U.S. Department of Education

Office of Inspector General

Federal Student Aid: Additional 

Actions Needed to Mitigate the 

Risk of Servicer Noncompliance 

with Requirements for Servicing 

Federally Held Student Loans

February 12, 2019

ED-OIG/A05Q0008
NOTICE

Statements that managerial practices need improvements, as well as other conclusions 

and recommendations in this report, represent the opinions of the Office of Inspector 

General. The appropriate Department of Education officials will determine what 

corrective actions should be taken.

In accordance with the Freedom of Information Act (Title 5, United States Code, 

Section 552), reports that the Office of Inspector General issues are available to 

members of the press and general public to the extent information they contain is not 

subject to exemptions in the Act.
UNITED STATES DEPARTMENT OF EDUCATION

OFFICE OF INSPECTOR GENERAL 

Audit Services

400 MARYLAND AVENUE, S.W., WASHINGTON, DC 20202-1510

Promoting the efficiency, effectiveness, and integrity of the Department’s programs and operations.

February 12, 2019

TO: James F. Manning

Acting Chief Operating Officer

Federal Student Aid

FROM: Bryon S. Gordon /s/

Assistant Inspector General for Audit

SUBJECT: Final Audit Report, “Federal Student Aid: Additional Actions Needed to Mitigate the Risk 

of Servicer Noncompliance with Requirements for Servicing Federally Held Student 

Loans,” Control Number ED-OIG/A05Q0008

Attached is the subject final audit report that consolidates the results of our audit of Federal Student 

Aid’s oversight of servicers. We received your written comments disagreeing with the overall conclusion 

presented but agreeing with the recommendations in our draft audit report and have included those 

comments at the end of this report.

U.S. Department of Education policy requires that you develop a final corrective action plan within 

30 days of the issuance of this report. The corrective action plan should set forth the specific action 

items and targeted completion dates necessary to implement final corrective actions on the findings and 

recommendations contained in this final audit report. Corrective actions that your office proposes and 

implements will be monitored and tracked through the Department’s Audit Accountability and 

Resolution Tracking System.

In accordance with the Inspector General Act of 1978, as amended, the Office of Inspector General is 

required to report to Congress twice a year on the audits that remain unresolved after 6 months from 

the date of issuance.

We appreciate your cooperation during this review. If you have any questions, please contact me at 

(202) 245-6900 or Bryon.Gordon@ed.gov or Gary D. Whitman, Regional Inspector General for Audit, at 

(312) 730-1620 or Gary.Whitman@ed.gov. 
Table of Contents

Results in Brief .................................................................................................................... 1

Introduction ........................................................................................................................ 5

Finding 1. FSA Did Not Track All Identified Instances of Noncompliance and Rarely Held 

Servicers Accountable for Noncompliance with Requirements......................................... 9

Finding 2. Information Necessary to Ensure Servicer Compliance Not Always Complete21

Appendix A. Scope and Methodology...............................................................................24

Appendix B. FSA’s Oversight of Servicers .........................................................................30

Appendix C. Federal Requirements that Apply to Loan Servicing ....................................38

Appendix D. Acronyms and Abbreviations.......................................................................40

FSA Comments..................................................................................................................41
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ED-OIG/A05Q0008 1 

Results in Brief

What We Did

The objective of our audit was to determine whether Federal Student Aid (FSA) had 

established policies and procedures to mitigate the risk of servicers not servicing 

federally held student loans in accordance with Federal requirements. We assessed 

FSA’s operations as of September 2017.

To answer the objective, we first gained an understanding of the five components of 

a system of internal control relevant to FSA’s oversight of the servicing of federally held 

student loans.1 We concluded that the control activities component of FSA’s system of 

internal control was most relevant to our audit objective.2 Next, we identified the 

control activities that FSA had established to mitigate the risk of servicers not servicing 

federally held student loans in accordance with Federal requirements. We then assessed 

the adequacy of the design of the following control activities that we determined had 

the greatest impact on the effectiveness of FSA’s oversight:

• monitoring telephone calls between servicer representatives and borrowers and 

providing feedback about the monitoring to servicers,

• conducting reviews of servicers’ compliance with requirements for servicing 

federally held student loans, and

• reviewing independent auditors’ reports on audits of servicers’ systems of 

internal control.

3

Finally, we evaluated whether the policies and procedures provided reasonable 

assurance that the risk of servicers not servicing federally held student loans in 

accordance with Federal requirements was mitigated. 

 

1 “Standards for Internal Control in the Federal Government” (Government Accountability Office, 

September 2014) sets the internal control standards for Federal agencies. The standards are organized 

into five components—control environment, risk assessment, control activities, information and 

communication, and monitoring.

2 Control activities are the actions management establishes through policies and procedures to achieve 

objectives and respond to risks.

3 Audits of service organizations’ systems of internal control completed by independent auditors 

following “Statement on Standards for Attestation Engagements,” No. 18, issued by the American 

Institute of Certified Public Accountants.
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ED-OIG/A05Q0008 2

What We Found

FSA had not established policies and procedures that provided reasonable assurance 

that the risk of servicer noncompliance with requirements for servicing federally held 

student loans was mitigated. 

FSA’s oversight activities regularly identified instances of servicers’ not servicing 

federally held student loans in accordance with Federal requirements. From 

January 1, 2015, through September 30, 2017, 61 percent (210) of 343 reports on FSA’s 

oversight activities disclosed instances of servicer noncompliance. FSA management 

routinely tracked the instances of noncompliance that servicers did not remediate

before FSA issued a final review report. However, it did not track the identified instances 

of noncompliance that servicers remediated, even though FSA management could have

used such information to identify patterns of noncompliance. FSA management also had 

not analyzed the information it did track to identify trends and recurring instances of 

noncompliance at each servicer and across all servicers.

FSA management rarely used available contract accountability provisions to hold 

servicers accountable for instances of noncompliance. It also did not incorporate a 

performance metric relevant to servicer compliance with Federal requirements into its 

methodology for assigning loans to servicers (see Finding 1).

4 By not holding servicers 

accountable for instances of noncompliance with Federal loan servicing requirements, 

FSA did not provide servicers with an incentive to take actions to mitigate the risk of 

continued servicer noncompliance that could harm students. Further, FSA’s not holding

servicers accountable could lead to servicers being paid more than they should be (the 

contracts with servicers allow FSA to recover amounts paid for loans not serviced in 

compliance with requirements).

Additionally, FSA employees did not always follow policy when evaluating the quality of 

servicer representatives’ interactions with borrowers, and FSA did not provide reports 

of failed calls to servicers during a 10-month period, from June 2016 through 

March 2017 (see Finding 2). As a result, FSA management did not have reasonable 

assurance that servicers were complying with Federal loan servicing requirements when 

handling borrowers’ inquiries, borrowers might not have been protected from poor 

services, and taxpayers might not have been protected from improper payments.

 

4 FSA’s contracts with the servicers allowed FSA to take certain actions, such as withholding payment or 

reducing loan volume, to hold servicers accountable when they failed to comply with Federal loan 

servicing requirements.
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What We Recommend

We recommend that the Chief Operating Officer for FSA— 

• track all instances of noncompliance identified during FSA oversight activities, 

regardless of whether servicers remediated the specific instances before FSA 

issues a final review report, and use the records to identify trends and recurring 

noncompliance for each servicer and across all servicers;

• use the contractual accountability provisions available, such as requiring the 

return of funds or reducing future loan volume, to hold servicers accountable 

for instances of noncompliance; and

• regularly share the results of any FSA loan servicing oversight activities with 

servicers. 

FSA Comments 

FSA provided written comments on the draft of this report on November 2, 2018. FSA 

neither agreed nor disagreed with the findings but agreed with all six recommendations. 

It did not comment on the overall conclusion presented in this report. On 

November 20, 2018, the Deputy Chief Operating Officer for FSA notified OIG that FSA 

would revise its comments on the draft audit report.

On December 7, 2018, FSA provided its revised written comments. FSA strongly 

disagreed with the overall conclusion that it did not establish policies and procedures 

that provided reasonable assurance that the risk of servicer noncompliance with Federal 

requirements was mitigated. FSA also stated that it already had or will implement all 

six recommendations and described improvements it has made to its oversight activities 

since September 2017.

FSA stated that the wording of Finding 1 implies a much broader risk than indicated by 

the examples included in the report. It also disagreed that FSA rarely held servicers 

accountable, stating that enforcement actions since September 2017 have resulted in 

about $2 million in recommended recoveries. FSA stated no disagreement with 

Finding 2.

We include the full text of FSA’s revised comments in the FSA Comments section at the 

end of this report. We also summarize FSA’s revised comments at the end of each 

finding.

OIG Response

Because the post-September 2017 improvements that FSA described in its comments 

did not occur during our audit period, we did not evaluate them and do not discuss
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ED-OIG/A05Q0008 4

them in this report. However, as described, the improvements are aligned with the 

recommendations in this report. Other than providing further emphasis that we based 

our overall conclusion and findings on an assessment of FSA’s control activities as of 

September 2017, we did not make any changes to the report based on FSA’s comments.

We acknowledge that reasonable assurance of risk mitigation is a matter of 

management’s risk appetite and risk tolerance. However, FSA’s revised comments did 

not explain, and FSA did not provide any evidence showing, the level of noncompliance 

that is acceptable to FSA management or the level of noncompliance that would compel 

FSA to take enforcement actions against a servicer. Without such policies, employees 

conducting FSA’s oversight activities cannot consistently know when it would be 

appropriate to recommend servicers take actions beyond correcting the specific 

instances of noncompliance identified by FSA’s review teams.

Further, we do not agree that the risk of servicer noncompliance as described in 

Finding 1 is not broad. From January 1, 2015, through September 30, 2017, 61 percent 

(210) of 343 reports on FSA’s oversight activities identified instances of servicer 

noncompliance with Federal loan servicing requirements. These reports disclosed 

noncompliance by all nine servicers and recurring instances of noncompliance by some

servicers. These instances included noncompliance with requirements relevant to 

forbearances, deferments, income-driven repayment, interest rates, due diligence, and 

consumer protection. In most cases, FSA only required servicers to correct the accounts 

of borrowers affected by the noncompliance specifically identified by FSA.

In most cases before October 2017, FSA did not take actions stronger than correcting 

the accounts of those affected by FSA-identified noncompliance; rarely did FSA require 

the servicer to conduct a full file review. FSA also rarely penalized servicers for recurring 

noncompliance. In the 5 years that ended September 2017, FSA had required only three 

servicers to return about $181,000 to FSA for four instances of failure to service loans in 

compliance with Federal loan servicing requirements. Additionally, FSA’s methodology 

for assigning new loans to servicers was not adjusted to take into account servicers’ 

compliance with Federal loan servicing requirements. Therefore, servicers with more 

frequent instances of noncompliance experienced no reduction in the amount of new 

loans that FSA assigned to them. Although FSA stated that enforcement actions since 

September 2017 have resulted in about $2 million in recommended recoveries, the 

amount represents less than 0.12 percent of $1.7 billion that FSA budgeted for its loan 

servicing contracts in 2018 and 2019. While increased use of enforcement actions by 

FSA aligns with our recommendation, it will be important for FSA to track all instances of 

noncompliance and to assess the effect that its increased enforcement actions have on 

reducing noncompliance by the servicers.
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Introduction

Background

The U.S. Department of Education (Department) is the nation’s largest provider of 

student financial aid for education beyond high school. Within the Department, FSA is 

responsible for servicing all loans originated through the William D. Ford Federal Direct 

Loan (Direct Loan) Program and Federal Family Education Loan (FFEL) Program loans 

purchased from nonfederal entities.

