan portfolio has grown, the student debt crisis in Pennsylvania has gotten worse. 

The average student loan debt for new graduates in Pennsylvania is nearly $37,000 per borrower – the second highest rate in the country, according to testimony Attorney General Josh Shapiro prepared for a Congressional panel this summer.

That’s partially because state support for public colleges and universities has failed to keep pace with inflation, especially after the Great Recession in 2008. 

Pennsylvania’s per-pupil spending on public universities fell by 30 percent between 2008 and 2017, according to the Center on Budget and Policy Priorities, a progressive think tank based in Washington, D.C.

Awards from PHEAA’s hallmark scholarship program, meanwhile, have stagnated. 

PA State Grants scholarships have been capped at $4,123 for three consecutive years, according to PennLive. The scholarship program narrowly avoided deep budget cuts this year thanks to a lower-than-anticipated number of applicants.

Student debt comes to the Capitol

Lawmakers who sit on the loan agency’s board may say they’re powerless to help borrowers who blame PHEAA for mishandling their debt forgiveness applications.

But some of their colleagues in the Legislature are looking for alternate methods to hold student loan agencies to account.

State Rep. Jennifer O’Mara, D-Delaware, is a 30-year-old lawmaker who co-chairs the bipartisan Student Debt caucus in Pennsylvania’s state House.

O’Mara told the Capital-Star that the 20-member caucus is considering legislation that would create a statewide student debt ombudsman — an official who will investigate administrative mistakes or problems for Pennsylvania lenders. 

O’Mara has spoken publicly about carrying $36,000 in student debt. She said ran into her own problems with FedLoan when she was on her path to federal loan forgiveness.

When her statements didn’t look right, she called PHEAA but never heard back. When she voiced her concerns at a House hearing on student debt in early December, and the problem was fixed. 

But O’Mara still learned a lesson from the exchange.

“It’s frustrating I can only get that attention as a state representative calling them out in public,” O’Mara told the Capital-Star.

Capital-Star reporter Stephen Caruso contributed to this story.