U.S. GOVERNMENT PUBLISHING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Publishing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

86–974 PDF 2015

EXAMINING THE MISMANAGEMENT OF 

THE STUDENT LOAN 

REHABILITATION PROCESS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON HIGHER EDUCATION 

AND WORKFORCE TRAINING 

COMMITTEE ON EDUCATION 

AND THE WORKFORCE 

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

HEARING HELD IN WASHINGTON, DC, MARCH 12, 2014 

Serial No. 113–50 

Printed for the use of the Committee on Education and the Workforce 

( 

Available via the World Wide Web: www.gpo.gov/fdsys/browse/ 

committee.action?chamber=house&committee=education 

or 

Committee address: http://edworkforce.house.gov 

CEWDOCROOM with DISTILLER

(II) 

COMMITTEE ON EDUCATION AND THE WORKFORCE 

JOHN KLINE, Minnesota, Chairman 

Thomas E. Petri, Wisconsin 

Howard P. ‘‘Buck’’ McKeon, California 

Joe Wilson, South Carolina 

Virginia Foxx, North Carolina 

Tom Price, Georgia 

Kenny Marchant, Texas 

Duncan Hunter, California 

David P. Roe, Tennessee 

Glenn Thompson, Pennsylvania 

Tim Walberg, Michigan 

Matt Salmon, Arizona 

Brett Guthrie, Kentucky 

Scott DesJarlais, Tennessee 

Todd Rokita, Indiana 

Larry Bucshon, Indiana 

Trey Gowdy, South Carolina 

Lou Barletta, Pennsylvania 

Joseph J. Heck, Nevada 

Susan W. Brooks, Indiana 

Richard Hudson, North Carolina 

Luke Messer, Indiana 

George Miller, California, 

Senior Democratic Member 

Robert C. ‘‘Bobby’’ Scott, Virginia 

Rube ́n Hinojosa, Texas 

Carolyn McCarthy, New York 

John F. Tierney, Massachusetts 

Rush Holt, New Jersey 

Susan A. Davis, California 

Rau ́l M. Grijalva, Arizona 

Timothy H. Bishop, New York 

David Loebsack, Iowa 

Joe Courtney, Connecticut 

Marcia L. Fudge, Ohio 

Jared Polis, Colorado 

Gregorio Kilili Camacho Sablan, 

Northern Mariana Islands 

Frederica S. Wilson, Florida 

Suzanne Bonamici, Oregon 

Mark Pocan, Wisconsin 

Juliane Sullivan, Staff Director 

Jody Calemine, Minority Staff Director 

SUBCOMMITTEE ON HIGHER EDUCATION AND WORKFORCE TRAINING 

VIRGINIA FOXX, North Carolina, Chairwoman 

Thomas E. Petri, Wisconsin 

Howard P. ‘‘Buck’’ McKeon, California 

Glenn Thompson, Pennsylvania 

Tim Walberg, Michigan 

Matt Salmon, Arizona 

Brett Guthrie, Kentucky 

Lou Barletta, Pennsylvania 

Joseph J. Heck, Nevada 

Susan W. Brooks, Indiana 

Richard Hudson, North Carolina 

Luke Messer, Indiana 

Rube ́n Hinojosa, Texas 

Ranking Minority Member 

John F. Tierney, Massachusetts 

Timothy H. Bishop, New York 

Suzanne Bonamici, Oregon 

Carolyn McCarthy, New York 

Rush Holt, New Jersey 

Susan A. Davis, California 

David Loebsack, Iowa 

Frederica S. Wilson, Florida 

CEWDOCROOM with DISTILLER

(III) 

C O N T E N T S 

Page 

Hearing held on March 12, 2014 ............................................................................ 1 

Statement of Members: 

Foxx, Hon. Virginia, Chairwoman, Subcommittee on Higher Education 

and Workforce Training ............................................................................... 1 

Prepared statement of ............................................................................... 3 

Hinojosa, Ranking Minority Member, Subcommittee on Higher Education 

and Workforce Training ............................................................................... 3 

Prepared statement of ............................................................................... 4 

Statement of Witnesses: 

Emrey-Arras, Melissa, Director, Education, Workforce and Income Security Issues, Boston, Massachusetts .............................................................. 7 

Prepared statement of ............................................................................... 9 

Julius, Peg, Executive Director of Enrollment Management, Kirkwood 

Community College, Cedar Rapids, Iowa ................................................... 40 

Prepared statement of ............................................................................... 42 

Runcie, James, Chief Operating Officer, Federal Student Aid, U.S. Department of Education, Washington, DC .................................................... 33 

Prepared statement of ............................................................................... 35 

Tighe, Kathleen, Inspector General, U.S. Department of Education, 

Washington, D.C. .......................................................................................... 22 

Prepared statement of ............................................................................... 24 

Additional Submissions: 

Ms Julius: 

National Direct Student Loan Colition (NDSLC), prepared statement 

of .............................................................................................................. 56 

Response to questions submitted for the record ..................................... 81 

Chairwoman Foxx: questions submitted for the record to: 77 

Miller, Hon. George, senior Democratic member, Committee on Education 

and the Workforce: questions submitted for the record ............................. 79 

CEWDOCROOM with DISTILLER

CEWDOCROOM with DISTILLER

(1) 

EXAMINING THE MISMANAGEMENT OF THE 

STUDENT 

LOAN REHABILITATION PROCESS 

Wednesday, March 12, 2014 

House of Representatives, 

Subcommittee on Higher Education and 

Workforce Training, 

Committee on Education and the Workforce, 

Washington, D.C. 

The subcommittee met, pursuant to call, at 2:32 p.m., in Room 

2175, Rayburn House Office Building, Hon. Virginia Foxx [chairwoman of the subcommittee] presiding. 

Present: Representatives Foxx, Petri, Walberg, Hinojosa, Tierney, 

Bishop, Bonamici, and Loebsack. 

Also present: Representative Kline. 

Staff present: Janelle Belland, Coalitions and Member Services 

Coordinator; Amy Raaf Jones, Deputy Director of Education and 

Human Services Policy; Nancy Locke, Chief Clerk; Brian Melnyk, 

Professional Staff Member; Daniel Murner, Press Assistant; 

Krisann Pearce, General Counsel; Jenny Prescott, Legislative Assistant; Mandy Schaumburg, Senior Education Counsel; Emily 

Slack, Professional Staff Member; Alex Sollberger, Communications 

Director; Alissa Strawcutter, Deputy Clerk; Tylease Alli, Minority 

Clerk/Intern and Fellow Coordinator; Kelly Broughan, Minority 

Education Policy Associate; Eamonn Collins, Minority Fellow, Education; Jamie Fasteau, Minority Director of Education Policy; Rich 

Williams, Minority Education Policy Advisor; and Michael Zola, Minority Deputy Staff Director. 

Chairwoman FOXX. A quorum being present, the subcommittee 

will come to order. 

Good afternoon and welcome. I thank our panel of witnesses for 

joining us today to examine the Department of Education’s management of the student loan rehabilitation process. Prior to 2010, 

the federal government authorized two loan programs through the 

Higher Education Act to help students and their families pay for 

college. As part of the health care overhaul in 2010, the Democratled Congress eliminated the Federal Family Education Loan Program, which offered student loans through private lenders, and 

shifted to 100 percent direct lending. 

The federal government now originates and oversees every single 

federal student loan issued. However, we aren’t here today to deCEWDOCROOM with DISTILLER

2 

bate the merits of private lending or federal lending. We are here 

to review whether the department is equipped to handle the enormous task it has taken on. In particular, a significant number of 

borrowers have raised concerns about the department’s inability to 

manage the critical loan rehabilitation process. In short, loan rehabilitation provides borrowers a one-time opportunity to get out of 

default. Once a borrower makes nine on-time monthly payments 

over a 10-month period, the loan returns to good standing, the default is removed from the borrower’s credit report, and eligibility 

for repayment options or additional financial aid are restored. 

Ensuring the rehabilitation process is working in a timely and effective manner is critical to the well-being of the nation’s borrowers. Defaulting on student loans has serious consequences for a 

borrower’s credit rating, making it more difficult to obtain affordable credit, secure a job, or take out a mortgage. In an effort to understand better the problems plaguing the direct loan system, the 

committee began conducting oversight and soliciting feedback from 

borrowers. The committee discovered widespread issues in the department’s management of the loan rehabilitation process, including security breaches, inaccurate reporting of payment statuses 

and loan delinquencies, and delays in accessing the department’s 

default loan management website. 