5 As of September 30, 2017, the outstanding 

federally held student loan debt was more than $1.1 trillion.

Servicing Federally Held Student Loans

In 2009, FSA contracted with four servicers: (1) Great Lakes Educational Loan Services 

(Great Lakes); (2) Navient, LLC (Navient);

6 (3) Nelnet Servicing, LLC (Nelnet); and 

(4) Pennsylvania Higher Education Assistance Agency (PHEAA). From 2011 through 2013, 

FSA contracted with 11 more servicers: (1) Aspire Resources, Inc.; (2) College 

Foundation, Inc.; (3) Council for South Texas Economic Progress; (4) Educational Services 

of America, Inc. (EdFinancial Services); (5) Kentucky Higher Education Student Loan 

Corporation (Kentucky); (6) Missouri Higher Education Loan Authority (Missouri); 

(7) New Hampshire Higher Education Loan Corporation (New Hampshire); (8) Oklahoma 

Student Loan Authority (Oklahoma); (9) South Carolina Student Loan Corporation; 

(10) Utah Higher Education Assistance Authority (Utah); and (11) Vermont Student 

Assistance Corporation.

7 These 15 servicers have been responsible for collecting 

payments on federally held student loans that are not in a default status,

8 advising

 

5 From September 2008 through September 2010, the Department purchased a portion of the 

outstanding FFEL program loans, as authorized under the Ensuring Continued Access to Student Loans 

Act of 2008 (Public Law 110-227). In this report, we refer to Direct Loan and the purchased FFEL loans as 

federally held student loans.

6 In 2009, FSA contracted with SLM Corporation. In 2014, SLM Corporation split into two corporations; 

the second corporation—Navient, LLC—assumed the loan servicing responsibilities.

7 As of September 2017, five of these 11 servicers (EdFinancial Services, Missouri, Oklahoma, 

New Hampshire, and Utah) were still servicing federally held student loans.

8 A borrower who is more than 270 days delinquent in making payments is considered in a default 

status. However, FSA’s policy is to not have the servicer transfer such loans to FSA’s Default 

Management Collection System for assignment to a private collection agency until 360 days pass 

without payment being received.
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borrowers on available resources to better manage their loan obligations, responding to 

borrowers’ inquiries, and performing other administrative tasks associated with 

collecting and servicing federally held student loans on behalf of the Department.

The contracts with the servicers stated that: “The contractor(s) will be responsible for 

maintaining a full understanding of all federal and state laws and regulations and 

FSA requirements and ensuring that all aspects of the service continue to remain in 

compliance as changes occur.” The contracts also specified certain activities that 

servicers were required to address through their policies and procedures. For example, 

all the contracts required servicers to report financial and other information to FSA and

provide FSA access to their loan servicing information. Additionally, the contracts with 

Great Lakes, Navient, Nelnet, and PHEAA required the servicers to provide the 

Department with a copy of any lawsuit within 10 days of the complaint being served.

The contracts with the servicers also stated that FSA will assign loans based on the 

performance of each servicer in relation to the other servicers (as determined twice 

a year). Since September 2014, FSA has assigned new loans to servicers by calculating 

performance scores based on five attributes. The five attributes (and corresponding 

weights) for calculating servicer performance scores were as follows:

• satisfaction surveys of borrowers (35 percent),

• percentage of borrowers who were not more than 5 days delinquent 

(30 percent),

• percentage of borrowers who were more than 90 days but less than 271 days 

delinquent (15 percent),

• percentage of borrowers who were more than 270 days but less than 361 days 

delinquent (15 percent), and

• satisfaction survey of FSA employees who interacted with the servicers 

(5 percent).

As of September 30, 2017, FSA was responsible for about $1.147 trillion of federally held 

student loans. Of the $1.147 trillion, about $1.026 trillion was assigned to servicers,

9 of 

which $950 billion (93 percent) was assigned to four servicers—PHEAA ($319 billion), 

Great Lakes ($236 billion), Navient ($215 billion), and Nelnet ($180 billion). FSA had

 

9 About $120 billion (10 percent) of the $1.147 trillion in outstanding federally held student loan debt 

was in default. Defaulted loans were assigned to private collection agencies, not to servicers.
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assigned the remaining $76 billion (7 percent) to EdFinancial Services, Missouri, 

Oklahoma, New Hampshire, and Utah.

Ensuring Servicer’s Compliance with Requirements

FSA is responsible for ensuring servicers comply with all requirements for servicing 

federally held student loans, including requirements relevant to income-driven 

repayment plans, forbearances and deferments of loan payments, consolidations of 

loans, and principal and interest payments. Among the many requirements with which 

they must adhere, servicers must

• correctly record the borrowers’ interest rates and calculate the borrowers’ 

balances;

• correctly apply payments to borrowers’ accounts;

• properly grant forbearances and deferments to borrowers;

• appropriately capitalize loan interest;

• follow guidelines for delinquency notice letters, telephone calls, and skip tracing 

activities as they pertain to the collection of loans;

• properly process borrowers’ applications for income-driven repayment plans;

• correctly calculate borrowers’ monthly payments under income-driven 

repayment plans; and

• maintain complete and accurate records to support borrower’s repayment 

plans.

See Appendix C for a list of significant Federal laws and regulations with which servicers 

must comply.

Employees from three FSA offices—Business Operations, Program Compliance, and 

Finance—performed oversight activities that FSA management established to provide 

reasonable assurance that servicers complied with the requirements for servicing 

federally held student loans. These procedures included

• listening to recorded telephone interactions between servicer representatives 

and borrowers,

• conducting reviews of servicers’ compliance with loan servicing requirements,

• reviewing independent auditors’ reports on audits of servicers’ systems of 

internal control,
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• meeting with servicers, and

• conducting surveys of borrowers and FSA employees.

For a description of these oversight activities , see Appendix B.
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Finding 1. FSA Did Not Track All Identified 

Instances of Noncompliance and Rarely Held 

Servicers Accountable for Noncompliance with 

Requirements

FSA

• did not track all instances of noncompliance that FSA identified during its

oversight activities,

• did not analyze the records relevant to identified instances of noncompliance

to identify trends and recurring noncompliance for each servicer and across 

all servicers,

• rarely used available contract accountability provisions to hold servicers 

accountable for instances of noncompliance, and

• did not incorporate a performance metric relevant to servicer compliance with 

Federal requirements into its methodology for assigning loans to servicers.

As a result, borrowers might not have received the most favorable repayment terms 

available to them, and servicers might have been paid more than they should have been 

under their contracts.

FSA Did Not Track All Information Necessary to Identify Trends 

in Servicer Noncompliance with Federal Requirements

FSA used a database to track instances of servicer noncompliance with Federal loan 

servicing requirements. The database included instances of servicer noncompliance that 

required further action to be taken by either the servicer or FSA.

However, the database did not include instances of noncompliance that FSA identified 

during its review but considered the actions that the servicer proposed to be sufficient 

to remedy the specific instance of noncompliance. For example, an April 2017 report on 

a servicer liaison team review of EdFinancial Services’ inbound and outbound calls 

disclosed that servicer representatives did not always provide interest capitalization 

information to borrowers. EdFinancial Services agreed to take the action as 

recommended by FSA; therefore, according to FSA’s practice, the instances of 

noncompliance were not recorded in FSA’s database.

In addition to the information in the database being incomplete, FSA management was 

not using the information it did have to identify trends and recurring noncompliance for 

each servicer and across all servicers. Instead, FSA relied on the memories of the 
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employees responsible for the oversight activities to recognize recurring instances of 

noncompliance.

We concluded that FSA had the information needed to identify recurring instances of 

and trends in noncompliance. We analyzed all 343 monitoring reports that FSA 

completed from January 1, 2015, through September 30, 2017. The 343 reports included 

those on FSA’s monitoring of calls between servicer representatives and borrowers 

(73 reports), reviews of servicers’ compliance with Federal requirements (210 reports),

and reviews of independent auditors’ reports on audits of servicers’ systems of internal 

control (60 reports).10 About 61 percent (210) of these reports disclosed instances of 

servicer noncompliance with various areas of Federal loan servicing requirements. 

These instances included noncompliance with requirements relevant to forbearances, 

deferments, income-driven repayment, interest rates, due diligence, and consumer 

protection. The reports disclosed recurring instances of noncompliance primarily in 

two areas: consumer protection (servicer representatives not informing borrowers of 

the available repayment options) and income-driven repayment (servicers incorrectly 

calculating income-driven payment amounts). The reports also disclosed that the 

noncompliance rates at some servicers were significantly higher than the average 

noncompliance rate of all servicers.

Servicer Representatives Not Sufficiently Informing Borrowers 

of Available Repayment Options

When a servicer is notified that a borrower is having difficulty making payments, the 

servicer is required to provide the borrower with information about her or his options

for avoiding default status.

11 The servicer must explain the repayment plans available to 

the borrower. The servicer also must explain how the borrower may request a change in 

her or his repayment plan, provide the borrower with a description of the requirements 

for obtaining forbearance on the loan and any costs associated with forbearance, and 

provide the borrower with a description of the options available to avoid default and 

any fees or costs associated with those options. From January 2015 through 

September 2017, monthly reports on FSA’s monitoring activities disclosed recurring 

instances at all servicers of servicer representatives not sufficiently informing borrowers 

about available repayment options.

 

10 For a description of these control activities, see Appendix B.

11 Title 34, Code of Federal Regulations (C.F.R.), § 682.205(a)(4). Where there was no comparable Direct 

Loan regulation, the FFEL program regulation was effective.
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Monthly, FSA listened to a sample of recorded telephone calls between servicer 

representatives from all nine servicers and borrowers. For each call, FSA call monitors 

completed a scoresheet. FSA failed all calls receiving a score under FSA’s established 

standard.12 From January 2015 through September 2017, FSA provided 73 monthly 

reports on individual servicers. Nearly 92 percent (67) of the monthly reports included 

at least 1 instance of the servicer representative not sufficiently informing borrowers 

about available repayment options. For the April 2017 reports, FSA listened to 4,440 

telephone calls. The monthly reports showed that FSA failed 193 calls (4.3 percent of 

the 4,440 calls). Of those failed calls, FSA failed 26 percent (50 calls) because the 

servicer representatives did not provide the borrowers with sufficient information about 

the repayment options available to them. The failed-call rates for two servicers (Utah, 

8.9 percent, and PHEAA, 10.6 percent) were significantly higher than the 4.3 percent 

average failed-call rate for all servicers (see Table 1).

Table 1. April 2017 Calls That FSA Monitored and Failed

Servicer

Number of 

Calls 

Evaluated

Number of 

Calls That 

Failed

Percentage of 

Calls That 

Failed

Number Failed 

Because Borrower 

Not Provided 

Sufficient Information 

Utah 158 14 8.9 2 

EdFinancial 

Services 492 15 3.0 4 

PHEAA 997 106 10.6 25

New Hampshire 261 3 1.1 2 

Great Lakes 206 3 1.5 3 

Missouri 568 29 5.1 9 

Navient 834 6 0.7 2 

Nelnet 466 7 1.5 2 

Oklahoma 458 10 2.2 1 

Total 4,440 193 4.3 50

 

12 See Appendix B. FSA’s Oversight Activities, Call Monitoring Team Reviews. 
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For the May 2017 reports on FSA’s call monitoring, FSA listened to 6,070 telephone calls

between servicer representatives from all 9 servicers and borrowers. The monthly 

reports showed that FSA failed 151 calls (2.5 percent of the 6,070 calls). Of those failed 

calls, FSA failed 20 percent (30 calls) because the servicer representatives did not 

provide the borrowers with sufficient information about the repayment options 

available to them. The failed-call rates for two servicers (Missouri, 4.9 percent, and 

PHEAA, 8.8 percent) were significantly higher than the 2.5 percent average failed-call 

rate for all servicers (see Table 2).

