Mohela Lawsuit Settlement Talks: 800,000 Borrowers Are Waiting — and the Courts Just Refused to Let the Case Die

For the better part of two years, a certain type of talk has been taking place in living rooms and kitchen tables across the nation. When a borrower enters their loan account, they find that the balance appears to be incorrect—it may be doubled, misreported, or in default even if they are positive they made payments. The servicer is contacted. No one who can assist answers the call. An automated answer is sent to them once they file a complaint online.

Months go by. Their credit report shows the delinquency. They were expecting the Public Service Loan Forgiveness approval, but it hasn’t materialized or, worse, was reversed after confirmation. That experience has been a pattern rather than an isolated annoyance for hundreds of thousands of student loan borrowers allocated to MOHELA; it has been sufficiently documented that numerous federal class action lawsuits are currently making their way through the legal system.

The ongoing settlement negotiations for the Mohela lawsuit mark a major turning point in what has grown to be one of the more important legal cases in the student loan servicing industry. The most well-known of the ongoing cases was filed in federal court by the American Federation of Teachers, which claimed that MOHELA engaged in intentional “call deflection” schemes—practices intended to keep distressed borrowers from contacting servicer representatives who could truly address their circumstances—and that these practices directly caused over 800,000 borrowers to end up with delinquent account statuses they didn’t deserve.

MOHELA filed a motion to dismiss the case. That motion was rejected by the court. Class certification initiatives are gathering momentum, and the case is progressing. Borrowers whose student loan balances were misreported after the loan transfer procedure that transferred their accounts to MOHELA are the subject of the Walsh class action, which tackles a separate but no less tangible issue. Some borrowers discovered that their balances appeared to have doubled in the system.

If this error is reported in credit reporting, it can have downstream effects that are challenging to undo even after the fundamental problem is fixed. It may take months or years for credit scores impacted by inaccurate delinquent or inflated balance reporting to improve, which can have long-lasting effects on mortgage applications, rental approvals, and lending decisions. The number of borrowers who are eligible for involvement in this case is being determined through the class certification process, which will influence the negotiation dynamics in any prospective settlement discussion as well as the extent of possible relief.

The story’s emotional impact is concentrated in the Public Service Loan Forgiveness dimension. PSLF was created for persons who worked in public service, such as teachers, nurses, social workers, and government personnel. They were informed that their loans would be canceled after ten years of qualifying employment and payments. For hundreds of thousands of people, the possibility of that forgiveness influenced financial planning and job choices.

Borrowers describe circumstances where financial planning based on a government commitment has been disrupted by servicing errors when they claim that MOHELA misprocessed their PSLF applications, reversed confirmed approvals, or failed to accurately track income-driven repayment progress. Both the number of individual borrowers who have filed CFPB complaints and the momentum behind the class actions are indicative of the kind of resentment that is generated by that experience, which is different from regular billing disputes.

It’s critical to understand what the settlement negotiations for the Mohela lawsuit do not yet entail for specific borrowers. No settlement fund has been authorized. To get paid, there is no claim procedure to follow. The legal process of class certification, discovery, and negotiation is currently in progress because the litigation is active and ongoing. However, no final resolution that would result in any distribution to impacted borrowers has been reached.

The Federal Student Aid Ombudsman Group and the CFPB both have procedures specifically for student loan servicer disputes and produce the kind of documented complaint record that becomes relevant in the context of regulatory oversight and potential litigation outcomes, so people who have encountered billing errors, PSLF mishandling, or credit reporting issues should file complaints with them.

The regulatory history that gives the legal picture more depth is the Department of Education’s earlier decision to withhold funding from MOHELA due to late billing statements. It implies that the issues borrowers have been reporting were evident enough to have an impact on the servicer’s finances, rather than being invisible to the federal regulatory mechanism.

Observing this through the prism of the class action proceedings, it appears that the legal cases have progressed to the point where dismissal is no longer a feasible result, and the focus has shifted from whether MOHELA will be held accountable to what that accountability will eventually entail and when.