For example, one borrower claimed to have made the required 

amount of on-time payments in an effort to rehabilitate his loan, 

but, due to the department’s delays, was unable to remove the 

black mark of default from his credit report to take advantage of 

better repayment options. Another borrower told the Chronicle of 

Higher Education she started a second job to cover the 1,350 

monthly payment on her defaulted loan. But once she finally made 

her ninth payment in October 2011, she was informed the department was unable to update her loan status due to problems with 

the loan management system. 

With thousands of borrowers stuck in financial limbo, Senate and 

House Republicans asked the Government Accountability Office to 

conduct a detailed review of the Department of Education’s capacity to move loans through the rehabilitation process. According to 

the final report released today, the GAO found the department 

lacked appropriate monitoring over the upgrading of the default 

management system. Further, not a single loan rehabilitation was 

processed from September 2011 through March 2012, affecting approximately 80,000 borrowers. 

Additionally, the report sheds light on weaknesses within the department that raise questions about the department’s ability to 

manage the direct loan program itself. When attempting to upgrade its default loan management system, the department failed 

to oversee the system upgrade effectively or prepare for any associated risk. The department also failed to monitor complaints from 

borrowers or ensure resolution of these issues. And although the 

department has claimed any issues are resolved and borrowers are 

able to rehabilitate their loans, we will learn today that the resolutions put in place are workarounds and not permanent solutions. 

Policymakers have a serious responsibility to ensure student 

loans increase opportunity, not limit future success. I look forward 

CEWDOCROOM with DISTILLER

3 

to continuing our oversight efforts today as we work to strengthen 

the federal student loan system and protect student borrowers. 

I now yield to my distinguished colleague, the senior Democrat 

member of the Higher Education and Workforce Training Subcommittee, Mr. Rube ́n Hinojosa, for his opening remarks. 

[The statement of Chairwoman Foxx follows:] 

Prior to 2010 the federal government authorized two loan programs through the 

Higher Education Act to help students and their families pay for college. As part 

of the health care overhaul in 2010, the Democrat-led Congress eliminated the Federal Family Education Loan program, which offered student loans through private 

lenders, and shifted to 100 percent Direct Lending. 

The federal government now originates and oversees every single federal student 

loan issued. However we aren’t here today to debate the merits of private lending 

or federal lending. We’re here to review whether the department is equipped to handle the enormous task it has taken on. In particular, a significant number of borrowers have raised concerns about the department’s inability to manage the critical 

loan rehabilitation process. 

In short, loan rehabilitation provides borrowers a one-time opportunity to get out 

of default. Once a borrower makes nine on-time monthly payments over a ten-month 

period, the loan returns to good standing, the default is removed from the borrower’s 

credit report, and eligibility for repayment options or additional financial aid are restored. 

Ensuring the rehabilitation process is working in a timely and effective manner 

is critical to the well-being of the nation’s borrowers. Defaulting on student loans 

has serious consequences for a borrower’s credit rating, making it more difficult to 

obtain affordable credit, secure a job, or take out a mortgage. In an effort to better 

understand the problems plaguing the Direct Loan system, the committee began 

conducting oversight and soliciting feedback from borrowers. 

The committee discovered widespread issues in the department’s management of 

the loan rehabilitation process; including security breaches, inaccurate reporting of 

payment statuses and loan delinquencies, and delays in accessing the department’s 

default loan management website. 

For example, one borrower claimed to have made the required amount of on-time 

payments in an effort to rehabilitate his loan, but due to the department’s delays, 

was unable to remove the black mark of default from his credit report to take advantage of better repayment options. 

Another borrower told the Chronicle of Higher Education she started a second job 

to cover the 1,350 monthly payment on her defaulted loan. But once she finally 

made her ninth payment in October 2011, she was informed the department was 

unable to update her loan status due to problems with the loan management system. 

With thousands of borrowers stuck in financial limbo, Senate and House Republicans asked the Government Accountability Office to conduct a detailed review the 

Education Department’s capacity to move loans through the rehabilitation process. 

According to the final report released today, the GAO found the department 

lacked appropriate monitoring over the upgrading of the default management system. Further, not a single loan rehabilitation was processed from September 2011 

through March 2012 – affecting approximately 80,000 borrowers. 

Additionally, the report sheds light on weaknesses within the department that 

raise questions about the department’s ability to manage the Direct Loan program 

itself. When attempting to upgrade its default loan management system, the department failed to oversee the system upgrade effectively or prepare for any associated 

risks. 

The department also failed to monitor complaints from borrowers or ensure resolution of these issues. And although the department has claimed any issues are resolved and borrowers are able to rehabilitate their loans, we will learn today that 

the resolutions put in place are work-arounds and not permanent solutions. 

Policymakers have a serious responsibility to ensure student loans increase opportunity, not limit future success. I look forward to continuing our oversight efforts 

today as we work to strengthen the federal student loan system and protect student 

borrowers. 

Mr. HINOJOSA. Thank you, Chairwoman Foxx. 

Today’s hearing will focus on student loan rehabilitation and the 

steps that the U.S. Department of Education has taken to strengthCEWDOCROOM with DISTILLER

4 

en that process. I want to thank our distinguished panel of witnesses for joining us this afternoon to provide some context for this 

discussion, and to share their views on how the federal government 

can continue to best serve student borrowers. Let me begin by saying that the U.S. Department of Education must do all it can to 

help student borrowers rehabilitate their student loans and build 

on the successes of the direct loan program. These responsibilities 

include effective management and oversight of federal student aid 

programs. 

In my view, the U.S. Department of Education’s move to 100 percent direct lending in 2010 continues to provide students with a 

streamlined loan origination system, a department with better 

oversight against waste, fraud and abuse, and taxpayers with a 

better deal. 

One of the issues before this committee today concerns the Department of Education’s transition to the Debt Management System II and the glitches that the Department of Education encountered with this system through the year 2012. I understand that 

between that period of 2012 to 2013 the Department of Education’s 

inspector general issued a series of alert memos to the student aid 

office about the glitches in the system, and provided recommendations to address the issues. 

To my knowledge, the FSA has taken these concerns very seriously and has corrected these weaknesses, including manually assisting borrowers in rehabilitating their student loans and clearing 

the backlog. By their fiscal year 2013 audit, FSA had resolved most 

of the areas noted by the I.G. Furthermore, the GAO report released today makes three recommendations to ensure that the department is tracking that rehabilitation of defaulted loans, properly 

noting risk associated with contractors, and improving the monitoring of contractor performance. I encourage the department to 

heed these suggestions and make necessary adjustments to improve the program. 

Finally, I want to remind my colleagues on both sides of the aisle 

that not so long ago, under the prior administration, President 

Bush, this committee investigated and held oversight hearings that 

exposed and highlighted rampant conflicts of interest and unethical 

practices within the Federal Family Education Loan—better known 

as FFEL—program, especially lenders’ use of bribes and kickbacks 

to curry favors with colleges. All that happened while I was here 

on this committee. As I recall, poor oversight of our federal student 

aid programs allowed inappropriate practices to go unchecked at 

the expense of student borrowers and their families. 

It was disgraceful at that time when the department did little to 

nothing to stop student loan companies from offering university financial aid officers things such as gifts, trips and more to buy their 

way onto college campuses and increase their access to student borrowers. My message to you today is simple. The Direct Loan Program is here to stay because it is the best option for student borrowers and their families. We are not retreating to the Wild Wild 

West and the days when monitoring oversight and accountability 

of our federal student aid programs were neglected and ignored. 

In terms of today’s hearing, what is most important, it seems to 

me, is that the department has taken significant steps to fix these 

CEWDOCROOM with DISTILLER

5 

problems, and will continue to work effectively, manage and track 

the rehabilitation of those defaulted loans and federal student aid 

programs. I am looking forward to, and I am interested in exploring how the loan system can work even better for borrowers and 

taxpayers through upcoming contract negotiations between the department and its servicers and contractors. 

And with that, Madam Chair, I yield back. 

[The statement of Mr. Hinojosa follows:] 

Thank you, Chairwoman Foxx. 

Today’s hearing will focus on student loan rehabilitation and the steps that the 

U.S. department of Education has taken to strengthen that process. 

I want to thank our distinguished panel of witnesses for joining us this morning 

to provide some context for this discussion and to share their views on how the federal government can continue to best serve student borrowers. 

Let me begin by saying that the U.S. Department of Education must do all that 

it can to help student borrowers rehabilitate their student loans and build on the 

successes of the Direct Loan Program. These responsibilities include effective management and oversight of federal student aid programs. 

In my view, the U.S. Department of Education’s move to 100% direct lending in 

2010 continues to provide students with a streamlined loan origination system, the 

Department with better oversight against waste, fraud and abuse, and taxpayers 

with a better deal. 

One of the issues before this committee today concerns the Department of Education’s transition to the Debt Management Collection System 2 and the glitches 

that the department of Education encountered with this system through 2012. 