Table 2. May 2017 Calls That FSA Monitored and Failed

Servicer

Number of 

Calls 

Evaluated

Number of 

Calls Failed

Percentage of 

Calls Failed

Number Failed 

Because Borrower 

Was Not Provided 

Sufficient 

Information 

Utah 735 11 1.5 1 

EdFinancial 

Services 481 4 0.8 0 

PHEAA 853 75 8.8 8 

New Hampshire 488 5 1.0 1 

Great Lakes 369 11 3.0 7 

Missouri 699 34 4.9 9 

Navient 1,112 3 0.3 0 

Nelnet 871 6 0.7 4 

Oklahoma 462 2 0.4 0 

Total 6,070 151 2.5 30

From January 2015 through September 2017, FSA issued 5 other reports (4 on reviews 

conducted by the servicer liaison team and 1 on a review conducted by Financial 

Institution Oversight Service) that covered the area of consumer protection.13 Of the 

 

13 During this period, FSA issued 33 reports on reviews conducted by the servicer liaison team and 

25 reports on reviews conducted by Financial Institution Oversight Service. 
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five reports, three identified instances of servicer representatives not sufficiently 

informing borrowers about available repayment options.

The April 2017 report on a servicer liaison team review of EdFinancial Services’ inbound 

and outbound calls disclosed that servicer representatives did not always provide 

interest capitalization information to borrowers. The servicer representatives provided 

interest capitalization information when discussing a forbearance or deferment but not 

when discussing different repayment plans.

The May 2017 report on a servicer liaison team review of Navient’s call center disclosed

that servicer representatives did not offer alternative or potentially beneficial options 

when attempting to assist borrowers with bringing their account current or managing 

repayment. Instead, Navient representatives placed the borrowers’ accounts into 

forbearance statuses.

14 For this review, FSA listened to 2,388 calls and determined that, 

for 220 calls (9.2 percent), servicer representatives did not provide the borrowers with 

all of their available repayment options. Navient offered only forbearance as an option 

during all 220 calls. The 9.2 percent rate of noncompliance was significantly higher than 

the 0.3 percent rate disclosed in FSA’s failed-call report for the same month.

The May 2017 report on a review conducted by Financial Institution Oversight Service 

disclosed that PHEAA representatives placed borrowers’ accounts into forbearance 

statuses to resolve delinquencies without discussing all available options with the 

borrowers. For this review, FSA listened to 99 borrower calls. It determined that, for

24 (24.2 percent) of the 99 calls, servicer representatives did not provide the borrowers 

with sufficient information regarding their available options. PHEAA granted 

forbearances to 17 borrowers when they might have benefitted from a different option, 

such as possible deferment or income-driven repayment. PHEAA either provided the 

other seven borrowers with inaccurate information regarding their options or did not 

follow internal procedures regarding the order of delinquency resolution options. 

The 24.2 percent rate of noncompliance was additional evidence (to the 8.8 percent 

rate disclosed in the failed-call report for the same month) of a pattern of 

noncompliance at PHEAA.

Income-Driven Payment Amounts Not Correctly Calculated

Income-driven repayment plans set a borrower’s monthly payment at an amount that is 

intended to be affordable based on the borrower’s income and family size. Any errors in 

 

14 Forbearance status results in a temporary cessation of the borrower’s required payment, providing 

the borrower an extension of time for making payments or to temporarily make smaller payments than 

previously scheduled. However, interest continues to accrue on the borrower’s account.
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the calculation of the affordable payment amounts could negatively affect borrowers or 

taxpayers. From January 2015 through September 2017, reports on FSA’s monitoring 

activities (Financial Institution Oversight Service reviews, process monitoring team

reviews, servicer liaison reviews, and reviews of audit reports on servicers’ systems of 

internal control) disclosed recurring instances of servicers not correctly calculating 

borrowers’ monthly payment amounts under income-driven repayment plans. FSA 

identified such noncompliance at seven servicers—at four more than once.

From January 2015 through September 2017, FSA issued 25 reports on reviews 

conducted by Financial Institution Oversight Service, 152 reports on reviews conducted 

by the process monitoring team, and 33 reports on reviews conducted by the servicer 

liaison team. These 210 reports disclosed the following:

• Twenty-two of the 25 Financial Institution Oversight Service reviews covered 

the calculation of income-driven repayment amounts. Five (23 percent) of those 

22 reviews disclosed instances of servicers not correctly calculating borrowers’ 

repayment amounts.

• Ten of the 152 process monitoring team reviews covered the calculation of 

income-driven repayment amounts. Two (20 percent) of the 10 reviews

disclosed instances of servicers not correctly calculating borrowers’ repayment 

amounts.

• Nine of the 33 servicer liaison team reviews covered the calculation of incomedriven repayment amounts. Six (67 percent) of the 9 reviews disclosed instances 

of servicers not correctly calculating borrowers’ repayment amounts.

In total, 13 (32 percent) of the 41 reports on FSA reviews that covered the calculation of 

income-driven repayment amounts disclosed instances of servicers not correctly 

calculating borrowers’ repayment amounts.

In addition to its own reviews, FSA reviewed independent auditors’ reports on audits of 

servicers’ systems of internal control, tracked the instances of noncompliance disclosed 

in those reports, and considered the noncompliance during planning for FSA’s following 

year’s compliance review work. Reports on 60 audits of servicers’ systems of internal 

control that FSA reviewed from January 1, 2015, through September 30, 2017, disclosed

that 1 servicer did not correctly calculate the income-driven monthly payment amounts 

during 2 consecutive audit periods. The report on the Utah audit covering July 1, 2016, 

through December 31, 2016, disclosed that Utah incorrectly calculated the payment 

amounts for 2 of 45 borrower accounts. The report on the Utah audit covering 

January 1, 2017, through June 30, 2017, disclosed that Utah incorrectly calculated the 

payment amounts for 6 of 45 borrower accounts.
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Contractual Accountability Provisions Rarely Used

FSA provided us with evidence of only four instances, affecting three servicers, in the 

past 5 years in which it required a servicer to return funds to the Federal government 

for failure to service loans in compliance with Federal requirements. In 2013, FSA 

reduced payments to Great Lakes by $99,836 because the servicer improperly billed FSA 

for borrower accounts placed in administrative forbearance. Great Lakes automatically 

placed delinquent accounts in administrative forbearance, which did not comply with 

the forbearance requirements. In 2017, FSA reduced payments to Great Lakes by 

$1,260, New Hampshire by $37,438, and Oklahoma by $42,550 because the three 

servicers billed FSA for borrower accounts despite not complying with administrative 

forbearance requirements. FSA has not adjusted the number of new loans assigned to 

a servicer or transferred a noncompliant servicer’s current loan volume to another 

servicer because of a servicer’s noncompliance with Federal loan servicing 

requirements.

FSA’s contracts with all servicers state that the servicers are required to follow all 

applicable Federal laws and regulations, or they will be required to return any fees that 

they billed to the Department from the time of noncompliance. The “Invoicing and NonCompliance” section of every servicer’s contract states the following:

Borrowers whose loans are not being serviced in compliance with the 

Requirements, Policy and Procedures for servicing federally held debt 

due to the fault of the servicer (i.e. correct interest calculations, correct 

balances, interest determination and calculations, notices sent properly, 

proper due diligence, etc.), will not be billable to the Government from 

the initial point of non-compliance. Any funds that have been invoiced 

for these borrowers and paid shall be returned to the Government via 

a credit on the next invoice.

According to the contracts, servicers are responsible for all supplies, services, and other 

costs to service borrower accounts. This includes costs for bringing contractor systems 

into compliance for handling federally held debt and costs for legislative, regulatory, or 

policy changes that affect the servicing of borrower accounts. For all other costs, the 

Department and the servicer may come to an agreement via change order process or 

negotiation, as necessary.

All contracts also allowed FSA to penalize the servicers for noncompliance by 

reallocating new loan volume to other servicers or transferring all or part of the

noncompliant servicer’s current loan volume to another servicer until the noncompliant 

servicer comes back into compliance. Servicers bill the Department for each individual 

borrower account serviced. The billing amount is based on the number of borrower 

accounts serviced (a set amount per account) and the status of each borrower account. 
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The contracts include a pricing structure for in-school, grace or repayment, deferment

or forbearance, and delinquent borrower account statuses.

As of September 2017, FSA’s methodology for assigning new loans to servicers did not 

take into account servicers’ compliance with Federal loan servicing requirements or 

FSA’s requirements for servicer representatives’ interactions with borrowers. Servicers 

with more instances of noncompliance experienced no reduction in the amount of new 

loans that FSA assigned to them, even though some borrowers might be experiencing 

poor service. All contracts required FSA to assign loans based on the performance of 

each servicer in relation to each of the other servicers (as determined two times a year). 

Since September 2014, FSA has assigned new loans to servicers by calculating servicer 

performance scores based on the following five attributes and weights:

• satisfaction surveys of borrowers (35 percent),

• percentage of borrowers who were not more than 5 days delinquent 

(30 percent),

• percentage of borrowers who were more than 90 days but less than 271 days 

delinquent (15 percent),

• percentage of borrowers who were more than 270 days but less than 361 days 

delinquent (15 percent), and

• satisfaction survey of FSA employees who interacted with the servicers 

(5 percent).

None of the contracts allowed FSA to establish performance metrics relevant to each 

servicer’s compliance with loan servicing requirements and evaluate individual servicer’s 

performance against such performance metrics. 

Agencies Should Evaluate and Modify Control Activities

“Standards for Internal Control in the Federal Government” states that management 

should design appropriate types of control activities to address risks, including those 

risks relevant to service organizations. The standards also state that management 

retains responsibility for monitoring the effectiveness of internal control over the 

assigned processes performed by service organizations and should hold service 

organizations accountable for their assigned internal control responsibilities. When 

issues are identified, management should evaluate them to determine whether any of 

the issues rise to the level of an internal control deficiency. Management should 

consider whether current controls address the identified issues and modify controls, 

if necessary. Management should also determine appropriate corrective actions and 

oversee remediation of deficiencies.
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In addition to the standards for internal control, FSA’s own strategic plan emphasizes 

that FSA’s control activities should focus on ensuring that servicers fulfill their 

responsibilities. FSA’s strategic plan for fiscal years 2015–2019 included a strategic goal 

to “Proactively manage the student aid portfolio to mitigate risk.” One of FSA’s 

objectives for this goal stated: “This will include the implementation of processes, tools, 

and methods that serve to protect the interests of students, and support FSA in making 

service providers accountable.” The objective further stated that FSA would “ensure 

that its processes for resolving student issues are simple for customers to use and 

sophisticated enough to capture insights that can be used to refine student aid 

operations.”

The Harm of Not Holding Servicers Accountable for Compliance 

with Federal Requirements

In its 2007 report on proposed amendments to the Higher Education Act, the Senate 

Committee on Health, Education, Labor, and Pensions stated: “[t]he committee believes 

strongly that lenders, guaranty agencies and institutions of higher education must act 

with honesty and integrity at all times to ensure that the financial aid programs under 

title IV serve the best interests of students.” In its December 2007 report on the Higher 

Education Opportunity Act of 2008, the House of Representatives Committee on 

Education and Labor stated: “[t]he nation’s financial aid system exists for a single 

purpose: to serve students and their families.”

