The U.S. House Committee on Education and the Workforce held a hearing this past week examining mismanagement in the federal student loan rehabilitation process. The hearing coincided with a damning report from the General Accountability Office (GAO), Better Oversight Could Improve Defaulted Loan Rehabilitation. Department of Education Inspector General Kathleen Tighe testified at the hearing about the seriousness of the problems uncovered in the GAO report.
Unfortunately, these operational breakdowns are not news to borrowers. We have been writing for years about problems not only in the loan rehabilitation program, but throughout the federal student loan program. Better late than never, the GAO’s report is hopefully a first step in fixing these widespread problems.
We hope that the Administration’s key takeaway is to act aggressively to fix not just loan rehabilitation, but the entire federal loan servicing and collection system. The Administration has been able to tackle other difficult projects. Why not this? As Federal Student Aid Chief Operating Officer James Runcie noted, the Administration was able to mobilize and implement the transition to full direct lending a few years ago. This was impressive and for the most part, it appears that the direct loan origination system works well. As the Inspector General pointed out, the Department of Education is one of the largest financial institutions in the country.
Now the government must put this same level of commitment to fixing the servicing and collection system. We will know it is working better if servicers and collectors start complying with existing laws and learn to explain these laws without bias to borrowers. The government must measure success on this basis instead of focusing only on higher collection levels. COO Runcie, for example, proudly noted his Department’s record overall collection totals in both FY 2012 and 2013. Collections grew from $3.4 billion in FY 2011 to $3.7 billion in FY 2012 and $8.5 billion in 2013, he said. In contrast, the GAO concluded that the Department lacks data to prove progress in other areas, including providing superior service, information to borrowers, and safeguarding taxpayer interests. In addition, the GAO report concluded that there are key weaknesses in the Department’s ability to effectively monitor their performance related to loan rehabilitation and other collection activities.
The government must balance the need to collect student loans and the need to assist borrowers. The current system heavily favors high pressure collection and collector profits, to the detriment of financially distressed borrowers seeking the help they so desperately need.
Contractors are too often rewarded based on the amounts collected without regard to borrower rights. There is no better example than the GAO findings that the Department documented instances where collection agency representatives provided false or misleading information to borrowers. What did the Department do when they found these problems? According to the GAO report, the Department provided feedback. GAO concluded that the Department generally does not ensure that the agencies take corrective actions. The GAO didn’t even ask why the Department didn’t immediately refer these legal violations to federal regulators such as the Consumer Financial Protection Bureau.
The tender treatment of collection agencies breaking the law is in sharp contract to the way borrowers are hounded forever when they run into financial distress.
Ultimately, the GAO report and House hearing should be about finding ways to improve the direct loan program, not about returning to the past guaranteed loan program. Memories are short and too many have forgotten the rampant abuses in the guaranteed loan program. As a refresher, check out this post from New America about the 9.5% scandal where taxpayers took the hit when private lenders in the guaranteed loan program put their own profits above the law. Taxpayers are still not made whole from just that one scandal. For example, media reports show that the Department has not yet recovered over $20 million in allegedly improper payments to Sallie Mae despite a 2009 recommendation to do so from the Inspector General.
The GAO report is so rich with important information that we wll follow this post with a series of posts focusing on different findings, including:
1. The need for data to measure default prevention programs such as rehabilitation.
It is also important to remember that rehabilitation is not the only program available to borrowers in default. The GAO report focused on rehabilitation, but the GAO, Inspector General and others should continue to review administration of other programs, including the new disability discharge system. There is such a focus on rehabilitation that even the GAO report is incomplete in describing other ways to get out of default. The report states that the way to get out of default through consolidation requires a borrower to make at least three on-time monthly payments. In fact, these borrowers may also consolidate right away without making the three payments as long as they select an income-driven repayment plan. (Check out this information sheet comparing rehabilitation vs. consolidation as ways out of student loan default).
2. Collection of complaint statistics.
Do borrowers even know where to go to lodge complaints?
3. Consequences when collection agencies violate the law. Do such consequences even exist? What about Department personnel, particularly at FSA, who botched the administration of the contract discussed in detail in the GAO report?
4. The costs to taxpayers of the government’s failure to provide rigorous oversight of contractors..
5. What about restitution for borrowers harmed by the Department’s errors?
6. The lack of public information about the servicing and collection contracts.
The ultimate fix is not just increased loan rehabilitations. The government must create a system that allows borrowers to get holistic, unbiased information to address student loan problems.