I understand that between 2012 and 2013, the Department of Education’s Inspector General (IG) issued a series of alert memos to the Federal Student Aid Office 

(FSA) about the glitches in the system and provided recommendations to address 

the issues. 

To my knowledge, the FSA has taken these concerns seriously and has corrected 

these weaknesses, including manually assisting borrowers in rehabilitating their 

student loans and clearing the backlog. By their FY 2013 audit, FSA had resolved 

most of the areas noted by the IG. 

Furthermore, the GAO report released today makes three recommendations to ensure that the department is tracking the rehabilitation of defaulted loans, properly 

noting risk associated with contractors, and improving the monitoring of contractor 

performance. I encourage the department to heed these suggestions and make the 

necessary adjustments to improve the program. 

Finally, I want to remind my colleagues that not so long ago, under the Prior administration— President Bush, this Committee investigated and held oversight 

hearings that exposed and highlighted rampant conflicts of interest and unethical 

practices within the Federal Family Education Loan (FFEL) program —especially 

lenders’ use of bribes and kickbacks to curry favor with colleges. 

As I recall, poor oversight of our federal student aid programs allowed inappropriate practices to go unchecked at the expense of student borrowers and their families. 

It was disgraceful at that time—when the department did little to nothing to stop 

student loan companies from offering university financial aid officers gifts, trips, 

and more to ‘‘buy’’ their way onto college campuses and increase their access to student borrowers. 

My message to you today is simple: the Direct loan program is here to stay because it is the best option for student borrowers. We are not retreating to the Wild 

Wild West and the days when monitoring, oversight and accountability of our federal student Aid programs were neglected and ignored. 

In terms of today’s hearing, what is most important to me is that the department 

has taken significant steps to fix these problems and will continue to work to effectively manage and track the rehabilitation of defaulted loans and federal student 

aid programs. 

Looking forward, I am interested in exploring how the loan system can work even 

better for borrowers and taxpayers through upcoming contract negotiations between 

the Department and its servicers and contractors. 

With that, I yield back. 

Chairwoman FOXX. Thank you, Mr. Hinojosa. 

CEWDOCROOM with DISTILLER

6 

Pursuant to committee rule 7(c), all subcommittee members will 

be permitted to submit written statements to be included in the 

permanent hearing record. And without objection, the hearing 

record will remain open for 14 days to allow statements, questions 

for the record, and other extraneous material referenced during the 

hearing to be submitted in the official hearing record. 

It is now my pleasure to introduce our distinguished panel of witnesses. Ms. Melissa Emrey-Arras serves as the director of education, workforce and income security issues, at the U.S. Government Accountability Office. The Honorable Kathleen Tighe serves 

as the inspector general of the U.S. Department of Education. Mr. 

James Runcie serves as chief operating officer of federal student 

aid at the U.S. Department of Education. 

I now recognize Mr. Loebsack to introduce our final witness. 

Mr. LOEBSACK. Thank you Chairwoman Foxx. I am pleased to introduce Peg Julius today, financial aid director at Kirkwood Community College. Kirkwood’s main campus is located just outside my 

district in Cedar Rapids, although I did have Kirkwood in Cedar 

Rapids for 6 years prior to the last redistricting. But there is also 

a campus in Iowa City for Kirkwood Community College. You can 

correct me, Peg, but I think that the college enrolls around 16,000 

or 17,000 students now. Is that correct, somewhere in that neighborhood? 

Ms. JULIUS. I have got 23,000. 

Mr. LOEBSACK. All right, I apologize. I have already offended one 

of our witnesses. 

[Laughter.] 

I should have known that. My staff person over here, Bonnie, is 

saying, ‘‘I told you so.’’ But it serves a lot of the counties in my district, as well. Peg is also a member of the executive council of the 

National Direct Student Loan Coalition. I have worked with her on 

college affordability issues since I have been in Congress the last 

eight years but, of course, I have known Peg for much longer than 

that. And I know that she is an expert in her field and, beyond 

that, she is my constituent to boot. So I look forward to her testimony. 

I look forward to all the testimony today, and I thank the chairwoman and I yield back. Thank you. 

Chairwoman FOXX. Thank you, Mr. Loebsack. 

Before I recognize you to provide your testimony, let me briefly 

explain our lighting system. You will have five minutes to present 

your testimony. When you begin, the light in front of you will turn 

green. When one minute is left, the light will turn yellow. When 

your time is expired, the light will turn red. At that point, I ask 

that you wrap up your remarks as best as you are able. After you 

have testified, members will each have five minutes to ask question 

of the panel. 

I now recognize Ms. Melissa Emrey-Arras for five minutes. 

CEWDOCROOM with DISTILLER

7 

STATEMENT OF MS. MELISSA EMREY–ARRAS, DIRECTOR, EDUCATION, WORKFORCE AND INCOME SECURITY ISSUES, U.S. 

GOVERNMENT ACCOUNTABILITY OFFICE, BOSTON, MASSACHUSETTS 

Ms. EMREY-ARRAS. Chairwoman Foxx, Ranking Member Hinojosa, and members of the subcommittee, I am pleased to be here 

to discuss our work examining the Department of Education’s efforts to rehabilitate defaulted federal student loans. As of September 2013, about 94 billion, over 11 percent of federal student 

loans in repayment, were in default. 

Loan rehabilitation allows borrowers who make nine on-time 

payments in 10 months to have the default removed from their 

credit report. Education contracts with collection agencies to assist 

borrowers with this process. 

Education recently upgraded its defaulted loan information system because the old system had become costly to maintain and had 

many manual workarounds. My remarks will address two areas 

from our report, which is being released today. One, how the upgrade of Education’s defaulted loan information system affected 

loan rehabilitation, and two, how Education oversees its collection 

agencies in implementing loan rehabilitation. Our review found 

that Education was unable to provide most borrowers who completed loan rehabilitation with timely benefits for more than a year 

following the upgrade. 

We found the delays largely due to gaps in Education’s oversight 

of its system contractor. For example, despite known risks such as 

concerns about the contractor’s unreliable performance on previous 

system development efforts, Education did not have plans for monitoring the upgrade. We also found the department’s testing of the 

new system was insufficient to detect problems associated with 

loan rehabilitation. For example, the system did not recognize 

when borrowers had made nine on-time payments in 10 months because it was only tested for seven months. 

As Education worked to correct problems with the system, it took 

some steps to hold the contractor accountable. Education also established procedures to help eligible borrowers by removing defaults from their credit reports. However, borrowers had to request 

the help, and Education estimated helping less than 10 percent of 

the estimated 80,000 borrowers who were affected when the system 

was shut down. Education officials have reported that they are still 

using workarounds to run the system, and a substantial amount of 

development work will need to be completed under a new contract 

that was recently awarded. 

The system challenges the new contractor will be expected to resolve provide a compelling case for Education to strengthen its 

oversight. To address this issue, we recommended that Education 

take steps to ensure necessary oversight for the new system contract. We also found that Education lacks data and related performance measures to inform its management and oversight of loan 

rehabilitation. 

Education does not have data to assess the number or extent of 

borrower delays or the extent to which borrowers who rehabilitate 

their loans stay out of default. To address these data issues, we 

CEWDOCROOM with DISTILLER

8 

recommended that Education develop an approach for tracking loan 

rehabilitation performance. 

Our work also identified weaknesses in Education’s oversight of 

its collection agencies. Although Education’s monitoring procedures 

required quarterly reviews of collection agency phone calls with 

borrowers, we found that Education did not consistently complete 

these reviews. The call review reports we examined also documented a range of errors, including collection agencies providing 

borrowers with misleading information. For example, in one case a 

collection agency incorrectly told borrowers that a debit card was 

required to rehabilitate a loan. 

While Education provides feedback on the results of its call reviews to each collection agency, it does not assure that collection 

agencies actually take corrective actions. To address these issues, 

we recommended that Education improve its call review process. In 

conclusion, our findings highlight serious weaknesses in Education’s management of the loan rehabilitation process. While Education has agreed with our recommendations and taken steps in response, it will be important to track how Education builds upon 

these actions to ensure it is providing appropriate oversight. 

Thank you. This concludes my statement. 

