Federal Student Loans: Key Weaknesses Limit Education's Management of Contractors
What GAO Found
The Department of Education's Office of Federal Student Aid's (FSA) instructions and guidance to loan servicers are sometimes lacking, resulting in inconsistent and inefficient services to borrowers. While FSA has taken some steps to improve program instructions and guidance, six of the seven servicers GAO interviewed reported various issues resulting from absent, unclear and inconsistent guidance and instructions from FSA. For example, one servicer said there are no instructions for how to apply over- or underpayments to borrower accounts. In other cases, guidance is unclear; for example, according to one servicer, there is insufficient guidance on how to handle reporting certain types of adverse credit history to credit bureaus. Furthermore, in certain instances when FSA provided additional guidance or clarifications, it did not consistently share them with all servicers. Federal internal control standards state that information should be communicated in a form that enables entities to carry out responsibilities. Without improved guidance and instructions to servicers, borrower finances or the integrity of the Direct Loan program could be negatively affected. FSA monitors calls between servicers and borrowers, but there are weaknesses in the processes for selecting calls to be monitored and for documenting results. For example, FSA monitors far fewer outbound than inbound calls, even though one servicer said it makes 60 times more outbound calls than it receives inbound calls, and outbound calls are often made to borrowers who are delinquent and at risk of default. Also, the methodology for selecting recorded calls for review is not well-defined and relies on servicers to implement, with no verification from FSA to ensure its integrity. This does not align with the Office of Management and Budget's best practices for developing sample designs. In addition, the overall results of the call monitoring are poorly documented. For example, summaries of monitored calls did not consistently track errors over time. FSA's Strategic Plan calls for enhancing customer-facing processes, but FSA's call monitoring leaves management without complete information it needs to understand how well servicers interact with borrowers.
FSA has taken some steps to improve its oversight of the defaulted loan rehabilitation process in response to GAO's March 2014 report. Loan rehabilitation allows eligible borrowers who make nine on-time monthly payments within 10 months to have the default removed from their credit reports. In March 2014, GAO found that FSA was unable to provide most eligible borrowers who completed loan rehabilitation with timely benefits, such as removing defaults from their credit reports, for more than a year after upgrading the information system it uses to manage defaulted loans. As a result of limited planning and oversight of its system contractor, no rehabilitations were processed from October 2011 until April 2012, and FSA officials said they needed until January 2013 to clear the resulting backlog. GAO recommended that FSA take steps to track loan rehabilitation performance and improve oversight of its system contractor. FSA agreed with the recommendations and has begun taking action to address them.
Why GAO Did This Study
During fiscal year 2014, Education issued more than $99 billion in Direct Loans to 9.4 million borrowers. Education contracts with and monitors the performance of servicers that handle billing and other services for borrowers, and entities that support rehabilitation of defaulted loans. In 1998, federal law established FSA as a performance-based organization, giving it more flexibility to manage operations, including Direct Loans.
GAO's testimony focuses on: (1) how effective FSA's instructions and guidance to servicers are, (2) how well FSA monitors and documents calls between Direct Loan borrowers and servicers, and (3) the status of FSA's oversight of the defaulted loan rehabilitation process. The first two questions address recently completed GAO work on FSA's oversight of servicers and communications with borrowers. The third question reflects results of GAO's previously issued work. GAO reviewed FSA's contracts, policies, procedures, instructions, and guidance; analyzed its monitoring reports and processes; and reviewed relevant federal laws and regulations. GAO also interviewed federal officials, including officials from FSA, servicers, and representatives from higher education associations. We shared our findings with FSA officials and incorporated their comments as appropriate.
GAO is recommending that FSA (1) review and improve how it provides instructions and guidance to servicers, (2) improve its methodology for monitoring calls between servicers and borrowers, and (3) improve documentation of its call monitoring.
Recommendations for Executive Action
|Department of Education||
Priority Rec.To strengthen management of the Direct Loan Program and ensure good customer service for borrowers, the Secretary of Education should direct the Office of Federal Student Aid's Chief Operating Officer to review its methods of providing instructions and guidance to servicers, identifying areas to improve clarity and sufficiency, and ensure consistent delivery of instructions and guidance to ensure program integrity and improve service to borrowers. For example, the Department could consider implementing a detailed, common servicing manual for the Direct Loan program.
Education agreed with this recommendation and took steps to improve how it provides instructions and guidance to servicers. As of October 2022, Education has issued guidance to improve clarity on issues such as how servicers should apply overpayments to a borrower's student loan balance, and how to treat retirement benefits when calculating borrowers' incomes for income-driven repayment plans. In addition, the agency is redesigning its student loan financial services system, which will include guidance to servicers.
|Department of Education||To strengthen management of the Direct Loan Program and ensure good customer service for borrowers, the Secretary of Education should direct the Office of Federal Student Aid's Chief Operating Officer to implement a more rigorous methodology for selecting recorded calls between servicers and borrowers to review, including a clearer definition of the sample servicers should select, a sample that targets more critical and more frequent types of calls, and a verification process to ensure integrity of the call selection process.||
The Department of Education agreed with this recommendation and, in January 2016, issued a change request to servicers implementing a more rigorous recorded call selection methodology that significantly increases the number of incoming and outgoing calls sampled and reviewed each month. Each servicer is instructed to provide Education with a monthly sample of 10,000 inbound and 5,000 outbound calls, from which Education will select at least 400 inbound and 200 outbound calls to review. This larger sample size gives the Office of Federal Student Aid (FSA) more discretion in selecting calls to review. The new methodology also explicitly requires the inclusion of calls related to specific accounts or business activities such as servicemember issues, loan rehabilitation, public service loan forgiveness, and loan consolidation. It also includes a validation process to ensure servicers meet the revised requirements.
|Department of Education||To strengthen management of the Direct Loan Program and ensure good customer service for borrowers, the Secretary of Education should direct the Office of Federal Student Aid's Chief Operating Officer to better document call monitoring results to allow analysis of trends over time and facilitate the sharing of complete and consistent information from these efforts with FSA management.||
The Department of Education agreed with this recommendation, and in June 2016, it implemented a more rigorous recorded call monitoring plan that includes enhancements to help the Office of Federal Student Aid (FSA) assess and improve servicer performance. The plan includes formal scoring and reporting of call monitoring results, more frequent review of calls, improved documentation by both FSA and servicers, enhanced analytics, and improved monitoring of quality assurance tracking when issues have been identified. Reports generated from the review contain consistent information and sufficient detail to allow FSA management to identify trends over time and address any issues that arise.