MOHELA Faces Multistate Investigations as Federal Oversight Crumbles

MOHELA, the embattled student loan servicer, now faces unprecedented scrutiny from both state and federal authorities. In late 2023, a coalition of state attorneys general and financial regulators launched a multistate investigation into the company’s handling of borrower accounts, citing chronic mismanagement, billing errors, and delays in income-driven repayment and Public Service Loan Forgiveness (PSLF) program processing.

And now, even as federal oversight systems appear to be deteriorating, the Department of Education has announced plans to transfer an unspecified number of MOHELA-serviced accounts to other contractors by the end of 2025—a move ostensibly intended to address longstanding service failures and improve customer outcomes.

Investigations into this servicer’s operations are nothing new because MOHELA has been under fire for years from lawmakers, regulators, and borrower advocates. Critics say the company routinely issues late or inaccurate billing statements, sends misleading notices about interest charges, and employs “call-deflection” tactics that trap borrowers in endless automated loops rather than connecting them directly with call center agents. The Student Borrower Protection Center even accused the servicer of intentionally creating a “byzantine loop of misinformation and false promises.”

A 2024 lawsuit filed by a labor union with one of the largest proportions of student loan borrowers in the United States—AFT, the American Federation of Teachers—paints an especially disturbing picture. The litigation accuses MOHELA of misleading borrowers and systematically obstructing access to Congressionally-mandated benefits within the PSLF program. The complaint characterized these behaviors as a “shocking series of abuses” and argues that MOHELA “misleads and misinforms borrowers, fails to process applications for PSLF and income-driven repayment (IDR) plans in a timely manner or entirely, fails to provide refunds, miscalculates balances, over-charges borrowers, fails to respond to borrower inquiries and denies borrowers information to which they are entitled.”

Nevertheless, the sweeping scope of the issues under investigation by the state attorneys general left observers and analysts surprised. Sources familiar with the inquiries told Jordan Weissmann of Yahoo Finance that after federal student loan payments resumed in 2023 following the pandemic pause, the servicer frequently botched some of the most basic administrative processes like billing, payment calculations, and documentation.

As he further explains in this video report, borrowers reported delayed or incorrect bills, prolonged processing times for IDR applications, and challenges in receiving accurate information about their accounts and alternatives that could help reduce their costs.

Cited repeatedly in both trial court and appellate complaints, MOHELA also played a high-profile role in the lawsuits by Republican attorneys general that derailed the Biden Administration’s attempts to offer widespread student loan forgiveness. Those suits include the latest appellate litigation that effectively killed Biden’s newest income-driven repayment program that saved borrowers the most money—the SAVE Plan. Ever since, an aggressive pressure campaign waged by borrower advocates and Democratic elected officials has brought increased scrutiny to bear on MOHELA’s activities.

The current list of participating state attorneys general includes Colorado, the District of Columbia, Illinois, Massachusetts, New York, Pennsylvania, and Washington. State financial regulation divisions in California and Oregon also launched parallel reviews. One of Weissmann’s sources told him that these states formed a collaborative working group to hold MOHELA accountable—a rare display of coordinated state enforcement muscle.

“Multistate investigations don’t happen every day,” one former U.S. Department of Education official told Weissmann. “The last time we saw this level of scrutiny, the company being investigated was ultimately forced out of the market entirely, and we’re still cleaning up the mess they left. That should make clear the gravity of the misconduct happening at MOHELA.”

But as state-led oversight gains momentum, advocates warn that federal regulators may be backing away from their role—potentially undermining the entire effort.

In a sharply-worded letter dated May 7, 2025, the AFT and the Student Borrower Protection Center urged the inspectors general of the Department of Education and the Federal Reserve System to investigate “potential mismanagement and corruption” within their own agencies. Specifically, the groups questioned whether recent layoffs and policy shifts—ostensibly claimed to be budget-saving moves—were actually intended to shield MOHELA and other loan servicers from accountability.

According to the letter, the Department of Education fired entire divisions responsible for supervising student loan servicers, including the teams that responded to information requests from state attorneys general. Meanwhile, at the Consumer Financial Protection Bureau (CFPB), senior leadership reportedly instructed staff to “deprioritize” Direct Loans enforcement altogether—even after a federal judge reinstated the agency’s former Student Loan Ombudsperson and CFPB Advisor Julia Barnard, who had been abruptly removed earlier this year.

The groups also raised concerns about James Bergeron, the acting undersecretary of education. Before joining the Trump Administration, Bergeron led a lobbying group representing federal loan servicers, including MOHELA. In his place, MOHELA CEO Scott Giles now chairs Bergeron’s former employer, the National Council of Higher Education Resources (NCHER). The letter calls for a formal investigation into whether Bergeron’s past ties influenced the department’s current posture.

“Any conflict of interest or obstruction of investigations would be unlawful fraud and abuse,” the letter states. “This must be rooted out and ended to maintain the agencies’ effectiveness and integrity.”

For many, the moment feels familiar. The last period during which the Department of Education witnessed such widespread complaints about a subcontractor ended in September 2024. That was when the CFPB permanently banned the servicer Navient from participating in the loan servicing marketplace.

In several of the nation’s largest industrial states, bans on MOHELA could be next. But much remains uncertain, such as how long investigations will take without federal cooperation. And even if state attorneys general prevail during enforcement actions or litigation, it also remains unclear how much relief borrowers might receive. Although the CFPB’s Navient enforcement action prompted the Biden Administration to cancel $50 billion in student loans for a million borrowers, states don’t have the authority to discharge student loans and would need to pursue other remedies.

What is clear, however, is that the public spotlight has shifted. What was once a quiet bureaucratic failure is turning into a political flashpoint. And as millions of borrowers continue to navigate the loan servicing system during the Trump Administration, the consequences of that system’s failures are becoming harder to ignore.