[The statement of Ms. Emrey-Arras follows:] 

CEWDOCROOM with DISTILLER

9 

CEWDOCROOM with DISTILLER


Insert offset folio 1 here 86974.001
10 

CEWDOCROOM with DISTILLER


Insert offset folio 2 here 86974.002
11 

CEWDOCROOM with DISTILLER


Insert offset folio 3 here 86974.003
12 

CEWDOCROOM with DISTILLER


Insert offset folio 4 here 86974.004
13 

CEWDOCROOM with DISTILLER


Insert offset folio 5 here 86974.005
14 

CEWDOCROOM with DISTILLER


Insert offset folio 6 here 86974.006
15 

CEWDOCROOM with DISTILLER


Insert offset folio 7 here 86974.007
16 

CEWDOCROOM with DISTILLER


Insert offset folio 8 here 86974.008
17 

CEWDOCROOM with DISTILLER


Insert offset folio 9 here 86974.009
18 

CEWDOCROOM with DISTILLER


Insert offset folio 10 here 86974.010
19 

CEWDOCROOM with DISTILLER


Insert offset folio 11 here 86974.011
20 

CEWDOCROOM with DISTILLER


Insert offset folio 059 here 86974.059
21 

CEWDOCROOM with DISTILLER


Insert offset folio 61 here 86974.061
22 

Chairwoman FOXX. Thank you very much. 

I now recognize the Honorable Kathleen Tighe for five minutes. 

STATEMENT OF HON. KATHLEEN TIGHE, INSPECTOR GENERAL, U.S. DEPARTMENT OF EDUCATION, WASHINGTON, D.C. 

Ms. TIGHE. Thank you very much. As members of this subcommittee know, the federal student assistance programs have 

long been a major focus of our audit and investigative work. Because of its significant student loan portfolio, FSA is, in fact, one 

of the largest financial institutions in the country. And, as such, effective oversight and monitoring of its programs and operations are 

critical. As I will discuss today, the Office of Inspector General has 

identified significant issues with FSA’s debt management collection 

system. 

When loans being serviced by FSA’s loan servicers reach 360 

days of nonpayment, they are transferred to FSA’s debt management collection system, at which time FSA notifies the borrower 

that the loan is in default and asks the borrower to make repayment arrangements. If there is no response from the borrower, or 

if the borrower refuses to pay, FSA then assigns the loan to a collection agency. Since 2003, FSA has contracted with ACS Education Solutions to manage its debt management system. ACS was 

later purchased by Xerox, and in 2010 that company agreed to update the system. 

The updated system is known as the Debt Management Collection System II. That system went live in October 2011. In 2012, we 

notified FSA that we had identified more than 190,000 defaulted 

loans in certain categories totaling more than $1.1 billion that 

could not be transferred from the FSA loan servicers to DMCS II. 

As a result, FSA was unable to undertake collection activities and 

eligible borrowers were unable to take steps to remove their loans 

from default status through loan rehabilitation. We also identified 

problems with transferring loans back from DMCS II to the FSA 

loan servicers. 

We made a number of recommendations to FSA to address the 

issues with DMCS II. FSA stated it was committed to resolving the 

problems, but has yet to provide us with an acceptable corrective 

action plan to address our recommendation on how it will ensure 

that it has a fully operational debt management system. The inability of DMCS II to process certain types of transactions and 

other system problems contributed to a material weakness in internal control over financial reporting in the fiscal year 2012 FSA financial statement audit. As reported in the fiscal year 2013 FSA 

financial statement audit, a full year after we had first identified 

problems with DMCS II, issues still remained with the transfer of 

some defaulted loans in the system, as well as other issues. 

Although the issue was designated now as a significant deficiency rather than a material weakness, the financial statement 

audit noted that as of September 30, 2013, although some 

functionality had been restored, 1.1 billion of defaulted loans still 

had not been transferred to DMCS II. In addition, action on four 

of the five recommendations made in the previous year’s report 

were still in process and not yet completed. The problems with 

DMCS II, however, went beyond accounting for defaulted loans. In 

CEWDOCROOM with DISTILLER

23 

May 2013, we reported that DMCS II could not provide the information necessary for FSA to calculate actual commissions and bonuses for private collection agencies. 

As a result, in fiscal year 2012, FSA paid 448 million in commissions and 8.3 million in bonuses to private collection agencies based 

on estimates. My office is very concerned with the problems posed 

by DMCS II and FSA’s inadequate oversight in monitoring of this 

system. As a result, we initiated additional work involving DMCS 

II and planned to take a broader look at FSA’s oversight management and monitoring of its data systems overall. We also highlighted the problems with DMCS II in our most recent management challenges report and added a new management challenge related to the department’s IT system, development and implementation. We will continue to closely monitor FSA’s action to improve 

DMCS II. 

This concludes my statement. I am happy to answer any questions. 

[The statement of Ms. Tighe follows:] 

CEWDOCROOM with DISTILLER

24 

CEWDOCROOM with DISTILLER


Insert offset folio 12 here 86974.012
25 

CEWDOCROOM with DISTILLER


Insert offset folio 13 here 86974.013
26 

CEWDOCROOM with DISTILLER


Insert offset folio 14 here 86974.014
27 

CEWDOCROOM with DISTILLER


Insert offset folio 15 here 86974.015
28 

CEWDOCROOM with DISTILLER


Insert offset folio 16 here 86974.016
29 

CEWDOCROOM with DISTILLER


Insert offset folio 17 here 86974.017
30 

CEWDOCROOM with DISTILLER


Insert offset folio 18 here 86974.018
31 

CEWDOCROOM with DISTILLER


Insert offset folio 19 here 86974.019
32 

CEWDOCROOM with DISTILLER


Insert offset folio 20 here 86974.020
33 

Chairwoman FOXX. Thank you both very much. You come in 

under time. 

Mr. Runcie, you have a challenge. I now recognize you for five 

minutes. 

[Laughter.] 

STATEMENT OF MR. JAMES RUNCIE, CHIEF OPERATING OFFICER, FEDERAL STUDENT AID, U.S. DEPARTMENT OF EDUCATION, WASHINGTON, D.C. 

Mr. RUNCIE. Well, thank you, Chairman Kline, Chairwoman 

Foxx, Ranking Member Hinojosa, and members of the subcommittee for inviting me to testify today. My name is James 

Runcie, and I am the chief operating officer of the Department of 

Education’s Federal Student Aid office. Our organization is responsible for administering the federal student aid programs that annually enable millions of students to pursue higher education. 

While managing defaulted loans is a significant, important part 

of our work at FSA, it is only one part of a successful public-private 

partnership encompassing over 1,300 government employees and 

more than 10,000 employees of private contractors. Together, we 

administer the federal student aid programs. We do this by, among 

other things, processing more than 20 million financial aid applications each year, dispersing $138 billion in grants and loans, providing management and oversight of a loan portfolio of more than 

1 trillion—representing 40 million borrowers—and collecting on defaulted student loans, the topic of this hearing. 

We have worked closely with the GAO and the department’s I.G. 

over the last several years. We appreciate their insights and concur 

with the three recommendations presented by GAO in its most recent report. We acknowledge that there were major challenges, and 

I hold myself accountable for these issues. Today, the major challenges presented by the new DMCS system have been addressed. 

Collections on defaulted loans are at record levels, and have grown 

from $3.4 billion in 2011 to $8.5 billion in 2013. 

However, to provide a broader context for this hearing, I would 

like to review with the committee how we got to where we are 

today. Since 1994, there have been two primary federal student 

loan programs, the FFEL program and the Direct Loan Program. 

In 2007, the DL Program’s share of the annual 64 billion in federal 

student loan disbursements was approximately 20 percent. Around 

that time, the decline in the financial markets began to directly affect student lending by severely restricting the availability of private capital. Many schools began moving from the FFEL to the DL 

program. As the number of schools moving to the DL program increased, we took steps to insure FSA had sufficient capacity. 

Beginning in 2008, we increased our loan origination capacity to 

ensure that it could handle the projected volumes. We also augmented our servicing capacity with the awarding of loan servicing 

contracts to four private sector companies. In addition, we began 

the process of upgrading an antiquated 30-year-old default management system called DMCS. In 2010, we successfully implemented the transition to full, direct lending. And last year, FSA 

disbursed approximately $100 billion in direct loans to over 10 milCEWDOCROOM with DISTILLER

34 

lion students and parent borrowers. This is an increase of almost 

700 percent in just five years. 

In order to successfully manage this exponential growth, we successfully upgraded legacy systems and processes and developed 

many new ones. Some examples include the implementation of the 

TIVAS not-for-profit servicers, IRS automated data retrieval, and 

new total and permanent disability system. We successfully oversee 

dozens of major systems and process tens of millions of transactions, leveraging our employees and numerous private contractors. Having said that, FSA’s transition to a new DMCS system 

faced difficulties, particularly during its initial months of operations. 

Our management team immediately took steps to assess the 

problem and to restore key functions. Our efforts prioritized restoring borrower services, such as loan rehabilitation and refund processing, and minimizing disruptions to the collection activities. As a 

result of these efforts, the system is working today and we are 

processing a greater number of rehabilitations than any time in our 

history. We have also instituted regulatory, contractual, and process improvements since 2012 that make loan rehabilitation easier 

for borrowers. 

