Nearly 5 million student loan borrowers who got a break on their monthly payments from Congress under the economic rescue law have been hit with incorrect information on their credit reports that lowered credit scores in some cases, POLITICO has confirmed.
The Trump administration has been rushing to fix the errors made by a company the federal government hired to collect and manage student loans. Great Lakes Educational Loan Services provided incorrect information for approximately 4.8 million federal student loan borrowers to credit bureaus such as Equifax, Experian and TransUnion, Education Department officials said Wednesday.
Credit reports are used by everyone from lenders to landlords to employers to assess prospective customers, tenants or employees. The problem affected borrowers who owe federal student loans and who were automatically granted a six-month pause on their payments under the CARES Act.
Congress anticipated that deferring those payments might blemish a borrower's credit report. The errors on borrowers' credit reports come as credit scores and history are especially important as Americans in financial distress seek access to credit. So Congress required the Education Department to make sure the deferred payments were reported to credit bureaus as on-time payments.
But that didn’t happen for most federal student loan borrowers whose loans were managed by Great Lakes.
The company, because of a “coding error,” erroneously reported to the credit bureaus that borrowers’ accounts were “deferred” — a notation that appeared on credit reports and triggered a lower credit score for some individuals.
The Education Department estimated that the credit-reporting error affected about two-thirds of the 7.3 million federal student loan borrowers' accounts assigned to Great Lakes. Both the department and Great Lakes said that they were fixing the problem and claimed that the errors resulted in little or no damage to borrowers’ credit scores.
But consumer advocates disagree, arguing that the “deferred” status could harm borrowers. State regulators and the Consumer Financial Protection Bureau are looking into the incident.
The credit-reporting mishap is the latest challenge that the Education Department has faced in trying to swiftly implement emergency student loan relief passed by Congress as part of the CARES Act.
Education Secretary Betsy DeVos was sued last month by borrowers whose wages were still being garnished to cover payments they owed on their loans — even though the CARES Act ordered a halt to the practice. Congressional Democrats have blasted the department’s inability to halt wage garnishment — which the agency says is the fault of employers who are ignoring its instructions.
Education Department spokesperson Angela Morabito said on Wednesday that the agency responded “aggressively” to fix the credit-reporting problem.
“Providing incorrect information to credit reporting bureaus is totally unacceptable, but it’s important to understand Great Lakes quickly corrected the coding issue last Friday and sent updated credit reporting files to ensure as little impact as possible from the coding error,” Morabito said.
Education Department officials and Great Lakes insisted the errors caused little harm. It is not clear the department will punish Great Lakes over the incident. Great Lakes is one of the department's major loan servicers, earning tens of millions of dollars a year through its contract with the agency.
“We’re working with credit reporting agencies (Equifax, Experian, TransUnion, and Innovis) to ensure the accuracy of the information we reported regarding COVID-19 forbearances,” Great Lakes wrote in a statement, adding that “we do not believe our reporting has impacted actual consumer credit scores provided by those agencies.”
Ben Kiser, a spokesperson for Nelnet, which owns Great Lakes, declined to comment further, referring questions to the Education Department.
For some borrowers, the “deferred” notation on a credit report could have triggered a lower credit score calculated by VantageScore, one of the two major companies that provides credit scores. VantageScore had viewed deferment as a negative factor, according to company spokesperson Jeff Richardson.
But VantageScore announced last week that it would change its algorithm “to minimize the potential of any negative impact associated uniquely” with deferred accounts of all types.
FICO, a competing and larger credit score provider, does not consider deferments in its score. Joanne Gaskin, the vice president of scores and analytics at FICO, confirmed that “there is no negative treatment” associated with a deferred federal student loan under the company’s scoring methodology.
Mike Pierce, who worked on credit-reporting issues at the Consumer Financial Protection Bureau during the Obama administration, said that it’s hard to believe assurances that the errors on borrowers’ credit reports will not end up harming borrowers.
“Across the economy, America has decided that what’s on your credit report is a proxy for how responsible you are,” said Pierce, who is now policy director at the Student Borrower Protection Center. “There are no guarantees when millions are newly looking for work that their job prospects or their housing prospects aren’t going to be held back by the fact that, for millions, their credit reports say they’re less responsible.”
