A stunning new report has just come out describing ongoing and systemwide failures by federal student loan servicing companies to manage student loan accounts. The report blames both the servicers themselves and the U.S. Department of Education for its failure to hold these servicing companies accountable for their actions. Remarkably, the report was issued and released by the U.S. Department of Education itself.

Background

First, some background. There are 15 total servicers that the Department of Education currently works with to collect payments for loans not in default, answer questions from borrowers, and conduct other administrative tasks. As of 2017, four main servicers maintained 93% of the FSA loans assigned to servicers: PHEAA (also known as FedLoan Servicing), Great Lakes, Navient, and Nelnet.

The contracts all servicers are expected to abide by state that servicers must be aware of and follow all regulations, and that student loan accounts would be assigned based on the servicers’ performance – including borrower satisfaction and delinquency rates. Ultimately, the Dept. of Education is responsible for ensuring that all servicers are compliant with federal regulations.

The Report

The Department of Education’s Office of Inspector General (OIG) released a report finding that federal student loan servicers are not doing their job, and the Department of Education is turning a blind eye. Here are some of the major findings:

• Servicers are not properly informing borrowers of available repayment options, which could improperly put borrowers into default – which can have significant and lasting consequences.
• Servicers are incorrectly calculating income-based repayment amounts, which could negatively affect both borrowers and taxpayers.
• Errors and mistakes made by servicers are inconsistent between different companies. Some servicers had significantly higher rates of noncompliance as compared to others. In some cases at Navient, OIG found that student loans were put into forbearance when other alternative options existed that could have helped borrowers become current with their loans. In 24% of the calls reviewed from PHEAA / FedLoan Servicing, borrowers were not provided with available options to avoid forbearance.
• The U.S. Department of Education did not hold the servicers accountable despite opportunities to do so under its servicing contracts, did not use compliance as a determination when placing student loan accounts with servicers, and potentially even overpaid servicers. OIG found that by not holding servicers accountable, the Department of Education was not providing any incentive for the servicers to provide accurate, quality service to borrowers.

Conclusions

While millions of student loan borrowers would be hardly surprised by the findings of this report, it nevertheless is remarkable, and it is fresh evidence of the systematic failure of the federal student loan system. The Department of Education has, of course, disputed the findings and conclusions of the OIG report. But ultimately, we’re going to need massive reform and systematic change if borrowers are going to have any hope of fairly repaying their loans.