The new debt management system has replaced a system that 

was 30 years old, technologically and functionally limited, and subject to a number of security issues and audit findings. The new system was designed to be more secure, more robust, and less costly. 

We also levied appropriate and necessary sanctions against a contractor for poor performance. These actions included the issuance 

of a cure notice and the imposition of significant financial penalties. Late last year, we moved into the final phase of ending our 

relationship with the original contractor and awarded a new contract for DMCS. 

The new system’s loan rehabilitation functions were restored in 

April of 2012, and the backlog of borrowers whose loan rehabilitation was delayed was resolved by January 2013. Over 525,000 borrowers have rehabilitated defaulted loans, with a value of more 

than $9 billion since functionality was restored. As a result of these 

efforts, we are processing record numbers of collections in all categories. Defaulted borrowers have better service and more options 

than at any time in the history of our programs. We have learned 

from the system transition, and are incorporating lessons into the 

management improvements across the organization. 

I want to thank the committee for providing me the opportunity 

to discuss this very important issue, and look forward to answering 

any questions that you may have this afternoon. 

[The statement of Mr. Runcie follows:] 

CEWDOCROOM with DISTILLER

35 

CEWDOCROOM with DISTILLER


Insert offset folio 21 here 86974.021
36 

CEWDOCROOM with DISTILLER


Insert offset folio 22 here 86974.022
37 

CEWDOCROOM with DISTILLER


Insert offset folio 23 here 86974.023
38 

CEWDOCROOM with DISTILLER


Insert offset folio 24 here 86974.024
39 

CEWDOCROOM with DISTILLER


Insert offset folio 25 here 86974.025
40 

Chairwoman FOXX. Thank you, Mr. Runcie. 

I now recognize Ms. Peg Julius for five minutes. 

STATEMENT OF MS. PEG JULIUS, EXECUTIVE DIRECTOR OF 

ENROLLMENT MANAGEMENT, KIRKWOOD COMMUNITY COLLEGE, CEDAR RAPIDS, IOWA 

Ms. JULIUS. Chairwoman Foxx and members of the subcommittee, thank you for the opportunity to speak to you today. My 

name is Peg Julius and I am a member of the executive council of 

the National Direct Student Loan Coalition, and executive director 

of enrollment management and financial aid at Kirkwood Community College in Cedar Rapids, Iowa. 

We are a 2-year public institution, enrolling approximately 

23,000 students annually. Fifty-one percent of them receive student 

financial aid, and 34 percent receive Pell grants. Kirkwood joined 

the direct lending program in the second year, 1995. I believed 

strongly then, and I continue to believe now, that direct lending is 

the best student loan option for our students. It is understandable 

for students and their families, it is simple, and it works. When 

borrower benefits were being used to entice schools away from direct lending in the late 1990s, my administration moved out of direct lending and back to the Federal Family Educational Loan Program. 

After 3 years of participation in FFEL and many concerns about 

the level of service that was provided to our student borrowers, the 

opportunity presented itself for us to move back to direct lending 

and my staff and I happily made that change. The direct loan program continues to be the best student loan option. The switch to 

100 percent direct lending in 2010 was an enormous undertaking 

by the Department of Education. As with any change of this magnitude, fine tuning continues to happen. The coalition believes that 

servicing of loans could be improved with the following changes. 

Borrowers need a single point of contact for all their loan repayment activities. The new option for students to choose their 

servicer during consolidation provides opportunities for abuse and 

fraud in the industry, and should be eliminated. Service levels, 

loan terms and borrower benefits must be equal and uniform. Performance measures should be relevant and uniformly applied to all 

servicers. We encourage the department to take advantage of the 

opportunity by the renewal of servicing and collection contracts to 

move that system to the best practices of the industry as a whole. 

The department has worked hard and accomplished much, correcting the issues with private collection agencies and the loan rehabilitation process. Despite the simplicity of the direct loan program, there are still challenges for students making repayments. 

And when students don’t pay their loans, the resulting default is 

concerning both for them and for the taxpayers of this nation. We 

suggest that all correspondence from servicers use the identification of the Federal Direct Stafford Loan Program as the primary 

identifier. Students need to understand that this is a federal loan 

provided by Congress, and not a loan from a servicer. 

We believe that these changes will make the current model for 

direct lending and servicing even better than it is today. We are 

encouraged by improvements made in the consolidation process for 

CEWDOCROOM with DISTILLER

41 

students on studentloans.gov. Real-time information about all the 

loans that a student has and an easy process for pulling IRS information for income-based repayment options will no doubt reduce 

defaults. Yet still, students find themselves with defaulted loans 

for a variety of reasons. The need for the rehabilitation of these 

loans is not uncommon. 

While the process is not quick, it is also not daunting. Most can 

navigate the process on their own. When students ask for our help, 

it is a fairly easy handoff from the repayment counseling that we 

provide to the processes required by the department to put the loan 

in a rehabilitated status. There were serious reporting problems for 

rehabilitated loans when the change in debt collection servicing occurred. The systems are operating properly now, and those problems have been resolved. 

I want to thank you, Madam Chairman, for the opportunity to 

speak with you today. I am honored to give you some perspective 

on this very important issue from the student borrower and school 

viewpoint. And I am happy to answer any questions. 

[The statement of Ms. Julius follows:] 

CEWDOCROOM with DISTILLER

42 

CEWDOCROOM with DISTILLER


Insert offset folio 26 here 86974.026
43 

CEWDOCROOM with DISTILLER


Insert offset folio 27 here 86974.027
44 

CEWDOCROOM with DISTILLER


Insert offset folio 28 here 86974.028
45 

CEWDOCROOM with DISTILLER


Insert offset folio 29 here 86974.029
46 

Chairwoman FOXX. Thank you very much. 

I am now going to recognize members for questions, and I would 

like to recognize the chairman of the committee, Congressman 

Kline. 

Mr. KLINE. Thank you, Madam Chair. Thank the witnesses for 

being here. A question I just want to get really clear for the record 

here. Ms. Emrey-Arras, you touched on it in your testimony, but 

I want to get from you and Inspector General Tighe a straight yes 

or no answer here. I will start with you—we always start with the 

GAO. And thank you for your work, by the way. I know that this 

committee and others, we just lay a lot of work on the GAO, and 

we appreciate the high quality of the work. 

So can you say, with certainty, that the department’s default 

management system is fully functioning without any workarounds, 

and that all loan rehabilitations are now being properly processed 

within the appropriate time frames? 

Ms. EMREY-ARRAS. No. Education continues to rely on system 

workarounds. In addition, Education has put together a long list of 

functional deficiencies with the system that will need to be addressed by the new contractor. And, in addition, Education lacks 

data to know for sure that there are no longer delays in the process. 

Mr. KLINE. Thank you. 

Inspector General Tighe, same question? 

Ms. TIGHE. No. 

Mr. KLINE. Exactly. Okay, thank you for that. And now again to 

the Inspector General. I have a nifty package put together here for 

us. I have got a couple of these alert memoranda dated May 8 and 

May 15 from your office to FSA. And in these, you point out significant oversight lapses by the department, which you have touched 

on. In both instances, the department’s response indicated they 

agreed with your concerns and listed action items they would undertake to address the concerns in your memoranda. In your follow 

up, has the department demonstrated it has met the stated corrective actions? 

Ms. TIGHE. Thank you. Regarding the alert memo on DMCS II, 

we had a number of recommendations. The department has submitted a corrective action plan on all but one, but has not completed action. On the most significant recommendation we made, 

which is the recommendation that basically they need to do a plan 

to demonstrate that they have a fully functional debt management 

collection system, we do not have a corrective action plan on that 

yet. 

Mr. KLINE. So, work to be done. 

Ms. TIGHE. Work yet to be done, yes. 

Mr. KLINE. Well, again, I want to thank you for your work, for 

your testimony. And that is what we are getting at here. We understand that there are people of good will here trying to get things 

done. But the point of the matter is, the fact of the matter is, we 

still got big problems. And so I appreciate all of you being here 

today and your testimony. 

And with that, Madam Chair, I will yield back. 

Chairwoman FOXX. My goodness, this chairman is setting a great 

example also. 

CEWDOCROOM with DISTILLER

47 

Mr. Bishop, I now recognize you for five minutes. 

Mr. BISHOP. Thank you very much, Madam Chair. And thank 

you very much for holding this hearing. This is a very important 

area, and I thank you for shedding light on it. And thank you to 

the panel. 

My first question is, it is my belief that this is a systems problem 

correction as opposed to there being something inherent in direct 

lending that contributed to this problem. Is it exclusively a systems 

problem? 