Millions of Americans may soon see an additional shakeup in the federal student loan system, as all these state investigations will soon be compounded by federal action. In short, the Department of Education has decided to migrate some portion of MOHELA’s accounts to other loan servicers, signaling a major operational transformation in how federal student loans are managed.

In August, the agency confirmed plans to transfer an unspecified portion of the seven million accounts serviced by MOHELA to other contractors on an expedited schedule—by the end of 2025. Instead of a press release or news conference, the migration plans were first disclosed in a reply from the Department to a letter written by Democratic Senator Elizabeth Warren of Massachusetts.

The federal student loan portfolio—more than $1.7 trillion held by over 42 million borrowers—is administered through private contractors. Following Navient’s sudden exit from the market late in 2024, only four remaining servicers now handle most accounts: MOHELA, Nelnet, Aidvantage, and EdFinancial.

But MOHELA’s intense scrutiny in recent months was compounded because it exclusively oversaw the Public Service Loan Forgiveness program’s two million borrower accounts before management of that system was consolidated at StudentAid.gov by the Biden Administration. That program’s borrowers tend to monitor their accounts conscientiously because they’re entitled to student loan forgiveness after only 120 qualifying monthly payments.

In the reply to Senator Warren, Sarah Ursprung—the new acting assistant secretary for legislation and congressional affairs at the Department of Education—said the decision to transfer accounts reflects the agency’s intent to “prioritize efforts to improve customer service to students and parent borrowers.” Ursprung added that “FSA is collaborating with MOHELA to help the servicer manage the multiple strains on its portfolio to help drive overall improvement.”

The Department has not yet disclosed how many accounts will be moved, which borrowers will be affected, or specifically when the transfers will occur. However, it appears that PSLF borrowers are most likely to be included in the migration, given that MOHELA no longer needs to function as the central servicer for that program.

In her letter, Senator Warren focused on how MOHELA performed worse than its peers in answering borrower calls. “In the fourth quarter of 2024, MOHELA took roughly seven times as long to answer phone calls from borrowers compared to the servicer with the second-worst average wait time,” she wrote.

Some financial experts view the problem as a capacity imbalance. Michael Ryan, the founder of MichaelRyanMoney.com, told Newsweek that “the portfolio is mismatched to their capacity. Once PSLF tracking shifted to StudentAid.gov, there’s no reason to keep PSLF-heavy borrowers at MOHELA.”

Pointing to chronically long telephone hold times, borrowers in forums like Reddit echo these complaints. Some of them say the prospect of moving to another servicer cannot come soon enough.

Although frustrated customers may welcome the news, loan servicing transfers have historically created headaches. The Consumer Financial Protection Bureau last year warned that data errors and mismanagement can result in inaccurate borrower records, lost progress toward forgiveness, and payment disruptions.

Kevin Thompson, the CEO of 9i Capital Group, cautioned borrowers to be proactive. “Transfers are rarely smooth. If the records at the current servicer are inaccurate, then the receiving servicer will be working off bad information from the start,” he told Newsweek. “That’s why it’s critical for borrowers to keep their own documentation—PDFs or hard copies—of statements, balances, and interest calculations. If there’s a discrepancy down the line, you’ll have what you need to push back and ensure your loan data is accurate.”

Ryan also warned that the process can be unsettling: “People don’t like change, transfers create friction. Autopay can break. Due dates can slip. Payment counts for PSLF/IDR can display wrong, even if they’re later corrected.” Still, he added, “A better borrower experience is possible, but only if data quality becomes the metric that pays. Otherwise, they’ll just play musical chairs with your loan file.”

Beyond operational concerns, MOHELA’s challenges have sparked a broader political debate over the federal government’s role in managing student loans and protecting borrowers.

Senator Warren challenged the Department to explain how it will ensure MOHELA’s performance following the migration will actually improve. “You admitted that you were doing so to improve MOHELA’s performance, and I appreciate your acknowledgement and action—to my knowledge, the first such admission from the Trump Administration—in response to MOHELA’s failures to adequately serve borrowers,” she wrote in her letter.

Department officials, however, have downplayed the migration’s potential adverse effects, characterizing the move more as “load-balancing.” Ellen Keast, ED’s deputy press secretary, told Newsweek that the agency intends “to spread out federal student loans that are eligible for PSLF across all servicers to drive overall service delivery improvement.” Moreover, Ursprung emphasized that the transition would be carried out “thoughtfully and in a responsible way that avoids negative impacts to borrowers.”

Yet the credibility of these assurances is diminished by MOHELA’s consistent stance that almost always denies any wrongdoing. “Any claims that MOHELA does not act in the best interest of the borrowers we serve as a federal contractor is simply not true,” a company spokesperson told Forbes in 2024. “MOHELA’s priority has always been on helping the student borrowers that we are here to serve while they navigate the often complex and overwhelming federal repayment process, and that is what we remain proudly committed to doing.”

Borrowers continue to feel uncertain about this migration because ED has disclosed so few details about it. The exact timing, scope, and impact of the migration remain unclear, and borrowers might observe different results depending on how effectively the department and the receiving servicers manage the handoff. Experts stress vigilance: updating contact details, monitoring all postal mail and email from loan servicers, and saving payment records will be critical steps that can avoid disruptions.

As Alex Beene, a financial literacy instructor at the University of Tennessee, told Newsweek, “Given the recent slew of changes to student loans at the federal level, borrowers may take this news with concern. There are many borrowers who have had poor experiences with MOHELA, citing poor customer service as the primary reason.”

In the weeks ahead, student loan borrowers will be watching to see whether the Department of Education’s plan to migrate MOHELA’s accounts actually improves customer service—or simply reshuffles all its many longstanding problems.