WASHINGTON — The raw numbers are staggering: 45 million Americans owe $1.56 trillion in student loan debt, more than all of the credit card or auto-loan debt combined. The bulk of that student debt, more than $1.1 trillion, is in the hands of Uncle Sam. Specifically, a little-known office within the Department of Education called Federal Student Aid (FSA) — motto: “Proud Sponsor of the American Mind.”
But it isn’t the Education Department that collects your money each month or comes knocking when you miss a payment. Instead, the government hires loan servicers with names like Navient, Nelnet and the Pennsylvania Higher Education Assistance Agency for the day-to-day work of interacting with student borrowers. Servicers are the middlemen of the student-loan industry, the ones to call to tweak a repayment plan or seek a deferment. FSA monitors the servicers to make sure they’re complying with their contracts with the federal government.
Here’s the problem: According to a new report by the Education Department’s Inspector General, the government is failing at oversight. These aren’t small mistakes at the margins, critics say. This is widespread dysfunction and corporate capture of the very government office intended to help protect borrowers — problems that began during Barack Obama’s presidency and persisted after Donald Trump took office in early 2017.
Seth Frotman, the former student-loan ombudsman at the Consumer Financial Protection Bureau, called the audit “damning” and said it showed the Education Department “asleep at the switch while borrowers get hurt.” Julie Margetta Morgan, a fellow at the Roosevelt Institute who has worked on student-loan servicing reform, says the audit is “one of the more scathing reports we’ve seen from the inspector general about oversight and accountability from the servicers.” But, she adds, “it’s not the first time we’ve seen this kind of report. This is part of a pattern.”
The new report comes at a critical moment for the student-loan industry. Last year, Education Secretary Betsy DeVos defended loan servicers when she intervened in a lawsuit by Massachusetts Attorney General Maura Healey, a Democrat. Healey had accused one of the largest federal student-loan servicers of deceiving borrowers about the Public Service Loan Forgiveness, which allows a borrower who works in the public sector for 10 years to get their remaining loan balance forgiven, as well as another financial assistance program for teachers.
DeVos claimed that federal law preempts states from suing servicers, and later said that any state could not take action against them given the Education Department’s sterling work and the “exemplary customer service” provided by those companies. A judge dismissed DeVos’ argument, but she and the servicing industry insist that states shouldn’t be able to sue servicers because the Education Department does enough already — a claim that has now suffered a major blow at the hands of her own department’s inspector general.
According to the IG’s report, which covers data from January 2015 to September 2017, a staggering 61 percent of FSA’s own oversight reports included examples of loan servicers not following guidelines or the law. The report says that FSA’s own employees found noncompliance by all nine servicers, in some instances on a recurring basis, on a litany of services: forbearances, deferments, income-driven repayment, interest rates, due diligence and consumer protection.
One form of oversight FSA uses is reviewing phone calls between borrowers and servicers to check that these companies followed the law and provided quality service. According to the IG, 92 percent of FSA’s own reports about those calls had at least one instance of a servicer failing to inform a borrower about all available repayment options. But what’s more enraging in the 48-page report is how little FSA did to fix these problems. After all, the federal student aid system “exists for a single purpose: to serve students and their families,” as a House education and labor committee report once put it.
But according to the report, FSA’s employees did not follow up with servicers to make sure they resolved problems in their interactions with student-loan borrowers. FSA failed to keep track of the different types of noncompliance to identify trends by individual companies and across the industry. Instead, FSA relied on “the memories of the employees responsible for the oversight activities” to spot patterns of wrongdoing.
The higher-ups at FSA “rarely” held servicers accountable, the report goes on, for their poor treatment of borrowers through fines or reducing the amount of debt the company was paid to manage. In fact, FSA didn’t even bother to include a performance metric for how well a servicer complied with the law into its decision-making for whether to give a company more business in the future. The report says that servicers with more frequent instances of bad behavior saw “no reduction in the amount of new loans that FSA assigned to them.”
In one particularly strange section of the report, the IG notes that when it highlighted a previous finding of shady practices by Navient, a servicer that has faced criticism from Sen. Elizabeth Warren (D-MA) for allegedly “cheating” borrowers, FSA’s leadership responded by citing Navient’s own statement responding to the work of FSA’s auditors. “This is an agency conflicting with its own experts by adopting talking points from one of the companies it’s supposed to oversee,” says Julie Margetta Morgan of the Roosevelt Institute.
FSA responded to the audit by agreeing to adopt many of the IG’s recommendations. James Manning, the agency’s acting chief operating officer, also said FSA had implemented new oversight measures in the period after September 2017. But at the same time, Manning disputed some of the audit’s findings, saying that he disagreed with the conclusion that FSA didn’t hold servicers accountable.
But even there, FSA’s responses are a bit head-scratching. In a December 2018 letter responding to a draft of the report, Manning said he was “concerned that the wording of your findings implies a much broader level of risk” than the report indicates. But the IG noted in its response to FSA that a 61-percent rate of screw-ups, by all nine loan servicers used by the Education Department, on a range of services, is indeed a broad problem.
Seth Frotman, the former student-loan ombudsman at the Consumer Financial Protection Bureau, tells Rolling Stone that the audit of FSA shows the need for larger reforms of how the government manages student debt. “We dropped a trillion dollars of student debt on the backs of American families with no idea how to oversee it,” Frotman says. “This is not just about a failure of leadership; it’s about creating a system that was bound to fail.”