Then-Education Secretary Arne Duncan said the department found little evidence of its student loan servicers violating service member law, but a new inspector general report says otherwise. (Jacquelyn Martin/AP)

The Education Department conducted a deeply flawed review of its student loan servicers, the middlemen who collect and apply payments to debt, and knowingly misled the public about the findings, according to a report released Tuesday by the agency’s inspector general.

The charges being leveled against the department stem from an audit administered after the Justice Department fined student loan servicer Navient Solutions $60 million in 2014 for unlawfully charging active-duty service members high interest rates on student loans. To ensure the violations were not widespread, then-Education Secretary Arne Duncan pledged to review all loan servicers’ records and later said there was little evidence of any wrongdoing.

Tuesday’s report rebuts those claims and paints the department’s investigation as shortsighted and inaccurate. The inspector general said the agency used an inadequate sample of loans to draw conclusions about whether its four largest servicers — Navient, Great Lakes, Nelnet and American Education Services — were complying with a law that caps interest rates for active-duty troops at 6 percent. Few of the borrowers requested the military benefit, and even fewer were eligible. What’s more, the department failed to remove duplicate records and exclude loans in military deferment or grace period with an interest rate of 6 percent or less.

In the case of Navient, the department said the servicer correctly granted interest-rate requests from 10 active-duty borrowers, but it turns out that three of those approvals occurred outside the scope of the review period, from 2009 to 2014. None of the four main servicers were required to review their portfolio of loans to identify and correct all potential cases of incorrect denials, according to the report.

Despite knowing the limitations of its review, the Education Department declared that less than 1 percent of the troops’ files it reviewed contained violations of the Servicemembers Civil Relief Act (SCRA). The inspector general called the May 2015 news release announcing the findings “unsupported and inaccurate.”

When the department’s findings were released, lawmakers were suspicious of the near-clean bill of health given to the loan servicers. Democratic Sens. Elizabeth Warren of Massachusetts, Patty Murray of Washington and Richard Blumenthal of Connecticut called on the inspector general to investigate the findings, which they said were in direct contradiction of the Justice Department investigation.

That probe found that Navient charged nearly 78,000 members of the military more than the 6 percent interest permitted by law. Federal prosecutors said company staff denied some borrowers’ benefit requests and stuck others with more than $500 in excess interest. And when soldiers fell behind on payments, the company took legal action against them without documenting their military service, in violation of the law, according to the complaint.

An analysis of the department’s findings by Warren’s staff concluded that the agency conducted detailed reviews of only 55 cases in which eligible borrowers asked for an interest-rate cap. Even in those few cases, the department found problems 29 percent of the time, according to the analysis. Department officials said at the time that they used a different standard than Justice that was consistent with its regulations on how to determine a service member’s active-duty status and based on contractual requirements for student loan servicers.

On Tuesday, Warren called the inspector general’s report “a stunning indictment of the Department of Education’s oversight of student loan servicers, exposing the extraordinary lengths to which the Department will go to protect these companies when they break the law.”

She added in her statement: “The thousands of servicemembers who were cheated deserve far better, ‎and these findings raise serious questions about whether the Department and its Office of Federal Student Aid can be trusted to protect the millions of borrowers under its care. We need to get to the bottom of how this happened — and who allowed it to happen — to ensure that it never happens again.”

Department spokesperson Dorie Nolt said in an email that the department takes the issues raised in the inspector general’s report “very seriously” and plans to “review the findings more carefully and take any appropriate steps to ensure the Department’s reviews of financial institutions meet the highest standards.”

After conversations with the inspector general last month, the department asked each servicer to review its records as far back as 2008 to ensure there are no borrowers who were denied the military benefit.

In the wake of the Navient settlement, the department said it has streamlined the process for service members to have their loan rates adjusted when they are called to active duty. Prior to that, men and women in uniform had to apply for the lower interest rate and provide proof of active-duty status. Servicers were instructed to match their loan portfolios against the Department of Defense’s database of active-duty troops to automatically grant the benefit.

Navient spokesperson Patricia Christel the new standards implemented by the department made it easier for servicers to provide the military benefit without requiring additional paperwork. She said the inspector general’s report confirmed that “Justice imposed a different standard for Navient than the statute and the Department of Education required of its other servicers. Navient is the only servicer that reviewed its entire portfolio and provided benefits retroactively to all customers eligible under the new DOJ-mandated standard.”

The Education Department has been under pressure from lawmakers and consumer advocates to drop Navient as one of the 11 companies that handles its $1.2 trillion in federal student loans. Critics railed against the department for renewing the company’s contract one month after the Justice settlement was announced and accused the agency of being slow to clean up abuses in loan servicing.

Starting this spring, the department will have to toss out a formula for divvying up its student loan portfolio that gives preference to the four servicers. The agency, as directed by Congress, will have to allocate new loans based solely on the quality of a servicer’s work and its ability to keep borrowers current. That will shift a significant share of business to nonprofit companies, such as the Missouri Higher Education Loan Authority and Oklahoma Student Loan Authority.

Want to read more about the student loan servicing? Check out these stories:

The provision in the budget agreement that could radically change student loan servicing

The surprisingly high number of people who are behind on their student loans

How the attempt to fix student loans got bogged down by the middlemen

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