New Audit Reveals Federal Student Loan Servicers Failed to Follow Rules, Lack Accountability

Inside Subprime: March 25, 2019

By Jessica Easto

Last month, the US Department of Education released an audit of Federal Student Aid’s (FSA) oversight of loan servicers, the companies that manage federally held student loans and collect payments from borrowers. The audit found that, in several cases, student loan servicers were not following federal regulations and that the FSA did not hold them accountable for noncompliance. Among other findings, the report concluded that servicers did not always properly calculate borrowers’ repayment plans or monthly payments.

The audit examined records from 2015 to 2017 to determine if FSA had “established policies and procedures to mitigate the risk of servicers” who did not follow federal requirements. It focused on FSA procedures deemed the most consequential to prudent oversight: monitoring telephone calls for quality control, compliance reviews of servicers, and independent auditor reports of servicer’s internal controls.

The audit outlined several key takeaways from the FSA’s failure to ensure servicer compliance:

  • The FSA rarely used available procedures designed to hold noncompliant servicers accountable.
  • The FSA did not take compliance into account when assigning loans to servicers.
  • FSA employees did not always properly evaluate phone calls between servicers and borrowers.
  • For 10 months, the FSA did not send failed-call reports to servicers.

The report concluded that the FSA’s lack of oversight did not provide servicers incentive to correct noncompliance, which could “harm students” and pay servicers “more than they should be” paid, since contracts allow the FSA to recover payments for loans that were not serviced according to federal regulation. Additionally, quality control issues may have allowed for “poor services” and “improper payments” that burdened borrowers and taxpayers.

In March, the House Appropriations Labor-HHS-Education Subcommittee held a hearing that reviewed the Department of Education audit report, criticizing the department and suggesting that future funding levels should take compliance into consideration. Those at the hearing also expressed concern for borrowers.

FSA was due to develop an action plan to correct the noncompliance found in the audit within 30 days of it being issued.

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