Pierce said that inaccurate information in a borrower’s credit report could have far-reaching consequences. Once the error is “out in the world,” he said, it’s possible “you will see someone deny a borrower a job offer, or a landlord reject an application for a lease because they see this information and decide a borrower is too big of a risk to take in the middle of a pandemic.”
Antonio Salazar, Maryland’s commissioner of financial regulation, said his office was looking into the credit-reporting issues that have arisen with the emergency coronavirus relief for student loans.
His office on Monday issued an advisory, warning student loan servicers and credit reporting agencies about accurately reporting credit information for student loan borrowers who received emergency relief under the CARES Act. The advisory alludes to a “systemic error” and the Great Lakes incident, but it did not name the company specifically.
“We are aware that they are the subject of speculation about alleged mistakes, so we’re looking into it so that we can understand what went on,” Salazar, who was appointed by Republican Gov. Larry Hogan, said of Great Lakes. “The goal is to make sure people follow the CARES Act and Maryland law.” He said his office was also working with the state’s attorney general on the problem.
Consumer advocates said that borrowers who believe they were affected by the credit reporting problems should download and save copies of each of their free credit reports from annualcreditreport.com.
The Consumer Financial Protection Bureau first identified the issue with Great Lakes credit reporting through consumer complaints, including tweets, and has been working with the Education Department on the issue, according to a CFPB official.
The consumer bureau has also been in touch with Great Lakes, the credit reporting agencies and VantageScore, the official said. That person declined to discuss any potential supervisory or enforcement work.
An Education Department official said that the agency had been meeting with the CFPB about this issue. But the official said that the department had not shared with the CFPB the student loan files of affected borrowers.
The CFPB and Education Department have long feuded over how to police federal student loan servicing companies like Great Lakes. The CFPB official confirmed that its joint examination of federal student loan companies with Education Department regulators had started.
The CARES Act suspended all monthly payments and interest on federally held loans until October.
The Education Department’s loan servicers soon after President Donald Trump signed the CARES Act on March 27 were ordered to implement those provisions.
“Servicers shall report to credit reporting agencies as if a regularly scheduled payment was made by the borrower during this period of forbearance,” the department wrote in guidance to its loan servicers, which a department official read over the phone to a reporter. “Reporting should indicate the borrower is current and have made their monthly payment of zero dollars, similar to zero-dollar IDR,” referring to borrowers who have incomes low enough such that they don’t have to pay anything under an income-driven repayment plan.
The Education Department’s Office of Federal Student Aid, which oversees federal student loan servicers, hasn’t made a “formal determination” about whether Great Lakes ran afoul of the department’s instructions, according to another department official.
“We’re trying to get this corrected and ensuring borrowers are not negatively impacted,” the department official said in an interview. “Once that’s completed, we’ll go ahead and assess if there were mistakes made, and if there were mistakes made, we’ll hold the appropriate parties accountable where we have the authorities to do so.”
The department official said it is believed the problems were contained to Great Lakes customers. Spokespeople for the other major federal loan servicing companies — Navient and the Pennsylvania Higher Education Assistance Agency, which operates FedLoan Servicing — said they were unaware of any credit reporting problems with their accounts.
The errors first started in the credit report information that Great Lakes sent to credit bureaus in April. On Friday, the department official said, Great Lakes sent corrected information to the three major credit bureaus — Experian, TransUnion and Equifax — though the department did not know how long it would take for individuals’ credit reports to reflect those changes.
Great Lakes has also fixed its internal systems such that it expects to correctly report borrowers for the month of May, according to the department.
Department officials also said they believed the Trump administration’s proposed overhaul of student loan servicing — which would create a single platform for all borrowers — would avoid these types of mistakes in the future.
“These types of issues are exactly why Secretary DeVos set in motion a complete overhaul of student loan servicing,” Morabito, the department spokesperson, said. “Next Gen will be a game changer that makes sure we no longer have multiple servicers, on multiple platforms, implementing directives and programming systems in different ways.”
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