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 (FSA) 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."
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 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 (PHEAA), 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.
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.
Even when the Department found evidence of widespread servicer error, the Inspector General's report suggests, federal student loan officials were reluctant to demand a refund from servicers or to penalize them by scaling back future contracts.