By rarely holding servicers accountable for instances of noncompliance with Federal 

loan servicing requirements, FSA is not providing servicers with incentive to take actions 

to mitigate the risk of continued noncompliance that harms students and their families. 

Failure by servicers to take appropriate corrective actions could lead to borrowers not 

receiving the most favorable repayment terms that should have been available to them. 

Additionally, FSA’s not holding servicers accountable could lead to servicers being paid 

more than they should be (the contracts with servicers allow FSA to recover amounts 

paid for loans not serviced in compliance with requirements).

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.
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Recommendations

We recommend that the Chief Operating Officer for FSA— 

1.1 Track all instances of noncompliance identified during FSA reviews, regardless of 

whether the specific instances were corrected and did not require further action 

to be taken by either the servicer or FSA. 

1.2 Analyze the records relevant to noncompliance, identify trends and recurring 

noncompliance for each servicer and across all servicers, and use the 

information as a basis for assessing servicer performance. 

1.3 Use the contractual accountability provisions available, such as requiring the 

return of funds or reducing future loan volume, to hold servicers accountable 

for instances of noncompliance.

FSA Comments

FSA disagreed with certain aspects of the finding (see FSA Comments). FSA stated that 

the wording of the finding implies a much broader risk than indicated by the examples 

described. According to FSA, it devotes significant resources to its servicer oversight and 

monitoring efforts. FSA and third parties, including the OIG, conduct regular audits of 

servicers’ internal control processes. Neither Finding 1 nor these oversight activities 

have identified material instances of servicer noncompliance. FSA also disagreed that it 

rarely held servicers accountable for identified instances of noncompliance, stating that, 

since September 2017, it has required servicers to return more than $2 million for 

noncompliance.

FSA also provided its explanation regarding the servicer liaison team review of Navient’s 

call center (see page 13 of this report). FSA stated that the review was part of a larger 

review initiated by FSA in response to a lawsuit filed against Navient by the Consumer 

Financial Protection Bureau. FSA stated that the review only targeted short-duration 

calls because those would most likely include improper use of forbearances. According 

to FSA, the review team concluded that Navient was not improperly steering borrowers 

into forbearance, and nothing in the review report indicated that Navient improperly 

applied forbearances. FSA further stated that the review supports a conclusion that 

Navient followed standard practice and acted consistent with the requirements of its 

contract.

Finally, FSA stated that it has made improvements to its oversight and monitoring 

policies and procedures since the end of the audit period (September 2017). According 

to FSA, some of the improvements align with the recommendations of this report. FSA 

asked that we revise the report to reflect these improvements.
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OIG Response

We did not revise the finding based on FSA’s comments. We agree that FSA devotes 

significant resources to its oversight activities. However, we disagree with FSA’s 

statement that the risk of servicer noncompliance is not broad. As stated in this finding, 

from January 1, 2015, through September 30, 2017, 61 percent (210) of 343 reports on 

FSA’s servicer oversight activities identified instances of servicer noncompliance with 

Federal loan servicing requirements. These reports disclosed noncompliance by all 

nine servicers and recurring instances of noncompliance by some servicers. These 

instances included failure to comply with requirements relevant to forbearances, 

deferments, income-driven repayment, interest rates, due diligence, and consumer 

protection. FSA usually concluded that the error rate was low (1, 2, or 3 instances of 

noncompliance in a sample of about 30 borrower accounts) and did not expand its 

samples of borrower accounts or require the servicer to conduct a review to determine 

the extent of the noncompliance. Instead, FSA only required the servicer to correct the 

borrower accounts that FSA identified as in error.

However, the noncompliance that FSA has repeatedly identified could affect a much 

larger population of borrowers than those specifically identified by FSA’s reviews of 

samples of borrower accounts. Those risks include increased interest or repayment 

costs incurred by borrowers, the missed opportunity for more borrowers to take 

advantage of certain repayment programs, negative effects on borrowers’ credit ratings, 

and an increased likelihood of delinquency or even default.

Our audit evaluated FSA’s control activities as of September 2017, and we found that 

FSA’s control activities disclosed instances of noncompliance across all servicers and 

recurring instances of noncompliance at some servicers. Those results suggest that a 

more concerted effort to enforce accountability on the part of servicers is necessary. 

The approximately $2 million in recommended recoveries since September 2017 that 

FSA described in its comments represents a significant increase in recommended 

recoveries during the 5 years ended September 2017. However, $2 million represents 

less than 0.12 percent of the approximately $1.7 billion that FSA budgeted for loan 

servicing contracts in fiscal years 2018 and 2019. While increased use of enforcement 

actions by FSA aligns with our recommendation, it will be important for FSA to track all 

instances of noncompliance and to assess the effect that its increased enforcement 

actions have on reducing noncompliance by the servicers.

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 review team’s sample did not include only short-duration 

calls. The review team’s report clearly stated that all calls were included in the review 

team’s universe. However, the team found that Navient representatives steered 
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borrowers into forbearance typically during short-duration calls. Also, the team’s review 

report did not state that Navient was properly steering borrowers into forbearance. 

Instead, the report stated that Navient used forbearances instead of sufficiently 

informing borrowers about available repayment options. FSA’s review report stated:

For 220 of the calls, Navient [Customer Service Representatives] 

neglected to offer the borrower an option other than forbearance. . . 

While this isn’t a contractual requirement, these borrowers were not 

given the opportunity to decide if another option (like one of the 

Income Driven plans or a deferment) would have been more favorable. 

And in some instances, interest was capitalized when another option 

may have prevented it.

Rather than reflect the FSA review team’s observations, the statements that FSA 

references are from the section of the review team’s draft review report containing 

Navient’s response.

Because the post-September 2017 improvements that FSA described in its comments 

did not occur during our audit period, we did not evaluate them and do not discuss 

them in this report. However, the described improvements are aligned with the 

recommendations for Finding 1.
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Finding 2. Information Necessary to Ensure 

Servicer Compliance Not Always Complete

The information that FSA collected and FSA’s communications with servicers were not 

always sufficient to ensure servicers complied with requirements for servicing federally 

held student loans. We found that FSA did not ensure that the call monitoring team 

completed scoresheets for all calls that it monitored. As a result, FSA’s call monitoring 

database could not generate a score for more than 8 percent of the calls that FSA 

monitored from March 2017 through May 2017, and FSA management was unable to 

determine whether the servicers complied with FSA’s established standards for 

interaction with borrowers. We also found that FSA’s call monitoring team did not 

provide failed-call reports to servicers for a 10-month period, from June 2016 through 

March 2017. As a result, servicers were not receiving feedback about their telephone

interactions with borrowers.

FSA Did Not Always Collect Information Necessary to Evaluate 

Servicer Interactions with Borrowers

We found that FSA employees did not always follow policy and complete a scoresheet

for every monitored call. FSA used these scoresheets to assess the quality of customer 

service provided by servicers and to determine whether the servicers were complying 

with FSA’s established standards for handling borrowers’ inquiries. FSA provided us with 

a list of 10,237 inbound calls that it monitored for the months of March, April, and 

May 2017. Of those 10,237 calls, 838 (8.2 percent) did not have a system-generated 

score.

According to FSA policy (“Call Center Monitoring – Improved Process for Call Entry”), 

call monitors must complete a scoresheet for each monitored call. The scoresheet 

contained 2 sections and had a possible overall score of 100 points. The first section was 

worth 25 points and evaluated the servicer representatives’ introduction and greeting of 

the borrower, verification of the borrower’s identity and contact information, and 

overall professionalism. The second section was worth 75 points and evaluated

the method of resolution used by the servicer representative to address the borrower’s 

concerns. To score the second section, the call monitor first selected the method of 

resolution from a list and the scoresheet was automatically populated with metrics for 

that method. The call monitor then answered the questions applicable to the call. 

One of the options that the call monitor could select was a miscellaneous option 

(“Unknown/Misc/Other”). This option did not have any metrics associated with it. 

Instead, the call monitor could only select “Yes” or “No” to indicate whether the servicer

representative properly addressed the borrower’s concerns. However, we found that 

call monitors did not always follow procedures and make a “Yes” or “No” selection, and 

the call monitoring database did not automatically reject incomplete scoresheets.
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FSA management was not aware that call monitors did not follow policy because, in 

part, it had not implemented a quality control process. In addition, FSA management did 

not design the call monitoring database to reject scoresheets that could not be scored.

After we raised our concerns about the completeness of its call monitoring data, FSA 

management acknowledged that the call monitoring database was not capturing 

enough information to score all monitored calls. FSA management also informed us 

that, as of November 2017, it had implemented a quality control process to evaluate 

about 4 percent of each call monitor’s scoresheets each month. Further, FSA 

management informed us that it ordered system programming changes. The changes 

are intended to ensure that all fields in a scoresheet are fully populated when the 

monitor submits it or the scoresheet will be rejected and the call monitor will be 

prompted to complete the blank fields and resubmit it. We have not verified whether 

FSA has implemented these corrective actions.

FSA Did Not Provide Servicers with Feedback about Failed Calls

During a 10-Month Period

From June 2016 through March 2017, FSA did not communicate the results of its call 

monitoring to servicers. Providing reports of failed calls to servicers was an oversight 

activity that FSA used to give servicers feedback about servicer representatives’

interactions with borrowers. FSA did not provide the reports because it was revising the 

report format. However, without this feedback, servicers were unaware of whether 

their call operations were meeting FSA’s expectations and whether they needed to 

correct potential deficiencies in their call operations.

Agencies Should Design Processes to Identify and Communicate 

Quality Information

“Standards for Internal Control in the Federal Government” states that management 

should design appropriate types of control activities for the entity’s internal control 

system. These include reviews by management at the functional or activity level and 

controls over information processing, such as edit checks of the data entered and 

comparing file totals with control accounts. Management also should design a process 

to identify the information needed to address risks, obtain relevant data in a timely 

manner so the data can be used for effective monitoring, and process the data it obtains 

into quality information that supports the internal control system. Quality information 

means information that is appropriate, current, complete, accurate, accessible, and 

timely provided. Management should communicate that quality information to the 

necessary external parties so that external parties can help the entity achieve its 

objectives and address related risks.
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Without complete call monitoring data, FSA management did not have reasonable 

assurance that servicers were complying with Federal loan servicing requirements when 

handling borrowers’ inquiries. When FSA does not identify and communicate 

noncompliance by servicers, borrowers are not protected from poor services and 

taxpayers are not protected from improper payments. 

FSA stated that it did not provide servicers with reports of failed calls from June 2016 

through March 2017 because it was revising the report. According to FSA, the revised 

report improved the information provided to servicers by including detailed information 

by category of failed calls. The revised report took months to create because it needed 

to be acceptable to FSA and all parties involved. While the report was being revised, FSA 

still could have shared the results of any oversight activities with servicers.

Recommendations

We recommend that the Chief Operating Officer for FSA— 

2.1 Verify that programming corrections ensure the system prompts call monitors 

to complete all necessary data fields before submitting scoresheets. 

2.2 Ensure that FSA management has implemented its new quality control process 

and is evaluating a management-determined percentage of each call monitor’s 

completed work each month. 

2.3 Regularly share the results of any oversight activities with servicers, regardless 

of whether management is making changes to existing processes. 

