Education Department Watchdog Finds Government’s Student Loan Arm Failed to Act as Student Loan Companies Cheated Borrowers

Shocking New Audit Finds Entire Student Loan Industry Broke the Rules, Offers New Evidence that Leadership in the Office of Federal Student Aid White-Washed Abuses by Navient

FEBRUARY 14, 2019 | WASHINGTON, D.C. – Today, the Inspector General of the U.S. Department of Education released a sweeping audit of the federal government’s flailing effort to police the student loan industry. This new audit finds that the Education Department’s student loan arm, the Office of Federal Student Aid (FSA), failed to oversee all nine student loan companies responsible for handling accounts for tens of millions of Americans. The audit also offers new evidence that when FSA staff found proof of improper practices by embattled student loan giant Navient in 2017, FSA officials misrepresented the nature of these findings to the Inspector General. These scathing findings come as Education Secretary Betsy DeVos and the Trump Administration continue to take unprecedented steps to shield the student loan industry from scrutiny by state law enforcement officials and Congress.

“This damning new audit is just the latest in a series of lawsuits and reports by law enforcement officials and government watchdogs showing the Department of Education is asleep at the switch while borrowers get hurt,” said Seth Frotman, Executive Director of the Student Borrower Protection Center and the former top student loan official at the Consumer Financial Protection Bureau. “In courthouses and statehouses across the country, Betsy DeVos has teamed up with student loan industry lawyers and lobbyists to lie about their supposed oversight. It’s time to let state legislators and law enforcement stand up for millions of struggling student loan borrowers.”

The Education Department Inspector General’s Audit is available at:
https://www2.ed.gov/about/offices/list/oig/auditreports/fy2019/a05q0008.pdf

For nearly two years, the Department of Education has sought to shield its student loan contractors from scrutiny by state attorneys general, state banking departments and the Consumer Financial Protection Bureau. As calls for expanded Congressional oversight mount, this report offers new evidence that the Department of Education has grossly mismanaged the $1.4 trillion federal student loan program. Today’s audit:

  • Undermines efforts by the Department of Education and the U.S. Department of Justice to block state officials working to protect student loan borrowers. In March 2018, the U.S. Department of Education released a new “interpretation” of the Higher Education Act, purporting to declare all state consumer protection statutes preempted under federal higher education law and exempting the student loan industry from scrutiny by state officials. At the same time, the U.S. Department of Justice began the extraordinary practice of filing “Statements of Interest” siding with the student loan industry in lawsuits against state law enforcement officials. The federal government relied on the argument that “the Department continues to oversee loan servicers to ensure that borrowers receive exemplary customer service and are protected from substandard practices.” These statements do not hold up in light of today’s audit.
    • This audit directly contradicts the government’s arguments, finding that by “not holding servicers accountable, FSA could give its servicers the impression that it is not concerned with servicer noncompliance with Federal loan servicing requirements, including protecting borrowers’ rights.”
    • To support this finding, the Inspector General “concluded that FSA had the information needed to identify recurring instances of and trends in noncompliance…About 61 percent [of FSA reviews]…disclosed instances of servicer noncompliance with various areas of Federal loan servicing requirements…[including] requirements relevant to forbearances, deferments, income-driven repayment…and consumer protection.”
  • Fuels calls from Congress to investigate mismanagement of the $1.4 trillion federal student loan program. For nearly two years, Congress has called on the Department of Education to crack down on abuses in the student loan industry, as state attorneys general and federal regulators continue to file lawsuits against companies servicing federal student loans. In December, 25 Senators wrote a letter to Secretary DeVos questioning “whether student loan servicers may be actively harming borrowers by failing to inform them of their options” and calling for greater oversight. The audit confirms that these concerns were warranted, offering new evidence of widespread abuses.
    • The audit directly addresses these Senators’ concerns, finding that “reports on FSA’s monitoring activities disclosed recurring instances at all servicers of servicer representatives not sufficiently informing borrowers about available repayment options.”
    • Upon reviewing the limited documentation FSA made available, the Inspector General observes that “[n]early 92 percent… [of FSA monthly call review reports] included at least 1 instance of the servicer representative not sufficiently informing borrowers about available repayment options.”
  • Offers new evidence of efforts by Secretary DeVos to obstruct investigations into Navient’s abuses. Late last year, Senator Warren revealed that, in May 2017, FSA had conducted its own audit of Navient and found routine, improper handling of borrowers seeking payment relief, including efforts by Navient personnel to steer borrowers into forbearance– the central allegation in a half-dozen lawsuits filed by state attorneys general and the Consumer Financial Protection Bureau. This revelation was met with an unsigned statement from the Department of Education, asserting that, in fact, Navient had been complying with all requirements and had not broken Education Department rules. Today’s audit proves this statement to be a lie.
    • This audit directly contradicts the Department of Education’s November 2018 statement, explaining that “although FSA provided additional information about its May 2017 review of Navient’s use of forbearances, that information does not accurately reflect the FSA review team’s work and observations.”
    • The Inspector General raises the possibility that the Department of Education’s subsequent communications with the Inspector General ignored findings by FSA personnel and instead provided information quoting from a “draft review report containing Navient’s response.” This raises important questions about whether Navient and the Department of Education also deceived Congress and the public when it claimed there was no evidence to support allegations of abuse made by state attorneys general and the CFPB.

