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Student loan servicers’ frequent mistakes went unpunished, audit finds

NEW YORK —

An audit released by the Education Department on Thursday described its slipshod oversight of federal student loan servicers that were regularly let off the hook for mistakes, driving up costs for taxpayers and for borrowers already owing more than $1 trillion in debt.

The department failed to track many mistakes by servicers, the contractors hired to send out monthly bills, keep track of what borrowers owe, and help them navigate repayment options. And when serious problems were discovered, the department rarely invoked its contractual right to dock servicers’ pay, the department’s inspector general said in its report.

The result was a group of contractors that effectively regulated themselves, with no incentive to fix their repeated failures, the report concluded.

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A spokeswoman for the Education Department did not immediately comment. But in a written response included in the report, James F. Manning, the acting chief operating officer of the agency’s Federal Student Aid office, said his department was dedicated to giving borrowers “world-class service” and strongly disagreed with the report’s conclusion.

“Neither your report nor any of these other extensive oversight efforts have identified material instances of noncompliance by our vendors,” Manning wrote.

The audit said that more than 60 percent of the agency’s oversight reports from 2015 to late 2017 contained examples of servicers acting improperly. But when the agency’s monitors found an error, they typically only required the servicer to fix it on that borrower’s account, rather than checking to see if the problem affected others.

And if services promised to fix errors, they were generally left out of a database the Education Department used to track mistakes, the audit found. The agency merely “relied on the memories of the employees responsible for the oversight activities to recognize recurring instances of noncompliance,” according to the report.

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The Education Department can reduce servicers’ pay because of mistakes, but it rarely did so, the auditors concluded. The $2 million the department fined its servicers in the last 17 months represented “less than 0.12 percent of $1.7 billion that FSA budgeted for its loan servicing contracts in 2018 and 2019,” the report noted.

Among other problems, the contractors made recurring mistakes in the information they gave borrowers about their payment options and in how they calculated payments for borrowers on income-based repayment plans, the auditors found.

While the report covered a relatively recent period, it pointed out that many of the problems had lingered for years, echoing complaints of borrowers and other government auditors. A Government Accountability Office investigation last year revealed that a loan forgiveness program for public servants had rejected more than 99 percent of those who applied, largely because of mistakes and confusion in its implementation.

That program’s operator, the Pennsylvania Higher Education Assistance Agency — also called FedLoan — is the department’s largest servicer, handling more than $340 million owed by 8 million borrowers. It was singled out for particular criticism in the inspector general’s report.

The audit called out another large servicer, Navient. In May 2017, the Education Department conducted a special review to investigate allegations that Navient had improperly steered borrowers toward forbearance to extend their repayment terms when they might have been better off with a different repayment option.

According to the audit, Navient offered the borrower no option other than forbearance on more than 9 percent of the reviewed calls. Instead of following up on that finding, the Education Department kept its report private and said publicly that Navient had done nothing improper.

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Navient said in its own public statement that it had acted correctly and had “exceptional” results in most reviews. A company spokesman declined to comment on the inspector general’s report.

Despite his disagreement with the report’s conclusions, Manning said the department had already implemented some of its recommendations. For example, it is working to fix problems in how some servicers handle forbearance requests and in how payments toward public service loan forgiveness are counted.

The report is likely to fuel efforts by some states to crack down on federal student loan servicers. Five state attorneys general have sued Navient. One state, Massachusetts, is pursuing FedLoan over what officials there say are violations of state consumer protection laws. The Education Department is seeking to have some of those lawsuits dismissed, saying that it alone has the authority to oversee its contractors.