A major student-loan company is being punished for preventing over 460,000 borrowers from accessing cheaper monthly payments

• The Education Department said student-loan company MOHELA failed to process borrower applications for income-driven repayment plans.
• The department is not assigning new accounts to MOHELA until it corrects its actions.
• This is the second penalty MOHELA has faced over failure to fulfill its contractual obligations.

The Education Department notified student-loan company MOHELA on Tuesday that it would be facing penalties for failing to perform the servicing obligations required in its contract.

According to a document from the Education Department reviewed by Business Insider, MOHELA has failed to process over 460,000 applications for borrowers on income-driven repayment plans, preventing those borrowers from accessing more affordable monthly payments.

The department also said that MOHELA has failed to stop capitalizing interest on borrowers' accounts, incorrectly marked some borrowers for negative credit reporting, and processed forgiveness for borrowers who met the threshold in a timely manner.

"The Department continues to take swift action in response to errors that cause confusion or unnecessary difficulty for borrowers," Education Secretary Miguel Cardona told BI in a statement. "Federal Student Aid has determined, through its oversight of federal student loan servicers, that MOHELA has not consistently met the Department's standards for serving borrowers. MOHELA's continued challenges have resulted in less-than-satisfactory quality of servicing for borrowers."

The Education Department requested that MOHELA provide a "corrective action plan" within 10 business days, Cardona said, along with weekly meetings with Federal Student Aid to review the servicer's performance .

In the meantime, the department will not assign new borrower accounts to MOHELA until it can demonstrate that it can properly serve borrowers, which could impact the servicer's revenue.

A MOHELA spokesperson told BI that the Education Department recently gave the servicer new borrower accounts and "is surprised by FSA's sudden change in direction and communication."

"As one of FSA's critical partners and contractors, MOHELA has and will continue to work closely with FSA," the spokesperson said.

Since student-loan payments resumed last October after an over three-year pause, MOHELA has been under scrutiny from the Education Department, lawmakers, and advocates over its handling of borrowers' accounts. It was the first servicer to receive a punishment from the department last year — on October 30, 2023, the department withheld $7.2 million in pay from MOHELA over its failure to deliver on-time billing statements to 2.5 million borrowers.

This is the second penalty MOHELA has faced this year. In January, the department withheld pay from the remaining three major federal servicers over failure to deliver on-time billing statements to borrowers. Still, MOHELA has remained in the spotlight as borrowers have continued to report challenges with the servicer, prompting Sen. Elizabeth Warren to hold a hearing in April over the servicer's performance and later calling for the Education Department to consider terminating the servicer's contract altogether.

'We've organized, we've held hearings, we've done everything possible to hold these student loan servicers accountable for their misconduct," Warren previously told BI. "And it's beginning to bite.

Last year, the department released an accountability framework that outlined enforcement actions it would take over servicers who failed to meet their obligations. It's unclear what action the department will take next over MOHELA if it does not correct its actions.