FSA Comments

FSA neither agreed nor disagreed with the finding but agreed with all three

recommendations (see FSA Comments). FSA stated that it implemented a new database 

on June 14, 2018. The new database requires completion of all data fields before a call 

monitoring submission will be accepted. FSA also stated that it has implemented a 

quality control measure for the call monitoring team. Each day, a quality control analyst 

will review from 10 to 14 of the calls between borrowers and servicers that FSA 

monitors. The review will include the monitoring conducted by each call monitoring 

team member. Finally, FSA stated that it resumed providing all servicers with the results 

of FSA’s call monitoring activities as of April 2017.

OIG Response

Because the improvements that FSA described did not all occur during our audit period, 

we did not confirm that the improvements were operating as FSA management 

intended. However, as described, the improvements are aligned with the 

recommendations for Finding 2.
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Appendix A. Scope and Methodology

We evaluated FSA’s system of internal control over loan servicing as of September 2017.

We obtained and reviewed information relevant to FSA, the servicers with whom FSA 

had contracted, the terms of the contracts between FSA and the servicers, and prior 

reports relevant to FSA’s oversight of the servicers. The information included the 

following:

• data covering the portfolio of federally held student loans;

• FSA’s annual report for fiscal years 2015, 2016, and 2017 and strategic plan for 

fiscal years 2015–2019; 

• contracts between FSA and Aspire Resources, Inc.; College Foundation, Inc.; 

Council for South Texas Economic Progress; EdFinancial Services; Great Lakes; 

Kentucky; Missouri; Navient; Nelnet; New Hampshire; Oklahoma; PHEAA; 

South Carolina Student Loan Corporation; Utah; and Vermont Student 

Assistance Corporation; 

• two Office of Inspector General reports relevant to FSA’s oversight of

loan servicing—“Federal Student Aid's Award and Administration of the Title IV

Additional Servicers Contracts” (A02L0006) and “The U.S. Department of 

Education’s Administration of Student Loan Debt and Repayment” (A09N0011);

• three Government Accountability Office (GAO) reports relevant to FSA’s 

oversight of loan servicing—“Federal Student Loans: Better Oversight Could 

Improve Defaulted Loan Rehabilitation” (GAO-14-256); “Federal Student Loans: 

Education Could Do More to Help Ensure Borrowers Are Aware of Repayment 

and Forgiveness Options” (GAO-15-663); and “Federal Student Loans: Education 

Could Improve Direct Loan Program Customer Service and Oversight” 

(GAO-16-523);

• the transcript of one GAO congressional testimony relevant to FSA’s oversight of

loan servicing—“Federal Student Loans: Key Weaknesses Limit Education’s 

Management of Contractors” (GAO-16-196T);

• three Consumer Financial Protection Bureau reports relevant to loan servicing—

“Student loan servicing: Analysis of public input and recommendations for 

reform” (September 2015); “Annual report of the Consumer Financial Protection 

Bureau Student Loan Ombudsman: Transitioning from default to an incomedriven repayment plan” (October 2016); and “Staying on track while giving back: 

The cost of student loan servicing breakdowns for people serving their 

communities” (June 2017); and
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• independent auditors’ reports on audits of nine servicers’ systems of internal 

control covering July 1, 2015, through December 31, 2015, and one servicer’s 

systems of internal control covering January 1, 2015, through

December 31, 2015. 

We then gained an understanding of the system of internal control relevant to FSA’s

oversight of servicers. After gaining that understanding, we concluded that the control 

activities component of internal control was the most significant to our audit objective

and assessed the adequacy of the three most significant activities FSA used to oversee 

the servicers: (1) reviewing servicer’s compliance with Federal loan servicing 

requirements, (2) listening to recorded telephone calls between servicer representatives

and borrowers, and (3) reviewing independent auditors’ reports on audits of servicers’ 

systems of internal control.

Understanding of FSA’s System of Internal Control

Standards for internal control are organized into five components (control environment, 

risk assessment, control activities, information and communication, and monitoring). 

The five components apply to employees at all organizational levels (entity, division, 

operating unit, and function) and to all categories of objectives (strategic, operations, 

reporting, and compliance). To gain an understanding of the five components of FSA’s 

system of internal control over loan servicing, we identified and interviewed 

FSA managers and employees from the office of the Chief Operating Officer, Finance, 

Program Compliance, Customer Experience, Acquisitions, Risk Management, and 

Business Operations who were responsible for the oversight of loan servicing. In total, 

we interviewed 26 managers and 34 employees. We also reviewed the following: 

• FSA’s organization charts and a list of employees involved with the oversight of 

servicers; 

• documents describing the elements covered by Financial Institution Oversight 

Service reviews during fiscal years 2016 and 2017, and Financial Institution 

Oversight Service’s “FY 2016 Review Program Methodology” and “FY 2017 

Review Program Methodology,” which established the policies and procedures 

employees were supposed to follow when conducting Financial Institution 

Oversight Service reviews during fiscal years 2016 and 2017; 

• “Process Monitoring Team Policy and Procedural Manual,” which established 

the policies and procedures employees should follow when performing process 

monitoring team reviews of servicers; 

• call monitoring standards, which established the scoring methodology used to 

determine whether calls passed or failed; 
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• “Site Visit Review Procedures Guide,” which established the policies and 

procedures employees were to follow when conducting servicer liaison reviews 

of a servicer; 

• FSA’s “OMB [Office of Management and Budget] Circular A-123, Appendix A 

FY16 Implementation Plan;” 

• the A-123 assessment of FSA’s system of internal control for fiscal year 2016 

and the A-123 assessment of FSA’s servicer oversight activities for fiscal year 

2016; 

• “Explanation of Allocation and Performance Measure Methodology,” which

describes the methodology FSA used to assign new borrower accounts to 

servicers and the performance measures included in the allocation 

methodology; 

• examples of meeting notes from internal FSA meetings relevant to overseeing 

servicers and FSA meetings with servicers; 

• flowchart of the process FSA used to revise the requirements that servicers’ 

need to follow; 

• examples of change requests that FSA issued to revise the requirements that 

servicers must follow; and

• Financial Institution Oversight Service, process monitoring, and servicer liaison

review reports, call monitoring failed-call reports, and reports on audits of 

servicers’ systems of internal control. 

After gaining an understanding of the five components of FSA’s system of internal 

control over loan servicing, we concluded that control activities was the component 

most significant to our audit objective. 

Assessing the Adequacy of Control Activities

To assess the adequacy of FSA’s control activities, we first identified the following 

processes that we considered having the most significant impact on the effectiveness of 

FSA’s oversight of loan servicers: 

• listening to recorded telephone calls between servicer representatives and 

borrowers;

• reviewing servicer’s compliance with Federal loan servicing requirements, 

completed by process monitoring teams, servicer liaison teams, and Financial 

Institution Oversight Service; and
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• reviewing reports on audits, completed by independent auditors, of servicers’

systems of internal control.

We then determined whether these processes were operating as FSA management 

intended and whether these processes were likely to mitigate the risk of servicer 

noncompliance with Federal loan servicing requirements.15

To determine whether a particular process was operating as intended, we reviewed 

records showing FSA’s implementation of the process.

• Listening to recorded telephone calls between servicer representatives and 

borrowers. During March, April, and May 2017, FSA monitored 10,237 calls that 

borrowers made to the 9 servicers.16 We grouped the 10,237 inbound calls by 

servicer. We then randomly selected 45 calls and judgmentally selected 

1 additional recorded call for each servicer. Using the same system and audio 

files that FSA employees used, we listened to each selected recording. Following 

FSA’s processes and using FSA’s scoring rubric, we calculated a score for each 

call. We then compared our score with FSA’s scoring records.

• Reviewing servicer’s compliance with loan servicing requirements. We reviewed 

6 of 27 process monitoring team review reports that FSA issued from 

June 1, 2016, through May 31, 2017. We selected the reports on reviews of the 

four largest servicers (Great Lakes, Nelnet, Navient, and PHEAA) and the reports 

on reviews of two of the five other servicers to ensure that our evaluation 

helped us ensure that FSA consistently implemented its activities regardless of 

the type of servicer. We also reviewed 5 of 13 servicer liaison team review 

reports that FSA issued from June 1, 2016, through May 31, 2017, ensuring that 

we selected recent reviews, reviews of different servicers, and reviews that 

covered different topics. In addition, we reviewed all nine Financial Institution 

Oversight Service review reports that FSA issued from July 11, 2016, through 

June 27, 2017. We reviewed the records that FSA employees created to show

the work performed and conclusions reached about the servicer’s compliance 

with the requirements within the scope of each review. We compared FSA’s 

 

15 FSA designed and implemented other processes, such as regular meetings with servicers and 

satisfaction surveys of borrowers and FSA employees. However, we did not evaluate the effectiveness of 

these other processes because we did not consider them as significant as the three that we evaluated.

16 At the time we were conducting our audit, these were the most recent months for which FSA had 

completed its monitoring.
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reports and records of the review processes to the documents describing FSA’s 

processes and the processes explained to us during interviews.

• Reviewing reports on servicers’ systems of internal control. We reviewed the 

most recent reports on audits of all nine servicers’ systems of internal control.

17

We then reviewed the records that FSA’s reviewers created to show whether 

the audits tested all required control activities. We compared FSA’s records to 

the documents describing FSA’s processes and the processes explained to us 

during interviews.

We also reviewed the instances of noncompliance that FSA identified through its 

oversight activities and how FSA addressed those instances of noncompliance. We

obtained and reviewed all call monitoring reports of failed calls; all reports on process 

monitoring team, servicer liaison team, and Financial Institution Oversight Service

reviews; and all independent auditors’ reports on audits of servicers’ systems of internal 

control that FSA issued or reviewed from January 1, 2015, through September 30, 2017. 

We then categorized all of the instances of noncompliance identified in those reports

into groups based on the general subject area of the noncompliance. Next, we listed the

noncompliance subject areas that occurred more than once. For noncompliance that 

occurred more than once, we assessed FSA’s recommended actions and the servicer’s 

proposed actions to determine whether the actions taken would likely mitigate the risk 

of similar instances of noncompliance occurring.

Use of Computer-Processed Data

We relied, in part, on inbound call monitoring data that FSA retained for the months of 

March, April, and May 2017. We analyzed the data to ensure that all fields included the 

correct type of information (for example, the date fields included only dates) and no 

fields were blank. Based on our analysis, we concluded that the computer-processed 

data were sufficiently reliable for the purposes of our audit.18

We also used data on federally held student loans that we obtained from FSA’s website. 

We used this data to identify the volume of loans serviced by FSA and the allocation of 

those loans to the servicers. We did not use the data to assess FSA’s processes or to 

support our conclusions. Accordingly, we did not assess the reliability of this data.

 

17 The audits covered either January 1, 2016, through December 31, 2016, or July 1, 2016, through 

December 31, 2016.

18 Not all calls were scored (see Finding 2). However, the lack of a score for some calls did not affect the 

overall reliability of the data for use in achieving our audit objective.
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ED-OIG/A05Q0008 29

Compliance with Auditing Standards

We conducted this performance audit in accordance with generally accepted 

government auditing standards. Those standards require that we plan and perform the 

audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objective. We believe that the evidence 

obtained provides a reasonable basis for our findings and conclusions based on our 

audit objective.

We conducted our audit at FSA’s offices in Washington, D.C.; Dallas, Texas; Kansas City, 

Missouri; and Chicago, Illinois; and our offices from June 2016 through December 2017. 