Today’s audit follows a series of extraordinary steps by the Trump Administration to shield the student loan industry from scrutiny by regulators and state law enforcement officials. To justify each of the following steps, the Trump Administration pointed to the comprehensive and exhaustive oversight performed by FSA.

  • In August 2017, the Department of Education revoked an agreement with the Consumer Financial Protection Bureau, obstructing the Bureau’s oversight of the Department of Education’s servicing contractors.
  • In January 2018, the Department of Justice sided with a large student loan servicer in a failed attempt to block a lawsuit brought by the Massachusetts Attorney General alleging illegal mishandling of the Public Service Loan Forgiveness program.
  • In March 2018, the Department of Education published a new “interpretation” of the Higher Education Act that purported to preempt state consumer protection statutes and block state oversight over student loan companies.
  • In May 2018, the Consumer Financial Protection Bureau shuttered the only unit in the federal government solely focused on protecting student loan borrowers and young adults from predatory actors in the financial sector.
  • In August 2018, the Department of Justice sided with student loan industry lobbyists in an attempt to block a District of Columbia law expanding state oversight over student loan companies.

While the Trump Administration was engaged in a government-wide effort to obstruct independent oversight and deny justice to millions, this audit shows that the Department of Education was mismanaging the $1.4 trillion federal student loan program, jeopardizing the financial futures of all 42 million federal student loan borrowers.

SBPC HELPING STATES FIGHT FOR 44 MILLION AMERICANS WITH STUDENT DEBT

In the face of continuing systemic abuses across the student loan industry, state governments are taking action to expand protections for student loan borrowers and halt illegal practices by predatory companies. Last year, the Student Borrower Protection Center launched States for Student Borrower Protection, an initiative which highlights the student debt crisis across the country, and is designed to support the leaders in and out of government working to end this crisis through state level actions.

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About the Student Borrower Protection Center (SBPC):

The Student Borrower Protection Center (www.protectborrowers.org) is a nonprofit organization solely focused on alleviating the burden of student debt for millions of Americans. SBPC engages in advocacy, policymaking, and litigation strategy to rein in industry abuses, protect borrowers’ rights, and advance economic opportunity for the next generation of students. Led by the team of former federal regulators that directed oversight of the student loan market at the Consumer Financial Protection Bureau, SBPC exposes harmful and illegal practices in the student loan industry, drives impact litigation, advocates on behalf of student loan borrowers in Washington and in state capitals, and promotes progressive policy change. SBPC accomplishes these goals by partnering with leaders at all levels of government and throughout the nonprofit sector.