Ms. TIGHE. Based on our work, it is a systems problem. 

Mr. BISHOP. Okay. Mr. Runcie, you would concur with that? 

Mr. RUNCIE. Yes, this is a systems issue that we have taken 

great effort to address. And we believe we have addressed it. But 

it is not a direct lending policy issue. 

Mr. BISHOP. Chairman Kline just asked if there were problems 

that remain. Ms. Emrey-Arras, you said yes. Ms. Tighe, you said 

yes. Mr. Runcie, you said in your testimony that, quote— 

‘‘functionality has been restored,’’ close quote. And I know that is 

a different matter than whether problems remain. Can you tell us 

how your department is addressing the problems that continue to 

exist, that have been highlighted by the Inspector General and by 

GAO? 

Mr. RUNCIE. Yes. First of all, the rehab issue. We put a fix in 

April of 2012. And then we cleaned out the backlog by the end of 

the year. So that issue is addressed. And so on a go-forward basis, 

you know, that functionality has been restored. In terms of the 

issue about workarounds, they’re supporting processes—we have 

always had supporting processes. In the old system we had many 

workarounds, or supporting processes, to address issues that 

couldn’t be handled directly by the system. 

We have less workarounds now than we did before we had the 

system. In our definition of a supporting process, a workaround 

that works is one that addresses the issue on a timely basis. So 

therefore, our workarounds are not creating any backlogs. So if 

there is a workaround process, there are no backlogs, so the borrower is not experiencing a detrimental situation. 

So this issue of fully-functioning or functioning system I think it 

can also be evidenced by the fact that we have increased the 

amount of collections, rehabs and collections in total, to a level of 

almost $9 billion since we put in that functionality. So from an 

operational definition of success, we would point to that as empirical evidence. 

Mr. BISHOP. Okay. Let me ask this question, and I would ask 

this of the GAO and the Inspector General. Are you confident that 

the department has put in place the appropriate remedial action 

and the appropriate oversight steps to see to it that if Madam 

Chair were to bring us all back together 6 months from now or 9 

months from now we would be viewing a different landscape than 

we are viewing right now? 

Ms. TIGHE. From us, I am not confident. We actually have ongoing work right now on DMCS II. One of those is to basically, you 

know, look over FSA’s shoulder and look at what they have set as 

functional and not functional. That work is still ongoing and will 

not be out for a little while, but we are checking on their claims 

CEWDOCROOM with DISTILLER

48 

of functionality. We also had started a job that we put aside because there was a big protest related to the follow on contract that 

is at issue here, that we would have looked at FSA’s plans to sort 

of deal with all these issues. We haven’t yet decided what to do 

with that job. 

Mr. BISHOP. So your monitoring is ongoing. 

How about the GAO? 

Ms. EMREY-ARRAS. We are also monitoring. While Education has 

agreed with our recommendations, we need to monitor them to see 

that those steps that they have promised are taken and that they 

fulfill the requirements of the recommendations. 

Mr. BISHOP. Okay. Thank you all very much. 

Chairwoman FOXX. Thank you very much, Mr. Bishop. 

Mr. Walberg, you are recognized for five minutes. 

Mr. WALBERG. Thank you, and thanks to the panel for being 

here. 

Ms. Emrey-Arras, let me ask you first if you could, in more detail, describe the department’s lack of oversight in its system—over 

its system contractor? And more specifically, what did you find 

when you looked through the department’s contract files? 

Ms. EMREY-ARRAS. Thank you for that important question. We 

found that Education did not create a monitoring plan for the upgrade prior to the beginning of the work on the system, and only 

became involved after the contractor began missing deadlines, and 

created a monitoring plan about a year after everything got going. 

Mr. WALBERG. Is that normal for— 

Ms. EMREY-ARRAS. That should not be normal. Actually, the department has guidance for contracting, and it recommends that 

people look to what risks are involved. And if a contractor has past 

performance problems, there should be more monitoring in place to 

mitigate those risks. And this contractor had those past performance problems, and oversight was not put in place up front when 

it needed to be to appropriately monitor the contractor. 

In terms of looking at the files, we did not find that monitoring 

documentation that the department requires of its employees in 

terms of status reports, other documents to show that they were 

really monitoring the contractor. 

Mr. WALBERG. Interesting. Seems common sense was missing 

there, to a point. But who am I to know about that? 

Ms. Tighe, in your opinion, should the issues highlighted in your 

May 2013 alert memorandum have been spotted by the department 

if they had proper oversight and monitoring practices in place? 

Ms. TIGHE. Yes, I do believe those issues should have been spotted. I think the principal problem, other than the underlying problem regarding the loans that would not transfer that we observed, 

was the failure to do proper testing of the system before it went 

live. That is a problem we recognize was also a problem recognized 

by the financial statement auditor in 2013. That is, the fact that 

they only tested certain functions and didn’t test all the way 

through the process of a loan and through rehabilitation, I think, 

created problems. I think if those things had been done we 

wouldn’t have the problems we have today. 

Mr. WALBERG. How much of your office’s time has been spent in 

dealing with this issue of this contract? 

CEWDOCROOM with DISTILLER

49 

Ms. TIGHE. Well, we have had two alert memos and we have ongoing work. We have spent just under a million dollars on staff 

time, on travel, and on related overhead for this work. 

Mr. WALBERG. Well, that is certainly part of your responsibility. 

But if it doesn’t have to be done. Are there any other audits that 

have been delayed because of this work? 

Ms. TIGHE. Well, we prioritize our work according to the issues 

that we think are important. And this, when it burbled up, clearly 

became a top issue for us. So we did put some things aside and decided to give priority to this. 

Mr. WALBERG. Okay. 

Mr. Runcie, contracting for services, as you would readily admit, 

is an important obligation, especially when it obligates millions of 

dollars of taxpayers’ funds. Why did the department award a contract for these important services to an entity that had demonstrated failures of its own in the past? 

Mr. RUNCIE. Okay. Well, we did not award a contract. There was 

an existing contract that we modified. So we did not award a contract, so there wasn’t a process. We ended up awarding a contract 

this past year. So it was considered almost more of an upgrade. 

Mr. WALBERG. But the contract was continued. It wasn’t, as you 

say, the word wasn’t ‘‘awarded.’’ 

Mr. RUNCIE. There was an existing contract that was modified to 

provide for an upgrade of the system that was already there. 

Mr. WALBERG. With known problems from the contractor. 

Mr. RUNCIE. Well— 

Mr. WALBERG. Was it modification meant to take of those known 

problems and to address those? 

Mr. RUNCIE. Well, the issue about its past performance had to 

do with systems integration work, not with the debt management 

collection system. There was some systems integration work involving four disparate systems that was a part of a contract, or an obligation. And that is what was not addressed. The actual operations 

and maintenance in delivery cycles around DMCS was not the 

issue that resulted in the past performance. 

Mr. WALBERG. As I understand it, 80,000 borrowers were impacted by this failure. Could you quantify what that means to each 

of those individuals, and even to the economy? 

Mr. RUNCIE. The 80,000 borrowers that were not able to get loan 

rehab, by definition they were rehabilitated. But the clearing of 

their credit and the eligibility for Title IV funds was not an automatic process. The borrower relief process that was— 

Mr. WALBERG. What does that mean? 

Mr. RUNCIE. It means that we put in place a borrower relief process. So they would contact us and we would contact the credit 

agencies to clear their credit, or if they needed a letter or any clearance for Title IV eligibility, we would provide that. And we provided that to about 8,000 people who called us. 

Mr. WALBERG. I see my time has expired, Madam Chair. 

Chairwoman FOXX. Thank you, Mr. Walberg. 

Ms. Bonamici, you are recognized for five minutes. 

Ms. BONAMICI. Thank you very much, Madam Chairwoman. 

Thank you for holding this hearing, which provides an opportunity 

for us to highlight the important work that is being done to make 

CEWDOCROOM with DISTILLER

50 

sure that Americans who have defaulted on their student loans 

aren’t victimized and are given a reasonable chance to return to 

good standing. And I appreciate the work that has been done so 

far. It looks like there is still some work to do. 

I wanted to make sure, Ms. Honorable Tighe, you set out the procedure here: 360 days of nonpayment, and then it goes to the FSA 

debt management. And then if there is no response, or a refusal 

to pay, then it goes to a collection agency. Is that all correct? 

Ms. TIGHE. Yes, that is correct. 

Ms. BONAMICI. And can I ask you, Ms. Tighe or Mr. Runcie, how 

is the collection agency chosen? How do you decide which collection 

agencies to use? 

Ms. TIGHE. I would defer to Mr. Runcie. 

