Federal Watchdog Issues Scathing Report On Ed Department's Handling Of Student Loans

Updated at 3:13 p.m. ET

A critical new report from the U.S. Department of Education's Office of Inspector General finds the department's student loan unit failed to adequately supervise the companies it pays to manage the nation's trillion-dollar portfolio of federal student loans. The report also rebukes the department's office of Federal Student Aid for rarely penalizing companies that failed to follow the rules.

Instead of safeguarding borrowers' interests, the report says, FSA's inconsistent oversight allowed these companies, known as loan servicers, to potentially hurt borrowers and pocket government dollars that should have been refunded because servicers weren't meeting federal requirements.

"By not holding servicers accountable," the report says, "FSA could give its servicers the impression that it is not concerned with servicer noncompliance with Federal loan servicing requirements, including protecting borrowers' rights."

"It's hard to look at this as anything other than completely damning," says Seth Frotman, a consumer advocate and former government, student loan watchdog who is now executive director of the Student Borrower Protection Center. "This is the most damaging in a long line of investigations, audits, and reports that show the Department of Education is asleep at the switch when it is responsible for over a trillion dollars of student loan debt."

The Education Department's independent watchdog reviewed FSA oversight records from January 2015 through September 2017, a period that includes both the Obama and Trump administrations. Among the inspector general's findings: While FSA did document servicers' many failures to follow the rules, it did not study these isolated failures to identify broader patterns of noncompliance that could have hurt many more students.

The inspector general's office writes that, without looking more broadly, the department ignored the possibility of patterns of failure by servicers that could result in "increased interest or repayment costs incurred by borrowers, the missed opportunity for more borrowers to take advantage of certain repayment programs, negative effects on borrowers' credit ratings, and an increased likelihood of delinquency or even default."

Colleen Campbell studies the loan servicing industry at the Center for American Progress and says this audit "brings to light issues that we have thought existed for a long time but that we couldn't say for sure were happening across the entire system. And, as time has gone on, we've been increasingly certain that Federal Student Aid wasn't properly overseeing servicers. And this really confirms that that's the case."

The audit documents several common failures by the servicers, among them, not telling borrowers about all of their repayment options, or miscalculating what borrowers should have to pay through an income-driven repayment plan. According to the review, two loan servicing companies, Navient and the Pennsylvania Higher Education Assistance Agency, better known as FedLoan, repeatedly placed borrowers into costly forbearance without offering them other, more beneficial options.

Representatives from Navient and PHEAA did not immediately respond to a request for comment.

In comments included with the report, FSA "strongly disagreed" with the OIG's conclusion that it had not done enough to make sure servicers followed the rules. FSA also argued that it had already implemented or would implement all of the inspector general's recommendations and had improved its oversight since the period reviewed in this report.

Education Department Press Secretary Liz Hill added, in a statement, that "the Department continuously strives to provide strong oversight of all contractors, including federal student loan servicers ... In addition to the steps outlined in our response to the OIG report, the Next Generation Financial Services Environment — which will modernize our legacy systems; centralize and streamline processes and procedures; and improve service to millions of students, parents, and borrowers — also will include rigorous performance standards and vendor accountability provisions that will support effective monitoring and oversight."

The Education Department, through FSA, is required to complete monitoring reports that include listening to phone calls between student borrowers and loan company representatives — to ensure that borrowers are given the best, most accurate information. For this audit, the inspector general reviewed all monitoring reports that FSA produced through 2015, 2016 and much of 2017, and found that 61 percent of those reports showed evidence of servicer failures.

While all nine loan servicing companies occasionally failed to follow the rules, some did so more frequently than others. According to one review of borrower phone calls from April 2017, servicers failed to comply with federal requirements in 4 percent of calls, on average. But PHEAA failed to give adequate or accurate information in 10.6 percent of its calls with borrowers. A review of more than 850 calls the following month found that PHEAA representatives failed to follow the rules in nearly 9 percent of those interactions — more than five times the average failure rate of the other servicers that month.

The Education Department's internal review arrives in the middle of a standoff between the department, led by Secretary Betsy DeVos, and many state leaders. Stories of loan servicers failing to act in borrowers' best interest are easy to find. In the past year, NPR investigations have documented sweeping failures in the management of both the federal TEACH Grant program and Public Service Loan Forgiveness.

But as state lawmakers and attorneys general have tried to step up their own oversight of servicers, the Education Department is opposing them, arguing in court that only it has the authority to police these loan companies.

In a memo entered into the Federal Register nearly a year ago, the department defended its role as sole watchdog: "The Secretary emphasizes that the Department continues to oversee loan servicers to ensure that borrowers receive exemplary customer service and are protected from substandard practices."

The inspector general's report appears to contradict this assessment. Even when the department found evidence of widespread servicer error, the report says, federal officials were reluctant to demand a refund from servicers or to penalize them by scaling back future contracts.

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