We discussed the results of our audit with FSA officials on June 26, 2018.
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ED-OIG/A05Q0008 30

Appendix B. FSA’s Oversight of Servicers

Managers and employees from three FSA offices—Business Operations, Finance, and 

Program Compliance—conducted the following oversight activities: 

• monitoring of telephone calls between servicer representatives and borrowers 

(completed by Business Operations call monitoring team);

• conducting reviews of servicers’ compliance with requirements for servicing 

federally held student loans (completed by the Business Operations process 

monitoring team, Business Operations servicer liaison team, and Program 

Compliance, Financial Institution Oversight Service); 

• reviewing audit reports on servicers’ systems of internal control (completed by 

independent auditors and reviewed by Business Operations); 

• meeting with servicers (facilitated by Business Operations servicer liaison team); 

and

• conducting surveys of borrowers’ satisfaction with their interactions with 

servicers and surveys of FSA employees (developed by a vendor through 

consultation with the Office of the Chief Operating Officer and completed by the 

vendor). 

Reviewing Servicer Compliance

Five separate teams (call monitoring team, process monitoring team, servicer liaison 

team, Financial Institution Oversight Service, and A-123A team) from three FSA offices 

(Business Operations, Finance, and Program Compliance) evaluated servicers’ 

compliance with contractual and Federal loan servicing requirements. 

Call Monitoring Team Reviews

Monthly, the Business Operations call monitoring team listened to a sample of recorded 

telephone calls between servicer representatives and borrowers.19 The purpose of this 

process was to determine whether borrowers received complete and accurate 

information in an efficient, polite, and professional manner in compliance with FSA’s 

standards for servicer interactions with borrowers. Every month, each servicer provided 

the call monitoring team with multiple lists of inbound and outbound telephone calls. 

FSA asked each servicer to provide a list and recordings of all specialty line calls (for 

example, military-related and consolidation calls). FSA did not ask each servicer to 

 

19 The call monitoring team is part of the Operations Services Group under Business Operations.
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ED-OIG/A05Q0008 31

provide recordings of all other inbound and outbound calls. Instead, FSA asked each 

servicer to provide a list of up to 10,000 inbound and 5,000 outbound calls. From each 

list, the call monitoring team selected a random sample of 200 to 400 calls. The call 

monitoring team provided the servicer with a list of the selected calls, and the servicers 

provided recordings of the selected calls to FSA.

Call monitors listened to the recordings and completed a scoresheet for each call in 

FSA’s call monitoring database. The scoresheet included sections for various subject 

areas, such as income-driven repayment plans, forbearances, and loan discharges. For 

each subject area, call monitors were required to answer questions by applying FSA’s 

established standards for handling such calls. FSA’s call monitoring database would then 

calculate a score for each call based on how the call monitor answered all the questions. 

A call could receive a score up to 100 points. As many as 25 points could be received 

based on the servicer representatives’ introduction and greeting of the borrower, 

verification of the borrower’s identity and contact information, and overall 

professionalism. As many as 75 points could be received based on the servicer 

representative’s handling of the call in relation to the subject of the call. Calls receiving 

a score less than 85 failed FSA’s established standards.

Each month, the call monitoring team prepared a failed-call report for each servicer.20

The failed-call report listed each call that received a score less than 85 and an 

explanation of why FSA considered the call to be substandard. The call monitoring team 

asked each servicer receiving a failed-call report to review the calls and provide 

comments and proposed actions. After the servicer provided comments or proposed 

actions to remediate the noncompliance relevant to the failed calls, or both, the call 

monitoring team reviewed and either approved or disapproved the proposed corrective 

actions.

Process Monitoring Team Reviews

Each year, the process monitoring team completed five to six reviews of each servicer.21

For a typical review, the team members selected samples of borrower accounts 

(usually 30) and reviewed the servicer’s records for those accounts. Examples of records 

included payment histories, servicing histories, and system screen shots. The team 

members reviewed the records to determine whether the servicer complied with 

 

20 FSA did not provide any servicers with failed-call reports during a 10-month period, from July 2016 

through March 2017.

21 The process monitoring team is part of the Servicers Oversight Division within the Operations Services 

Group under Business Operations.
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ED-OIG/A05Q0008 32

Federal loan servicing requirements relevant to the special topic of the review and a set 

of standard topics. Since January 2015, the special topics of the reviews have included 

determining whether servicers

• appropriately capitalized loan interest,

• correctly applied payments to borrowers’ accounts,

• properly processed borrowers’ applications for income-driven repayment plans, 

and

• correctly calculated borrowers’ monthly payments under income-driven 

repayment plans.

Standard topics have included determining whether servicers

• properly granted forbearances and deferments to borrowers;

• correctly recorded the borrowers’ interest rates and calculated the borrowers’ 

balances;

• appropriately applied military benefits to eligible borrowers;

• followed guidelines for delinquency notice letters, telephone calls, and skip 

tracing activities as they pertain to the collection of loans;

• maintained complete and accurate records to support borrower’s repayment 

plans; and

• properly handled borrowers’ claims for death, closed-school, or other 

discharges.

After conducting each review, the process monitoring team prepared a report for 

each servicer to review. The team asked each servicer for comments and any technical 

corrections. After a servicer provided comments, the team combined the 

individual servicer reports into one consolidated report. The consolidated report 

included the methodology followed during the reviews of all the servicers, the instances 

of noncompliance identified at each servicer, the team’s recommended corrective 

actions (if any), and comments (if any) from each of the servicers.

The process monitoring team provided the consolidated report to Business Operations 

management for review. Once approved, Business Operations management provided

the consolidated report to the servicer liaisons (employees who served as the primary 
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ED-OIG/A05Q0008 33

point of contact between FSA and servicers), who provided individual reports to their 

assigned servicers.22

Servicer Liaison Team Reviews

At least once each year, FSA sent a team of employees to each servicer. Each review 

team typically consisted of one member of the Business Operations servicer liaison team 

and at least one member of the process monitoring team.23 A servicer liaison team 

review could be either a comprehensive review or a targeted review. A comprehensive 

review covered multiple loan servicing processes and operations. A targeted review 

covered a specific area of concern. Since January 2015, specific areas of concern have 

included call center operations, forbearances, and income-driven repayment plan 

processing and approval. After completing a site visit, the review team prepared a draft 

report describing the instances of noncompliance identified and the team’s 

recommended actions for remediating the instances of noncompliance. The review 

team provided the report to Business Operations management for review.

After Business Operations management reviewed the report, the review team held

a meeting with the servicer to discuss the information included in the draft report. 

This meeting provided the servicer an opportunity to raise any concerns with the 

information included in the draft report and to provide additional information. If the 

servicer provided additional information, a member of the review team researched the 

information to determine whether it changed the results of the review as presented in 

the draft report. After the review team made any necessary changes to the draft report, 

it issued a final report to the servicer and requested the servicer’s official written 

response and proposed actions.

The review team compared the servicer’s written response and proposed actions to 

determine whether the proposed actions would sufficiently address the identified 

instances of noncompliance. If not, the review team required the servicer to reconsider 

its proposed actions. Once the review team determined that the actions would likely 

remediate the FSA-identified instances of noncompliance, a team member monitored 

the servicer until the proposed actions were implemented.

 

22 The consolidated report is not provided to the servicers because it contains information on all 

the servicers reviewed.

23 Servicer liaisons are part of the Operations Services Group under Business Operations.
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ED-OIG/A05Q0008 34

Financial Institution Oversight Service Reviews

Financial Institution Oversight Service annually reviewed all servicers.

24 Financial 

Institution Oversight Service conducted a risk analysis to determine the requirements to 

test during the coming fiscal year. For example, for fiscal year 2017, the risk analysis 

identified three areas of risk that applied to Great Lakes, Navient, Nelnet, and PHEAA

and three areas of risk that applied to the other five servicers. Based on the risk analysis, 

Financial Institution Oversight Service designed its 2017 reviews of Great Lakes, Navient, 

Nelnet, and PHEAA to determine whether they

• timely processed borrowers’ requested loan consolidations and correctly 

calculated the interest rates for the consolidated loans,

• properly processed applications for income-driven repayment plans and 

correctly calculated the payment amounts for those repayment plans, and 

• properly granted an interest rate cap to borrowers eligible under the 

Servicemembers Civil Relief Act.

Financial Institution Oversight Service designed its 2017 reviews of the other servicers 

to determine whether they

• properly processed new loans received for servicing,

• properly processed applications for income-driven repayment plans and 

correctly calculated the payment amounts for those repayment plans, and

• properly granted an interest rate cap to borrowers eligible under the 

Servicemembers Civil Relief Act.

To determine whether a servicer complied with the selected requirements, Financial 

Institution Oversight Service reviewed the records for a sample of borrower accounts

(usually 29).

After completing its review of the records, Financial Institution Oversight Service

prepared a report describing the review objective, review scope, and any instances of 

noncompliance identified. Financial Institution Oversight Service provided the report to 

Business Operations management for review. (Financial Institution Oversight Service did 

not include recommendations in its reports to Business Operations.) After review, 

Business Operations provided the report to the servicer and worked with the servicer to 

resolve the instances of noncompliance included in the report.

 

24 Financial Institution Oversight Service is part of Program Compliance.
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ED-OIG/A05Q0008 35

A-123A Team Reviews

FSA’s A-123A team reviewed reports on audits of servicers’ systems of internal 

control.25 These audits were conducted once or twice a year by independent auditors. 

Such audits are intended to provide a description of a service organization’s system of 

internal control over areas that are likely to be relevant to the service organization’s

customers’ internal control over financial reporting. Although these audits are primarily 

intended to cover internal control over financial reporting, customers may request that 

the service organization have the independent auditors cover other key areas of its 

operations.

Annually, the A-123A team identified key controls over compliance with loan servicing 

requirements that each servicer was required to have the independent auditor review 

during the next audit cycle. For example, for fiscal year 2017, the A-123A team 

identified the following key controls: reporting information to credit bureaus, processing 

income-driven repayment plans, adding new loans to the financial system, and applying 

correct interest rates to loans. 

The A-123A team reviewed the audit reports to ensure that the independent auditors 

reviewed all of the servicers’ key controls. If the report indicated that the auditor did 

not test a required key control, the A-123A team would decide whether it needed to 

conduct its own review of that servicer. If the report disclosed noncompliance, the

A-123A team recorded the noncompliance and the servicer’s proposed action plan in 

a summary of aggregated deficiencies. The A-123A team tracked the status of all actions 

to ensure that the controls relevant to those actions would be tested during the next 

audit. 

Meeting with Servicers

Each servicer liaison held calls once or twice a month with her or his assigned servicer 

(once a month with EdFinancial Services, New Hampshire, Oklahoma, and Utah and 

twice a month with Great Lakes, Missouri, Navient, Nelnet, and PHEAA). Each call 

typically included discussions about (1) noncompliance that FSA identified through its 

oversight activities; (2) corrective actions to address noncompliance that FSA identified; 

(3) a report on call center statistics, such as call volume, average call length, average 

amount of time to answer a call, number of calls that the caller hung up; (4) questions or 

concerns relevant to loan servicing; and (5) areas that need improvement according to

the quarterly satisfaction survey results.

 

25 The A-123A Team is comprised of employees from Finance and an audit firm contracted to assist with 

planning the audits.
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ED-OIG/A05Q0008 36

Surveying Borrowers’ and FSA Employees’ Satisfaction with 

Servicers

FSA contracted with a third-party vendor to conduct surveys of borrowers’ and FSA 

employees’ satisfaction with their interactions with servicers.

