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Appropriators Scold Agency for Poor Student Loan Oversight

The Education Department has to do a better job of holding accountable the companies that service student loans and don’t always do what’s best for borrowers, House appropriators said Wednesday. [LEARN MORE]


The hearing by the House Appropriations Labor-HHS-Education Subcommittee comes after the Education Department inspector general issued a report last month that, among other things, said the Federal Student Aid program was inadequately overseeing loan servicers, who violated rules that prevented borrowers from choosing favorable repayment plans or even paying the correct monthly amounts.

“At the end of every single one of those violations is a human being, who is now having to delay their lives,” Democratic Rep. Cheri Bustos of Illinois said at the hearing.

Lawmakers emphasized that in determining funding levels for the Education Department, they should take into account FSA’s performance.

“The subcommittee provides nearly a billion dollars a year to the Department of Education for servicing federal student loans,″ ranking member Tom Cole of Oklahoma said. “The policy behind it is outside our jurisdiction, but I agree we need to ensure accountability and proper program performance.”

The Education Department has contracted nine companies to service federal student loans, which totaled $1.147 trillion during the time of review in 2017. Collectively, student loan debt topped $1.5 trillion in 2018 among 44 million borrowers, according to the Federal Reserve.

Lawmakers also worried about the impact on people with student loans if servicers were shunning federal requirements, which include correctly calculating borrowers’ payments, applying payments to their accounts and maintaining accurate records.

“Servicers have been systematically failing to keep borrowers current. People routinely fall behind because of lost or improperly processed paperwork,” Joanna Darcus, a fellow at the National Consumer Law Center, said at the hearing. “Borrowers struggle to make unaffordable payments because servicers routinely fail to inform them about income-driven repayment, and borrowers miss out on program benefits like public service loan forgiveness as a result.”

Bryon Gordon, an Education Department inspector general, said servicer mess-ups “can have a direct financial consequence on the borrower.”

He added “that the borrower may select a payment plan that may not be in their best interest, they may not understand the full consequences of that plan.”

The inspector general’s office examined FSA procedures from September 2017 and found that in internal FSA oversight reviews, servicers were breaking federal requirements for loan servicing. Even so, the inspector general said, the agency didn’t have a system in place to track patterns of noncompliance or to analyze trends.

“One of the most frequent areas that we highlighted was that servicers were not providing information on all the available options for borrowers to make adjustments to their payment plans,” Gordon said.

Moreover, FSA is expected to regularly reassess which loan servicers should receive a portion of the federal loans based on their performance. But the report found that servicers were assigned more loans regardless of how well they had been managing their existing accounts.

Some servicers are not-for-profits. The bigger, for-profit entities handle more than 6 million borrower accounts, according to Colleen Campbell of the Center for American Progress, and they’re paid by FSA based on the status of the loan.

Servicers make the most money for loans that are current and not in delinquency at $2.85 per month for each current account, she said.

Contracts with servicers also allow for different ways to punish the organizations for breaking the rules, including recovering money from loan repayments serviced incorrectly.

But FSA wasn’t fully using these methods when they found noncompliance, which didn’t give servicers incentives to follow federal requirements, the report said.

“They have a choice of the college on the front end, but they do not have options for loan services when they leave school,” Chairwoman Rosa DeLauro said of student loan borrowers.

FSA pushed back against the findings but agreed with the report’s recommendations, which included tracking all instances of federal requirement violations, analyzing trends and using all options to hold servicers accountable, including the government getting money back. The agency is required to issue a plan within the month to correct the problems.

“We have a good track record with FSA accepting and adopting our recommendations, but we continue to find instances of problems with oversight on contractors and program participants,” Gordon said.

The report has drawn further criticism of the Education Department from Democratic Sen. Patty Murray of Washington and Rep. Susan A. Davis of California. Murray is the ranking member on the Senate’s Health, Education, Labor and Pensions Committee.

The department “has let student loan servicers off the hook to the detriment of borrowers and taxpayers alike,” they wrote Tuesday in a letter to Secretary Betsy DeVos.

“These oversight failures can lead to the incorrect application of payments to borrowers’ accounts, inappropriate capitalization of loan interest, improper use of forbearance and not providing borrowers with the opportunity to correctly enroll in income-driven repayment plans,” they wrote.

Murray and Davis, the chairwoman of the House Education subcommittee on higher education, also penned a letter requesting more information on FSA’s servicer oversight.

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Source: http://www.rollcall.com/news/congress/appropriators-scold-agency-poor-student-loan-oversight
Appropriators Scold Agency for Poor Student Loan Oversight Appropriators Scold Agency for Poor Student Loan Oversight Reviewed by Student Loans Center on February 27, 2020 Rating: 5

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