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It’s time to reform the financial arm of the Education Department, report says


Minimal transparency and oversight of the Education Department’s financial arm has allowed a unit responsible for $1.1 trillion in federal loans and grants to operate with little accountability to students or taxpayers, according to a report released Tuesday by the National Association of Student Financial Aid Administrators.

The trade group, known as NASFAA, is urging Congress to review whether the Federal Student Aid office is subject to enough supervision by the education secretary, and whether the unit has been granted too much autonomy in setting goals, assessing its own success and awarding financial bonuses to employees. It is calling for the creation of an independent, seven-member oversight board at FSA that reports directly to the public, the secretary and Congress.

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“We feel most people at FSA are in it for the right reasons and are trying to do the right thing,” said Justin Draeger, president of NASFAA. “Structurally, there is no real entity holding the organization’s feet to the fire when it comes to developing strategic plans, operational objectives that align with those plans and assessing whether they’ve completed them.”

As the federal government’s first “performance-based organization,” the Federal Student Aid office has operated with far less political interference than most other government entities since 1998. The chief operating officer, James Runcie, is not politically appointed and reports to Education Secretary Betsy DeVos. His office has flexibility with bonuses, contracts and its overall structure, similar to the private sector. But unlike the private sector, there is no board to hold the office accountable.

Before becoming a “performance-based” unit, or PBO, the student aid office had long-standing management problems. The Government Accountability Office had designated it as a “high risk” agency. The conversion was supposed to improve the level of service, reduce the costs of administering programs and increase accountability to consumers. But many critics of the unit say it has fallen short of those goals.

“Because it’s the first there are naturally going to be some missteps when it comes to things like accountability, transparency, things that were corrected as other PBOs were created, but still is lacking at FSA today,” Draeger said.

The Education Department did not immediately respond to requests for comment.

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To assess FSA’s performance, Draeger and his team looked at the operations of other PBOs, interviewed former federal officials and employees, and examined complaints from Congress, the GAO and other federal watchdog groups.

Advocacy groups, think tanks and academic researchers have complained about the inability to access even basic data on the performance of federal student loans, such as the rate of repayment or the extent of defaults. They argue that given the shear size of the portfolio — one that rivals the assets of some of the largest banks — the public deserves comprehensive information. That way, everyone can see whether the policies governing student aid and the contractors that carry them out are serving people as intended.

Several audits by federal watchdogs have called into question the effectiveness and competency of the student aid office because of its management of third-party companies charged with handling student loan payments or collecting on past due accounts.

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A 2015 report from the GAO criticized FSA’s instructions and guidance to loan servicing companies, which results in “inconsistent and inefficient services to borrowers.” Servicing companies complained of receiving no instructions for applying excess payments to a borrower’s account or how to handle reporting adverse credit history to credit bureaus, for instance. Researchers at the GAO said the student aid office failed to consistently share information with all of its contractors.

Despite statutes that require the student aid office to consult with stakeholders in the development of annual reports, the NASFAA report said the office routinely cuts them out of the process. Draeger said FSA imposes arbitrary policies without explanation that can delay distribution of grants and loans. This year, for instance, the student aid office required colleges and universities to verify with the Internal Revenue Service the filing status of low-income students whose families didn’t earn enough to file.

“That’s burdensome because it’s a manual process that requires the family to mail something in, then we have to wait up to 10 business days to get something back. And if you don’t get something back, this can turn into federal bureaucracy times 10,” he said. “It’s a real a real barrier for students who are just trying to complete their financial aid form.”

FSA, he said, made the decision to require the added layer to the financial aid application out of concern that some families were falsifying their tax status, but never provided data to back up the claim. It is difficult to even quantify the full impact of such policies because the student aid office doesn’t necessarily collect and report out the data, Draeger said. But he knows that for colleges that serve large numbers of low-income students the impact can be significant.