Ms. BONAMICI. Mr. Runcie, how do you make that determination? 

Mr. RUNCIE. There is an allocation process, I believe, based on 

performance. I don’t have the details on that, but that is what I 

believe. 

Ms. BONAMICI. And do you look at their record of whether they 

have been sued under the Fair Debt Collection Practices Act, for 

example? 

Mr. RUNCIE. Yes. As a part of the oversight process, we review 

them for compliance under the terms of the contract, any other 

issues that might impact their ability to collect on behalf of the Department of Education. 

Ms. BONAMICI. So Ms. Emrey-Arras, you said in your report that 

there was an effort to assist borrowers. You said that there were 

procedures in November 2011 to assist eligible borrowers by removing defaults from the credit reports or reinstating their eligibility. 

However, borrowers had to contact the department or their collection agency to receive the assistance. So then it said that less than 

10 percent were actually affected. So can you talk about whether 

there was follow up? You or Mr. Runcie or Ms. Tighe, was there 

follow up with these borrowers to make sure that they got the assistance they needed to reinstate their eligibility? 

Mr. RUNCIE. All of the backlog was cleared. So the remaining— 

you know, if you subtracted the 8,000 from the 82,000—say, 72,000 

were cleared out of backlog. So if they were eligible for being rehabilitated and getting their credit cleared, or the default cleared, entitled for eligibility, they would have received that by now. 

Ms. BONAMICI. Okay. So there has been, you know, plenty written about the practices of certain debt collection agencies. Mr. 

Runcie, does your organization comply with the Fair Debt Collection Practices Act? 

Mr. RUNCIE. I assume so. I mean, all of our debt collectors have 

to comply with the Fair Debt Collection Act or they would not be— 

you know, that would be violation, I assume, of their contract 

terms. 

Ms. BONAMICI. So since there has been the direct loan program, 

has there been an increase or decrease in borrowers’ complaints? 

Mr. RUNCIE. Based upon one metric, there was, at the time that 

we put the system in, complaints jumped from .07 to .08 of a percent. And subsequently, it has gone down to a lower level than it 

was prior to the actual installation of the system. 

Ms. BONAMICI. So now it is a lower level? 

CEWDOCROOM with DISTILLER

51 

Mr. RUNCIE. It is a lower number. 

Ms. BONAMICI. And what does the FSA do to help borrowers 

avoid going to a collection agent, being referred a collection agency? 

Are there efforts to encourage them to negotiate early on? Are 

there steps taken to warn them that if you do not handle this or 

make arrangements it will go to a collection agency? 

Mr. RUNCIE. Yes. Yes, there are a number of financial literacy activities and tools. There is also entrance and exit counseling, some 

in-school counseling. We also have contractual terms that motivate, 

you know, the servicers to provide a level of education and process 

that would help defer or avoid, you know, students going into default. In addition, when the loans are turned over to us there is a 

sort of a 60-day period where we will reach out before we actually 

even send it out to the collection agency. 

So, you know, we can always do more, and we are constantly putting more in the way of financial literacy and outreach out there. 

But we do have a pretty rigorous approach to trying to help students avoid default. 

Ms. BONAMICI. And you also talked about the regulatory change 

to help define what a reasonable and affordable payment is. And 

it is my understanding that becomes effective in July. Is that correct? 

Mr. RUNCIE. Yes, of previous year. So it allows default. It makes 

it easier for defaulted borrowers to rehabilitate their loans. Because their payments, the nine payments that they would make 

over a 10-month process, is now based upon a percentage of their 

income. So there is a higher likelihood that they can pay those 

amounts, rehabilitate their loan, get title IV eligibility, and get the 

default off of their credit. So before, there was some judgment and 

there was some negotiation. 

But you know, after that point we were able to put that in place. 

And so you will also notice that after that became the standard, 

there was an increase in the amount of rehab. So it is actually, it 

is working. 

Ms. BONAMICI. Terrific. Thank you. My time has expired. 

I yield back. Thank you, Madam Chairwoman. 

Chairwoman FOXX. Thank you, Ms. Bonamici. 

Mr. Tierney, you are recognized for five minutes. 

Mr. TIERNEY. Thank you very much. 

Mr. Runcie, I note that in Ms. Tighe’s report she indicates that 

there is a continuing problem of the non-report from the private 

contracting agencies, non-reporting on verbal complaints. Where 

does that stand now? 

Mr. RUNCIE. That has been addressed. I mean, there was—you 

know, the PCAs thought that if they handled the verbal complaint, 

if they handled the verbal complaint over the phone—someone had 

an issue and they handled it—they felt that they didn’t have to report that. We have provided much clearer guidance in terms of 

what must be reported, and we have noticed that we are getting 

notifications, and logging, you know, verbal complaints. So that has 

been addressed. 

Mr. TIERNEY. Well I tell you, it bothers me that it took a report 

to get it addressed. I mean, that is a large part—you know, we 

have got great protections in this bill to go after and chase people 

CEWDOCROOM with DISTILLER

52 

who are in default, many of them facing circumstances that just 

the vicissitudes of the life put them in there. And we are beating 

them up. We garnish their wages, we take their tax funds, we go 

after Social Security benefits. Pretty onerous stuff. 

And then for us to have to have a report to find out that these 

private contracting agencies aren’t even reporting verbal complaints doesn’t seem justified to me. And I hope that you are doing 

a better job of oversight, and not waiting for some report to come 

down the pike. Because I tell you, you know, I am gonna ask you 

whether or not you think that some of these collection agencies are 

just being unfairly difficult on people that are trying to get back 

from default or avoid default on that, and whether or not they are 

just being too onerous in the way they do it. What is your thought 

on that? 

Mr. RUNCIE. Well, what we are looking at right now is, it was 

something that was noted in the report, the level monitoring of the 

PCAs. So we have increased the level of monitoring. Before, we 

were monitoring—we are supposed to monitor, you know, once a 

quarter. And based upon some of the workloads and some of the 

issues and resource contentions, we weren’t consistent in doing 

that. We have now increased to four times a quarter, where we 

would listen in on calls and we would provide a higher level of 

oversight to make sure that borrowers aren’t being harmed. 

Mr. TIERNEY. Understand, I hear horror stories—you know, my 

constituents calling me—that would stand your hair on end about 

the way they are being treated by folks like that who end up putting them in a worse situation than they would otherwise be if 

somebody gave them the right attention and helped them out from 

the very beginning. We just can’t have that on that basis. I will tell 

you what. I want your opinion of the Educational Credit Management Corporation and the way they go after people who may have 

had a health issue, or a loss of job and a health issue, trying to 

seek bankruptcy through the one small window that allows for any 

bankruptcy filing at all. 

And the reports of the courts having to tell this agency that they 

are just being abusive and that they are stepping outside the 

bounds. What are you doing about that? 

Mr. RUNCIE. Well, we use them for—I think that had to do with 

the guarantee agency side of their business and not the direct loan 

side of the business. Because our litigation goes through the Department of Justice, so that wouldn’t have been an issue that we 

would have oversight on. 

Mr. TIERNEY. So you don’t deal with that at all? 

Mr. RUNCIE. Not those issues related to the guarantee agency. 

Mr. TIERNEY. All right. Because that should be troubling for all 

of us on that basis. What is your thought about, you know, letting 

some people have relief of these enormous loans, and they have 

had a problem for one reason or another with the system or with 

the PCAs overstepping their bounds or whatever? What can we do 

for those folks to get them back on track that doesn’t leave them 

in the situation being 55 years old, having 98,000 worth of debt, 

and never be able to get out of this thing? 

Mr. RUNCIE. Yes. I mean, I think there are some things that 

have been done in terms of, you know, income-driven repayment, 

CEWDOCROOM with DISTILLER

53 

you know. And then, you know, they have certain entitlements. 

But, I mean, I think some of those things are less operational and 

may be more policy. But there certainly are, you know, borrowers 

who have, you know, issues making the payments. 

Mr. TIERNEY. Ms. Tighe, do you have any ideas of how you might 

help the department, you know, monitor this thing in a better way 

that gives people a fairer disposition of their situations? 

Ms. TIGHE. The alert report you noted dealing with verbal complaints that we brought forward is actually done while we were out 

doing—we noticed that problem when we were out doing field work 

for an audit we have ongoing right now on borrower complaints 

against PCAs. So we should have a report out on that. I don’t know 

the timetable, but perhaps sometime over the summer. 

Mr. TIERNEY. Well, that will be helpful and I appreciate that. 

Thank you. 

I will yield back. 

Chairwoman FOXX. Thank you, Mr. Tierney. 

