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Federal Student Aid office lets loan servicers get away with shoddy work, watchdog says

Federal Student Aid office lets loan servicers get away with shoddy work, watchdog says
Students on the campus of Miami Dade College, in Miami. (Lynne Sladky / Associated Press)

The Education Department's Federal Student Aid office has failed to keep watch over the contractors servicing its $1.4 trillion portfolio of student loans, a lapse that may be costing taxpayers, the federal agency's inspector general said in a scathing audit issued Thursday.

Companies such as Navient, Great Lakes and FedLoan Servicing are paid millions of dollars by the federal government to collect student loan payments, guide people through the thicket of repayment options and help borrowers avert default. Critics of these loan servicers say they are not doing enough to stem rising delinquencies and defaults, and accuse them of providing inconsistent information and mishandling borrower accounts.

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Many critics have accused the Education Department of lax supervision of its contractors, an allegation now backed up by the inspector general's audit.

The report documents a laissez faire culture within the federal aid office that has allowed student loan servicers to operate without being held accountable for failing to comply with their contracts. The office does not consistently track the performance of servicers or penalize them when mistakes are identified, the inspector general found. Even when contractors are admonished, the federal aid office often neglects to catalog the incident, giving an incomplete picture of problems within the servicing system, according to the audit.

The Education Department rejected much of the criticism. Loan servicers could not immediately be reached for comment.

The inspector general tracked problems in federal student loan servicing from Jan. 1, 2015, through Sept. 30, 2017, spanning the Obama and Trump administrations. During that time, 61% of the 343 internal reports on the student aid office's oversight activities revealed widespread instances of poor servicing.

Representatives at several companies provided insufficient information to borrowers about repayment plans, incorrectly calculated monthly payments or encouraged borrowers to temporarily postpone payments rather than walk them through more time-consuming options, according to the audit. All of those problems track with complaints that borrowers have submitted to the Consumer Financial Protection Bureau in recent years.

The Education Department has the authority to require contractors to return money for not servicing loans in compliance with federal requirements, but it has rarely invoked that power. In the last five years, the student aid office recorded only four instances of servicing companies being forced to return funds.

"Federal Student Aid's not holding servicers accountable could lead to servicers being paid more than they should be," Bryon Gordon, assistant inspector general for audit, wrote in the report. "By not holding servicers accountable, FSA could give its servicers the impression that it is not concerned with servicer noncompliance with Federal loan servicing requirements, including protecting borrowers' rights."

The inspector general's office recommended the federal aid office shore up procedures for tracking poor servicing and exercise its authority to punish contractors by requesting the return of funds or by reducing future loan volume.

In a letter responding to the inspector general's report, James Manning, acting chief operating officer for the student aid office, strongly disagreed with many of the findings and defended the work of his team.

"Your report fails to reflect significant ongoing improvements we have made to our oversight and monitoring policies and procedures, some of which directly align with the recommendations included in your report," Manning wrote.

He added, "The scope and scale of issues identified in your report, as well as the fact that most of them have been addressed since the fieldwork was completed, does not support the broad negative characterization of [Federal Student Aid's] overall oversight efforts."

Manning went on to point out that the office was tracking 17 corrective-action plans involving federal loan servicers, citing that as proof they are being held accountable for their actions. He said the office had forced servicers to return roughly $2 million for not complying with their contracts.

Gordon held firm to his argument that the problems identified in the audit were not one-offs but indicative of a broader failure of the Education Department to monitor contractors. He also noted that the $2 million in recovered funds that Manning touted amounted to less than 0.12% of the $1.7 billion that the student aid office budgeted for servicing contracts in 2018 and 2019.

The exchange between Manning and Gordon highlights tensions that exist in efforts to change the federal student loan servicing model. Although the Education Department is embarking on an overhaul of the system, some higher-education experts say the agency is not taking a hard look at its own role in creating the problems and not going far enough to solve them.

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"Issues identified in the OIG report span two administrations and point to organizational and structural changes that must be made to help FSA meet its congressionally mandated objectives," said Justin Draeger, president of the National Assn. of Student Financial Aid Administrators, a trade group. "Improper oversight creates an environment that normalizes subpar customer service of an already confusing and frustrating process for too many borrowers."

Seth Frotman, a former senior official at the Consumer Financial Protection Bureau, has argued that state authorities and other regulatory bodies must play a part in keeping servicing companies accountable for their actions. Education Secretary Betsy DeVos has tried to thwart such efforts by insisting the Education Department has sole authority to regulate its contractors.

"This report should be Exhibit A,” said Frotman, “as law enforcement officials and state legislators demand justice for the millions of student loan borrowers whose financial futures were destroyed by this broken system.”

Frotman, who now runs the Student Borrower Protection Center, added: "The student loan market is plagued with rampant breakdowns, chronic lack of oversight and an industry whose business model is built on denying borrowers their rights."

Douglas-Gabriel writes for the Washington Post

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