26 The purpose of the 

surveys was to help FSA with loan allocation methodology and to identify areas in which 

servicers might need improvement.

For the July 2017 through December 2017 borrower survey, the vendor sent the survey 

to about 23,500 borrowers for each servicer.

27 According to FSA’s Office of the Chief 

Operating Officer, about 3 or 4 percent (700 to 900 responses) of the borrowers 

typically responded to the surveys. For the July 2017 through December 2017 FSA 

employee survey, the Deputy Chief Business Operations Officer provided the vendor 

a list of employees who had interactions with servicers. Each employee was to complete 

a separate survey for each servicer with which he or she worked during the past 

6 months. Of the 28 FSA employees receiving the survey, about 60 percent (17)

responded.

Both surveys included three general questions.

28

• The respondent’s overall satisfaction with the servicer.

• The extent to which the servicer fell short of or exceeded expectations.

• How the respondent’s interactions with the servicer compared to what the 

respondent thought would be an ideal interaction.

The borrower survey also included questions covering multiple areas, such as the clarity 

and usefulness of letters and emails received from the servicer, ease of making 

payments, accuracy and understandability of billing statements, ease of navigating the 

servicer’s website, and quality of service received from the servicers representatives. 

In addition to the three general questions, the FSA employee survey included questions 

about their experiences with the servicer’s data system; work products, reports, or 

other servicer-generated deliverables; information received during communications 

with the servicer; interactions with the servicer; and general working relationship with 

the servicer.

 

26 Before calendar year 2017, the survey was conducted four times a year. Effective for calendar year 

2017, the survey was conducted twice a year.

27 Borrowers were selected using data from the National Student Loan Data System.

28 FSA and the vendor jointly developed the survey questions.
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ED-OIG/A05Q0008 37

Those surveyed were asked to answer questions using a scale of 1 through 10 to 

indicate their level of satisfaction. All of the questions included a comment area in 

which those surveyed could provide additional information or explain questions 

assigned a score below seven.
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ED-OIG/A05Q0008 38

Appendix C. Federal Requirements that Apply to 

Loan Servicing

Law Subject Statutory 

Citation

Summary of Loan ServicingRelevant ProvisionsRegulatory 

Citation

Dodd-Frank 

Wall Street 

Reform and 

Consumer 

Protection Act

Consumer 

protection

12 United 

States Code 

§ 5531

Prohibits unfair, deceptive, or 

abusive acts or practices.

-

Fair Debt 

Collection

Practices Act

Debt 

collection

15 United 

States Code 

§§ 1692d1692f

Prohibits the use of abusive, 

deceptive, and unfair debt 

collection practices and 

prohibits the threatening or 

harassing borrowers.

-

Higher 

Education Act 

of 1965, as 

amended 

(HEA)

Borrower 

eligibility and 

consolidation 

loan 

eligibility

§§ 428, 

428B, 428C, 

428H, and 

455

Specifies eligibility requirements 

for borrowers to receive Federal 

loans and requirements with 

which servicers must comply 

when determining borrower 

eligibility for loan consolidation.

34 C.F.R. 

§§ 682.201, 

682.412, 

685.200, 

685.211(e), 

and 685.220

HEA Deferment §§ 428, 

428B, 

455(f), and 

493D

Establishes requirements 

servicers must follow when 

determining whether a 

borrower is eligible for a 

deferment of loan payments.

34 C.F.R. 

§§ 682.210, 

and 685.204

HEA Loan 

discharge 

and 

forgiveness

§§ 428J, 

428K, 428L, 

437, 455(h),

455(m), and

460

Public Law 

109-292 § 6

Establishes requirements for 

determining whether a 

borrower is eligible for loan 

discharge and forgiveness.

34 C.F.R. 

§§ 682.209,

682.402, 

682.407, 

685.206-

685.219, 

and 685.222

HEA Due diligence § 432 Sets requirements for reporting 

certain information to consumer 

reporting agencies, responding 

to borrower inquiries, 

establishing terms of 

repayment, and reporting a 

borrower’s enrollment and loan 

status information.

34 C.F.R. 

§§ 682.208 

and 682.411
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ED-OIG/A05Q0008 39

Law Subject Statutory 

Citation

Summary of Loan ServicingRelevant ProvisionsRegulatory 

Citation

HEA Forbearance §§ 428(c)(3), 

428(c)(10), 

428H(e)(7), 

and 430(c)

Allows the granting of 

forbearance to borrowers 

meeting certain requirements.

34 C.F.R. 

§§ 682.211 

and 685.205

HEA Interest rates §§ 427A, 

428C, and 

455(b)

Sets the applicable interest rate 

on the borrower’s loan.

34 C.F.R. 

§§ 682.202 

and 685.202

HEA Loan limits §§ 428 and 

428H

Sets limits on the amounts 

students may borrow.

34 C.F.R. 

§§ 682.204 

and 685.203

HEA Repayment 

plans

§§ 428(b), 

428(b)(9), 

428C(c)(2), 

455(d), 

455(e), and 

493C

Establishes the repayment plans 

for a borrower (based on 

eligibility):

• Standard (10-Year and 

Consolidation)

• Extended

• Graduated (10-Year and 

Consolidation)

• Income-Contingent

• Income-Based

• Pay As You Earn

• Revised Pay As You Earn

• Alternative

34 C.F.R. 

§§ 682.209, 

682.215, 

685.208, 

685.209, 

and 685.221

Note: Table is not inclusive of all requirements that must be followed when servicing 

federally held student loans.
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ED-OIG/A05Q0008 40

Appendix D. Acronyms and Abbreviations

A–123 Office of Management and Budget Circular A–123

C.F.R. Code of Federal Regulations

Department U.S. Department of Education

Direct Loan William D. Ford Federal Direct Loan

EdFinancial Services Educational Services of America, Inc.

FFEL Federal Family Education Loan

FSA Federal Student Aid

GAO Government Accountability Office

Great Lakes Great Lakes Educational Loan Services

HEA Higher Education Act of 1965, as amended

Kentucky Kentucky Higher Education Student Loan Corporation

Missouri Missouri Higher Education Loan Authority

Navient Navient, LLC

Nelnet Nelnet Servicing, LLC

New Hampshire New Hampshire Higher Education Loan Corporation

OMB Office of Management and Budget

Oklahoma Oklahoma Student Loan Authority

PHEAA Pennsylvania Higher Education Assistance Authority

Utah Utah Higher Education Assistance Authority
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ED-OIG/A05Q0008 41

FSA Comments
Federa I StudentAid '' I ... . ;•. 

PROUO SPONSOR of

/he AMERICAN MIND 

December 7, 2018 

TO: Bryon S. Gordon 

Assistant Inspector General for Audit 

FROM: James F. Manning 

Acting Chief Operating Officer 

Federal Student Aid 

SUBJECT: Draft Audit Report, "Federal Student Aid: Actions Needed to Mitigate the Risk of 

Servicer Noncompliance with Requirements for Servicing Federally Held Student Loans,n 

Control Number EO-OIG/AOSQ0008 

Thank you for the opportunity to review and comment on the Office of Inspector General's (OIG) draft 

audit report "Federal Student Aid: Actions Needed to Mitigate the Risk of servicer Noncompliance with 

Requirements for servicing Federally Held Student Loans/ dated September 28, 2018. The purpose of 

the audit was to determine whether Federal Student Aid's (FSA's) has established policies and 

procedures to mitigate the risk of servicers not servicing federally held student loans in accordance with 

federal requirements. 

We take our responsibility to provide high-quality service to federal student loan borrowers very 

seriously. We strongly disagree with your report's statement that HF�A did not establish policies and 

procedures that provide reasonable assurance that the risk of servicer noncompliance with 

requirements for servicing federally held student loans was mitigatedH and disagree that we rarely hold 

servicers accountable. We also are concerned that the wording of your findings implies a much broader 

level of risk than is indicated by the specific examples identified in your report. FSA devotes significant 

resources to vendor oversight and monitoring efforts-which include extensive call and process reviews, 

control audits, complaint monitoring, and contractual accountability measures - and has established 

performance-based contracts focused on driving improvements in customer satisfaction and outcomes 

related to reduced borrower delinquency and default. In addition, FSA and third parties-including the 

OIG's financial statement auditor-conduct regular audits of FSA's and our vendors internal control 

processes. Neither your report nor any of these other extensive oversight efforts have identified 

material instances of noncompliance by our vendors. 

Further, your report is based on fieldwork performed between Jan. 1, 2015, and Sept. 30, 2017. As such, 

your report fails to reflect significant ongoing improvements we have made to our oversight and 

monitoring policies and procedures, some of which directly align with the recommendations included in 

your report. A discussion of some of these efforts, as well as clarifications on some of the specific issues 

discussed in the report, is provided below. 

We appreciate OIG's review and agree that there always is room for improvement in policies, processes, 

and procedures, particularly in a program as large and complex as federal student loans. That said, we 

believe that the scope and scale of issues identified in your report, as·well as the fact that most of them 

U.S. Department of Education 

Office oflnspector General 

ED-OIG/ A0SQ0008 42 
'1 

have been addressed since the fieldwork was completed, does not support the broad negative 

characterization of FSA's overall oversight efforts. 

Before addressing the report's recommendations in detail, I am providing additional context and 

updated information related to OIG's federal loan servicer oversight findings. In some cases these 

activities were in their early stages during the latter part of OIG's fieldwork, whlle others have been put 

in place since September 2017. 

• FSA cunrently is tracking 17 Corrective Action Plans (CAPs) involving our federal loan servicers. 

Five of those CAPs have been closed because the servicers canried out all of the corrective 

actions, and 12 are in the process of being fully implemented. In general, we have identified and 

are correcting primary issues that include proper application of forbearance, income-driven 

repayment (IDR) selection and annual certification, Public Service Loan Forgiveness (PSLF) 

payment counting, and interest capitalization. All CAPS include making affected borrowers 

whole, when appropriate, and determining the monetary amount a servicer must reimburse the 

Department because the contracted fee we paid them to perform a service was not performed 

appropriately. 

The total amount of contracted fees identified to be reimbursed since the end of the audit 

period in September 2017 as a result of closed CAPS and work plan completion is approximately 

$2,055,000. In one e,iample, a servicer was not capitalizing unpaid interest on borrower 

accounts due to negative amortization. That resulted in a revenue loss for the government 

totaling approximately $940,000, which the servicer has repaid to the government. In addition, 

approximately $1,004,000 in fees paid to a servicer for the performance of a contracted service 

will be reimbursed to FSA upon final determination that the service was not performed. In most 

cases, amounts owed are credited to FSA on the next monthly invoice after a determination of 

non-performance has been made. 

• In addition to initiating, tracking, and completing CAPs, FSA has restructured one component of 

the three federal loan servicer oversight resources described in the report. The restructuring 

involves FSA's Servicer Liaison Team (SLT). Instead of having each member of the SLT assigned to 

cover one (or sometimes more than one) servicer exclusively, each SLT member now is assigned 

to monitor one or more specific oversight areas across all servicers. This change in structure 

allows a more holistic, objective, and cohesive approach to identifying and remediating issues. 

Once we identify an issue with one servicer, we immediately expand our c1ssessment to a 11 

servicers. Oversight areas include, but are not limited to, forbearance and deferment, discharges 

and forgiveness, repayment plans, delinquency and default, and day-to-day work in process. We 

also have added a separate team focused only on PSLF, and our call monitoring team remains in 

place. 