I now recognize myself for five minutes. I wait until the end because I have to be here. Other folks can leave if they need to. I 

wanted to ask Ms. Emrey-Arras a question. You talked about—and 

I read your report really, very carefully—you talked about the 

need—and Ms. Tighe, you may want to respond to this also, of how 

the department sets up its data collection process. The inadequacy 

of the setting up the data collection process to begin with. And I 

know people have said over the years that things are close enough 

for government work. 

But is there any way that the department can be alerted in advance of how to do the appropriate—set up the appropriate evaluation to begin with? We know that is the real key to getting the kind 

of information that you need. And we are dealing with people who 

aren’t necessarily experts in this area. So does GAO have a mechanism for helping the department set these programs up in advance 

so that we are not retrospectively asking why aren’t we collecting 

this information? 

Ms. EMREY-ARRAS. That is a good question. The department actually has good guidance to help people identify when there may 

be risks involved and when more oversight is needed. So Education’s own guidance suggests certain factors that would necessitate more attention being paid. Those include if a contractor has 

an unreliable performance history, if there are multiple subcontractors involved, and the degree to which the project is interrelated 

with other contracts or projects. 

So I think looking at that departmental directive can help Education staff realize when a contract may be more risky, and be 

more attuned to putting monitoring steps in place early on. 

Chairwoman FOXX. All right. And follow up just a little bit about 

that. Without putting words in Mr. Runcie’s mouth, there was 

something said earlier about the fact that the department didn’t 

award more contracts to the contractor that was not doing its work 

properly. But they did benefit by being allowed to stay on, as I recall from reading the report. So they did get a benefit by being allowed to do the additional work. Is that correct? 

Ms. EMREY-ARRAS. That is correct. Although the contract modification was technically no cost, there was also an arrangement 

CEWDOCROOM with DISTILLER

54 

made where the system contractor was guaranteed $5 million in 

non-defaulted loans to service. 

Chairwoman FOXX. Thank you. 

Ms. Tighe, would you like to respond to those questions? 

Ms. TIGHE. Well, I would agree with everything GAO said. And 

note that, you know, we have had concerns. Rather than sort of hit 

these contracts and these systems in onesies and twosies, you 

know, we really need to step back and look at where FSA is in 

terms of looking at these whole processes. Which is why we put 

these two jobs on our audit plan for this year. It is, let’s look at, 

overall, at how their IT systems develop. DMCS II doesn’t seem 

like a good example of how a system should be developed. 

And I think that to the extent, as an example of how other systems may be handled now or in the future, it would be nice to come 

up with recommendations to FSA on how to do that better. Similar 

on its contracting processes, we have certainly gone in over the 

years and looked at onesies and twosies on contracts. We really 

want to look at the process more from a wider standpoint and 

make recommendations for improvement. 

Chairwoman FOXX. Thank you. 

Mr. Runcie, I appreciate the statements of commitment that you 

have made about wanting to do this work right and to make sure 

that the taxpayer is getting its appropriate payback on what is 

done in the department. And I appreciated also very much Mr. 

Bishop’s comments. Can you tell us when there will be a plan that 

would be able to be evaluated to correct the problems that have 

been talked about here today? 

Mr. RUNCIE. Yes. Well, we submitted a plan recently, and my understanding it is under review by the inspector general, the most 

recent plan. And I think, you know, that review might be tied to 

the other audit that is going on. But that notwithstanding, you 

know, we have put a plan in place that has resulted, I think, in 

some of the performance that we have talked about in terms of 

debt collections and clearing the rehab. 

In addition, we have taken to heart what the I.G. and the GAO 

has said about making sure that we have a level of oversight on 

contracts going forward. So the new debt management collection 

system that we awarded does have independent verification, a validation vendor that is going to checkpoint all the milestones and go 

through the process to make sure that there is a level of quality 

assurance that is going on as the project is being developed. In addition to that, we are running it through our life cycle management 

methodology, which is a very rigorous process where we have risk 

logs and we track and we have remediation. 

And so we have incorporated some of the lessons that we have 

learned as well as the guidance from the I.G. and GAO to make 

sure that as we move forward we can mitigate the risk and perform 

at the highest level possible. 

Chairwoman FOXX. Thank you very much. Okay. 

Well, I want, on behalf of all of the members of the subcommittee, to thank our witnesses for being here today. I think we 

have had a good hearing. Again, when Mr. Bishop left, he thanked 

me again for having the hearing. And I believe you all have helped 

us understand these issues a little bit better. I particularly appreCEWDOCROOM with DISTILLER

55 

ciate, again, the report from the GAO. I appreciate what the I.G. 

is doing. Mr. Runcie, I appreciate your commitment to making 

things better here in terms of the service that we give to the students. 

I also am very grateful for the comments that Mr. Hinojosa made 

in his opening remarks that he pointed out that we have a need 

for oversight. And we agree with him on our side of the aisle that 

we need this oversight no matter which administration is in place. 

It is our job as members of Congress to see that hardworking taxpayer money is being spent appropriately, and that the people that 

we are servicing through the Department of Education are treated 

appropriately. 

I believe that this program is going to stay in place. And my 

major concern is that we not mistreat any students in any way or 

any people who are former students who had loans who want to get 

them rehabilitated. Our responsibility is just to make sure that 

they are treated appropriately. 

Unfortunately, when you do this in the government there aren’t 

usually very many incentives for getting the job done right and getting it done in a timely fashion. I wish we had a better way to do 

that than we have now. 

But I will accept your commitment, Mr. Runcie, that the department wants to do these things right and will set in place a plan 

to make sure that everyone who is affected, has been affected, and 

will be affected in the future, will be treated appropriately. 

There being no further business, the subcommittee stands adjourned. And thank you, again. 

[Additional Submissions by Julius follow:] 

CEWDOCROOM with DISTILLER

56 

CEWDOCROOM with DISTILLER


Insert offset folio 30 here 86974.030
57 

CEWDOCROOM with DISTILLER


Insert offset folio 31 here 86974.031
58 

CEWDOCROOM with DISTILLER


Insert offset folio 32 here 86974.032
59 

CEWDOCROOM with DISTILLER


Insert offset folio 33 here 86974.033
60 

CEWDOCROOM with DISTILLER


Insert offset folio 34 here 86974.034
61 

CEWDOCROOM with DISTILLER


Insert offset folio 35 here 86974.035
62 

CEWDOCROOM with DISTILLER


Insert offset folio 36 here 86974.036
63 

CEWDOCROOM with DISTILLER


Insert offset folio 37 here 86974.037
64 

CEWDOCROOM with DISTILLER


Insert offset folio 38 here 86974.038
65 

CEWDOCROOM with DISTILLER


Insert offset folio 39 here 86974.039
66 

CEWDOCROOM with DISTILLER


Insert offset folio 40 here 86974.040
67 

CEWDOCROOM with DISTILLER


Insert offset folio 41 here 86974.041
68 

CEWDOCROOM with DISTILLER


Insert offset folio 42 here 86974.042
69 

CEWDOCROOM with DISTILLER


Insert offset folio 43 here 86974.043
70 

CEWDOCROOM with DISTILLER


Insert offset folio 44 here 86974.044
71 

CEWDOCROOM with DISTILLER


Insert offset folio 45 here 86974.045
72 

CEWDOCROOM with DISTILLER


Insert offset folio 46 here 86974.046
73 

CEWDOCROOM with DISTILLER


Insert offset folio 47 here 86974.047
74 

CEWDOCROOM with DISTILLER


Insert offset folio 48 here 86974.048
75 

CEWDOCROOM with DISTILLER


Insert offset folio 49 here 86974.049
76 

[Questions submitted for the record and their responses follow:] 

CEWDOCROOM with DISTILLER

77 

CEWDOCROOM with DISTILLER


Insert offset folio 50 here 86974.050
78 

CEWDOCROOM with DISTILLER


Insert offset folio 51 here 86974.051
79 

CEWDOCROOM with DISTILLER


Insert offset folio 52 here 86974.052
80 

[Mr. Runcie response to questions submitted follows:] 

CEWDOCROOM with DISTILLER

81 

CEWDOCROOM with DISTILLER


Insert offset folio 53 here 86974.053
82 

CEWDOCROOM with DISTILLER


Insert offset folio 54 here 86974.054
83 

CEWDOCROOM with DISTILLER


Insert offset folio 55 here 86974.055
84 

CEWDOCROOM with DISTILLER


Insert offset folio 56 here 86974.056
85 

CEWDOCROOM with DISTILLER


Insert offset folio 57 here 86974.057
86 

CEWDOCROOM with DISTILLER


Insert offset folio 58 here 86974.058
87 

[Whereupon, at 3:38 p.m., the subcommittee was adjourned.] 

Æ 

CEWDOCROOM with DISTILLER