Government watchdogs skewered the financial arm of the Department of Education on Wednesday for sloppy communication with contractors, colleges and borrowers, raising concerns about the division’s ability to manage more than $1 trillion in federal student loans and grants.
The aptitude of the Office of Federal Student Aid, which administers all federal loan, grant and work-study programs, came into question at a joint House hearing on the division. Testimony from the Government Accountability Office and the department’s inspector general detailed lax oversight of schools receiving aid and student loan servicers, the middlemen who collect and apply borrower payments.
Melissa Emrey-Arras, director of education workforce and income security at GAO, told members of Congress that six of the seven servicers her office interviewed reported problems resulting from “absent, unclear and inconsistent guidance and instructions from FSA.”
One servicer said there are no instructions for how to apply payments when borrowers send more or less money than owed for the month. Another complained that there was no clarification on how to handle reporting to credit bureaus.
“If the agency fails to strengthen its instructions and guidance to servicers, there will continue to be areas of inconsistent implementation, and differences between servicers could have financial consequences that hurt borrowers or risk the integrity of the program,” Emrey-Arras said. She recommended that the department create a detailed manual for the direct loan program to clear up any confusion among servicers.
Inspector General Kathleen Tighe said her office continues to identify problems in FSA auditing schools to ensure timely disbursement of funds or putting an end to criminals fraudulently obtaining financial aid. She also testified that the office has not done enough to track and respond to complaints filed against its collection agencies.
Defending his office, James Runcie, who heads the FSA, said his team continues to improve its compliance process and efforts to detect fraud. He said the department is working to standardize practices among the servicers and teaming with the Consumer Financial Protection Bureau to fix problems with the way payments are applied.
“Despite changing landscapes, we have maintained a framework and continuity of leadership that have been vital to successfully delivering student financial assistance,” said Runcie, chief operating officer at the department. “It is essential that FSA be in a position to continue to respond to rapid regulatory and market changes.”
The government’s oversight of its massive student aid programs has taken center stage as student loan borrowers complain of servicers failing to handle their payments or provide accurate information. It is ultimately FSA’s job to supervise those companies, who are paid hundreds of millions of dollars to manage the government’s portfolio of loans.
People sympathetic to the office have said it should be commended for pulling off the transition from bank-based student lending to all direct government lending, a monumental undertaking president Obama instituted five years ago. Not only did the office gain greater responsibilities, but it also had to contend with soaring demand as college enrollment and costs climbed.
The amount of federal student aid delivered by FSA has increased from $82 billion in 2008 to $130 billion this year, with the number of students the office serves doubling during that time from 6.8 million to 13 million.
At the same time, the office has simplified the application for federal financial aid and implemented the expansion of loan repayment plans that let borrowers tie payments to their income, said Ben Miller, senior director for postsecondary education at the Center for American Progress.
Problems persist in getting and keeping people in those so-called income-based plans. And Miller testified that FSA should be more transparent about the condition of its $1 trillion student loan portfolio and do a better job of overseeing its contractors. Yet he said the office has been successful at “fixing issues related to getting funds to students and keeping administrative costs reasonable.”
But college financial aid officers argue that FSA takes months, and in some cases years, to respond to program reviews, renewals and changes in participation agreement, according to Justin Draeger, president of the National Association of Student Aid Administrators.
He testified that FSA missed its own deadlines during the roll out of the administration’s so-called gainful employment rule, which limits how much debt students can amass in career training programs. When schools asked for more guidance during the process, the office dragged its feet in responding and threatened to go after schools for failing to comply with the rule, Draeger said.
“FSA continues though self-assessment to give itself high marks, pay healthy bonuses and avert responsibility for these persistent issues,” he said. “We see FSA as a partner, but partnership is not a one-way street.”
Although congressional members were generally even-handed in questioning Runcie, Rep. Virginia Foxx (R-N.C.) lit into the FSA chief as the hearing concluded.
“It is clear that FSA cannot administer this program,” said Foxx, who chairs the House subcommittee on higher education and workforce training. “There is a lot of blame being foisted upon the servicers. That’s not where the problem is; the problem is with the leadership with the FSA. If you gave clear guidelines … if you did things in a timely fashion, we would not have this problem.”