• It should be noted that the Financial Institution Oversight Service (FIOS} has completed testing 

at all of the TIVAS/NFPs during FY 2018. In doing so, we have found that there has been 

improvement in the servicers' performance overall. In fact, tliere were several service rs that had 

no failure during our testing. 

• The OIG report discusses a Maya2017 SLTareport summarizing the results of a site visit review on 

Navient's use of forbea ranees. This SLT report was one element of a significantly larger review of 

U.S. Department of Education 

Office oflnspector General 

ED-OIG/A0SQ0008 43 
Navient activities in the wake of a lawsuit filed against the company in January 2017 by the 

Consumer Financial Protection Bureau ICFPB). While ongoing contract oversight snd monitoring 

activities had given no indication of widespread compliance issues with Navient:. FSA senior 

management requested the additional review to obtain supplementary information given the 

issues raised in the CFPB's lawsuit, which included accusations of widespread efforts to direct 

borrowers to obtain forbearances when other repayment options could be more beneficial. 

Based on our own due diligence, our review of case-specific information provided by 

Navient, and our analysis of Navient as compared to other servicers, the Department 

concluded that Navient was not improperly steering borrowers into forbearance, a 

conclusion supported by FSA's May 2017 site visit report and the data provided in 

response to the report. Nothing in the report indicates forbearances were applied 

inappropriately; the observations noted focused on suggested Improvements regarding 

how to best counsel borrowers on a small minority of cc1lls. In fact, a subsequent review of 

the borrower-level data provided by Navient in response to the site visit report confirmed 

that, in most cases, forbearances were used as intended to resolve short-term issues 

related to delinquency consistent with the borrower's circumstances. 

Other elements of FSA's review included an assessment of data across all federal servicers 

to determine whether there were any indications of excessive forbearance use or other 

noncompllant behavior. Program data indicated that Navient's overall use of forbearance 

was consistent with that of other servicers, while the duration of forbearances for Navient 

borrowers was actually among the lowest of the Department's nine servicers. Further 

analysis by FSA determined that Navient also had among the highest "take-up" rates for 

income-driven repayment plans, as well as longer-than-average call durations in 

comparison to all servicers. Calls on which borrowers only were offered forbearance 

without discussing other options would be expected to be shorter than average, rather 

than longer. 

Across the federal and commercial student loan industry, forbearance originally was developed 

and appropriately is used as a tool to help borrowers cover temporary periods of financial 

hardship during which they are unable to make timely payments. For example, if borrowers are 

laid off from work, suffer an injury, or have their life disrupted by a natural disaster or family 

crisis, they may fail to make payments for a number of months without needing to permanently 

change their repayment plan. Forbearance can be used as a tool to bring these borrowers 

current without the need for a lump-sum payment to cover the months of delinquency. Even in 

cases where a change in repayment plan to an income-driven repayment plan is the best 

solution, short-term administrative forbearances must be applied to cover the period when 

income documentation is being provided and reviewed to ensure the borrower enters the new 

repayment plan in a "current status." 

Page 12 of the OIG report notes that the May 2017 review identified 220 instances-out 

of 2,388 calls reviewed-where the servicer's call center staff placed borrower accounts 

into forbearance status without offering alternative or potentially beneficial options to 

bring accounts current or manage repayment We should note that the site visit call 

review was specifically targeted on short-duration calls, as those would be the cases most 

likely to include improperly truncated Interactions of the type cited by CFPB. More 

U.S. Department of Education 

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ED-OIG/ A0SQ0008 44 
specifically, while the 220 instances observed represent 9.2 percent ofthe short-duration 

calls sampled, those results cannot be extrapolated to Navient's overall portfolio. If 

longer-duration calls had been included in the sample, we would expect this percentage 

to be significantly reduced. 

Also, as noted above, upon subsequently analyzing case-by-case detail about the 220 calls 

noted in the review, and considering the ultimate outcome of the borrower's situation, 

FSA determined that that in virtually all cases there was a clear reason for the application 

of those forbearances and the servicer was following standard practice as discussed in the 

previous paragraph. In addition, the OIG report does not note that the May 2017 report 

specifically states that in these instances the servicer acted consistent with the 

requirements of their contract. 

• With respect to the issue concerning FIOS testing as it relates to !DR (see page 131, the OIG 

addresses the FIOS review of IDR as if it was a comprehensive review of IDR. In fact, FIOS testing 

was directed at subsets of IDR during specific fiscal years. 

For example, during FY 2013 and 2014, FIOS focused on the granting of income-based 

repayment (IBR) and income-contingent repayment (ICR). 

• During FY 2015, FIOS testing focused on the implementation of the Pay As You Earn 

(PAYE) repayment plan. • During FY 2016, FIOS testing focused on the renewal process across the IDR plans. • During FY 2017, FIOS testing focused on the renewal process and the implementation of 

the Revised Pay As You Earn (REPAVE) plan. 

• During FY 2018, FIOS testing focused on IDR plans granted when the borrower 

submitted alternative documentation of income (ADOI) instead of using an Adjusted 

Gross Income (AGII from a federal tax return. 

Applying the results of the portions of IDR that FIOS considered at the highest risk during each 

year would skew the results of that subset when comparing it to the universe of borrowers 

granted IDR. In about half the cases where the servicer miscalculated the AG! during FY 2018, 

there was no impact to the monthly payment amount {MPA), because the borrower's 

recalculated income still resulted in a zero-dollar MPA. For lower-income borrowers, incorrect 

calculation of AGl did not result in an incorrect MPA or repayment amount. 

As noted above, FSA is committed to ensuring that students, parents, and borrowers receive world-class 

service throughout the student aid life cycle. While we strongly believe that our current oversight and 

monitoring environment includes policies and procedures that provide reasonable assurance that the 

risk of servicer noncompliance with requirements for servicing federally held student loans was 

mitigated and a reasonable assurance that our vendors are generally complying with the requirements 

of their contracts, we recognize that we can do better still. Accordingly, we have launched the Next Gen 

FSA initiative, which is focused on fundamentally transforming the way we interact with our customers. 

A key element of Next Gen FSA will be restructuring our systems, processes, and contracts to introduce 

even greater accountability based on more target standards, metrics, and incentives and disincentives to 

drive outstanding performance. We believe that this effort also directly addresses a number of the 

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Office of Inspector General 

ED-OIG/ A05Q0008 45 
issues underlying the findings and recommendations within the OIG report and will lead to even better 

outcomes for the customer and taxpayer alike. 

l'SA Response to Recommendations 

Finding No. 1: FSA Did Not Track All Identified Instances of Noncompliance and Rarely Held Servicers 

Accountable for Noncompliance with Requirements. 

Recommendation 1.1: Track all instances of noncompliance identified during FSA reviews, regardless of 

whether the specific instances were corrected and did not require further action to be taken by either 

the servicer or FSA. 

Response: FSA agrees with this recommendation to track all instances of noncompliance and has 

implemented the suggested improvement. FSA has developed procedures to ensure that all 

instances of non-<:ompliance are tracked in an internal tracking database, including non-compliance 

that does not require further action by either the servicer or FSA. This tracking mechanism has been 

in place for several years and has been enhanced to ensure that all instances are tracked regardless 

of resolution classification. All instances are followed through to resolution. In instances where there 

is no resolution, the items remain in the tracking database as data points for trending and other 

analytical purposes. Thus, FSA is a I ready implementing this recommendation to track all instances of 

noncompliance. 

Recommendation 1.2: Analyze the records relevant to noncompliance, identify trends and recurring 

noncompliance for each servicer and across all servicers, and use the information as a basis for assessing 

servicer performance. 

Response: FSA agrees with the recommendation and is using analysis and trending information gleaned 

from servicer noncompliance tracking as a basis for assessing servicer performance. The information 

collected in the internal tracking database (see 1.1 above) allows FSA to perform that analysis and 

trending for use in assessing servicer performance. We also use the noncompliance tracking information 

to evaluate the effectiveness of guidance FSA provides to servicers and issues inherent in the Title IV 

program regulations. Thus, FSA is already implementing this recommendation to use data on 

noncompliance to analyze and use trending information to assess servicer performance along with the 

other processes mentioned above. 

Recommendation 1.3: Use the contractual accountability provisions available, such as requiring the 

return of funds or reducing future loan volume, to hold servicers accountable for instances of 

noncompliance. 

Response: FSA agrees with the recommendation and, as we previously discussed, is using these tools to 

ensure accountability of the servicers through the use of contractual provisions and CAPs to servicers 

that must be implemented. As appropriate to the instance of noncompliance, some actions taken have 

included review and approval of corrective work plans, as well as imposing penalties. Examples of 

penalties have included reducing the loan volume allocation for a one-month period for a servicer that 

had call statistics outside the acceptable range and requiring multiple servicers to reimburse FSA in 

U.S. Department of Education 

Office of Inspector General 

ED-OIG/ A0SQ0008 46 
cases where fees were paid related to contracted services that were not performed. Thus, FSA is 

already implementing this recommendation. 

Finding No. Z: Information Necessary to Ensure Servicer Compliance Not Always Complete. 

Recommendation Z.1: Verify that programming corrections ensure the system prompts call monitors to 

complete all necessary data fields before submitting scoresheets. 

Response: While FSA agrees that there were programming errors that resulted in scores not being 

recorded fully in the system previously used to generate call Monitoring Reports, FSA corrected 

these errors and subsequently implemented an improved system. On June 14, 2018, FSA 

implemented a new database that requires the completion of all data fields and all selections 

before a submission can be accepted into the database. This enhancement helps to reduce the 

chances of inadvertent completion errors by the Call Monitoring Team. Thus, FSA has already 

implemented this recommendation. 

Recommendation z.z: Ensure that FSA management has implemented its new quality control process 

and is evaluating a management-determined percentage of each call monitor's completed work each 

month. 

Response: FSA agrees with this recommendation and has implemented a Quality Control measure 

for the Call Monitoring Team. Each day, the team's quality control analyst reviews between 10 and 

14 calls, which is three to four percent of the total calls monitored. This equates to quality control 

being conducted on 220-300 calls per month in an even distribution across all Call Monitoring Team 

members. 

Recommendation 2.3: Regularly share the results of any oversight activities with servicers, regardless of 

whether management is making changes to existing processes. 

Response: FSA agrees with the recommendation and since April 2017 has provided federal loan 

servicers with the results of all oversight activities related to call monitoring. OJG observed a period of 

time (June 2016 to March 2017) during which call monitoring reports were not issued directly to 

servicers; however, during that period FSA did provide alternative relevant feedback to servicers 

through regular meetings and issue escalation. Starting with the Aprii.2017 Monthly Call Monitoring 

Report, servicers have received and continue to receive reports on a monthly basis. In addition, servicers 

have the opportunity to provide feedback on each Call Monitoring Report before the report is made 

final. 

Again, we thank you for the opportunity to review and comment on this draft report. As noted above, 

we strongly disagree with the report's characterization of FSA's overall monitoring and oversight efforts, 

and respectfully suggest that the fin a I report be revised to reflect the information provided above, 

U.S. Department of Education 

Office of lnspector General 

ED-OIG/ A0SQ0008 47 
which we believe would provide a more accurate and complete picture of our efforts to mitigate the risk 

of servicers not servicing federally held student loans in accordance with federal requirements. Please 

let me know if you have any questions or need further information. 

Sincerely, 

James F. Manning 

Acting Chief Operating Officer 

U.S. Department of Education 

Office of lnspector General 

ED-OIG/ A0SQ0008 48