FEDERAL STUDENT 

LOANS

Oversight of Defaulted 

Loan Rehabilitation Needs 

Strengthening

Statement of Melissa Emrey-Arras, Director, 

Education, Workforce, and Income Security

Testimony 

Before the Subcommittee on Higher 

Education and Workforce Training, 

Committee on Education and the 

Workforce, House of Representatives

For Release on Delivery 

Expected at 2:30 p.m. EDT

Wednesday, March 12, 2014

GAO-14-426T

United States Government Accountability Office
Page 1 GAO-14-426T Federal Student Loans

Chairwoman Foxx, Ranking Member Hinojosa, and Members of the 

Subcommittee:

I am pleased to be here today to discuss our work examining the 

Department of Education’s (Education) efforts to rehabilitate defaulted 

federal student loans. As of September 2013 about $94 billion—over 11 

percent of federal student loan volume in repayment—was in default.1

Loan rehabilitation allows borrowers who make nine on-time monthly 

payments within 10 months to have the default removed from their credit 

reports.2 Education contracts with collection agencies to assist borrowers 

with rehabilitation and other options for repaying defaulted student loans. 

The federal government has an interest in ensuring that the loan 

rehabilitation process works well given the potential savings from 

returning defaulted loans to repayment. However, when Education 

upgraded its defaulted loan information system in October 2011, there 

were reports that some loans remained in default after borrowers had 

made enough payments to rehabilitate the loans, raising questions about 

Education’s ability to manage the loan rehabilitation program.

You asked us to examine Education’s rehabilitation of defaulted student 

loans. My remarks today will address the following two areas and is 

based on our report, which is being released at this hearing: (1) how the 

upgrade of Education’s defaulted loan information system affected loan 

rehabilitation; and (2) how Education oversees collection agencies in 

implementing loan rehabilitation.3

In conducting this work, we focused our review on loans included in 

Education’s defaulted loan information system.4 We reviewed Education’s 

policies, procedures, and guidance; contracts and monitoring records for 

Education’s system contractor and 22 collection agencies; fiscal year 

2011-2013 collections and rehabilitation data; and relevant federal laws 

and regulations. We interviewed officials from Education, its defaulted 

 1

Default generally occurs when a borrower fails to make a payment for more than 270 

days. 20 U.S.C. § 1085(l); 34 C.F.R. §§ 682.200(b) and 685.102(b). 

2

20 U.S.C. §1078-6(a)(1)(A); 34 C.F.R. §§ 682.405(a)(2) and 685.211(f)(1).

3

GAO, Federal Student Loans: Better Oversight Could Improve Defaulted Loan 

Rehabilitation, GAO-14-256 (Washington, D.C.: Mar. 6, 2014). 

4

According to Education, this includes about $55 billion in Direct and Federal Family 

Education Loan program loans held by the department. 
Page 2 GAO-14-426T Federal Student Loans

student loan system contractor, and borrower advocacy and consumer 

protection groups. We also conducted site visits to a nongeneralizable 

sample of 6 collection agencies, based on factors such as loan volume 

and geographic location. Our work was performed in accordance with 

generally accepted government auditing standards.

Because of limited planning and oversight, Education was unable to 

provide most borrowers who completed loan rehabilitation with timely 

benefits for more than a year following the October 2011 upgrade of its 

defaulted loan information system. As a result, borrowers who made a 

good faith effort to rehabilitate their loans experienced delays in having 

the defaults removed from their credit reports and reinstating their federal 

student aid eligibility.

Education reported that the original information system, which had been 

in place since 1989, had become costly to maintain and many manual 

workarounds had been developed over the years to address emerging 

requirements. Education officials said it was also necessary to upgrade 

the system to handle the increased loan volume that the department was 

responsible for servicing.5 Education invited six firms, including the 

original system contractor to submit proposals for upgrading the system in 

2009. The original contractor subsequently offered to upgrade the system 

at no additional cost to the government. In June 2010, Education 

canceled the request for proposals and modified the original contract to 

include the upgrade. The contract addresses the management of student 

loans, including loan servicing, which involves tracking loans and 

accepting payments from borrowers. The modification also guaranteed 

the contractor a minimum of 5 million non-defaulted borrowers to service 

through the end of the contract. Education officials said that their decision 

was based on the contractor’s experience with the original system, its 

proposal to develop the upgrade in 6 months, the ease of upgrading 

 5

Education expected increased loan volume following passage of the Ensuring Continued 

Access to Student Loans Act of 2008, which provided the department with the authority to 

purchase or enter into commitments to purchase Federal Family Education Loans (FFEL) 

from lenders and secondary markets to help ensure continued access to federally 

guaranteed student loans in the wake of the economic downturn. Pub. L. No. 110-227, § 

7, 122 Stat. 740, 746. Further, Education anticipated an increase in the number of 

borrowers with Direct Loans, from about 7 million borrowers to about 13 million borrowers, 

due to the SAFRA Act, which terminated the authority to make or insure new FFEL loans 

after June 30, 2010. Pub. L. No. 111-152, § 2201, 124 Stat. 1029, 1074 (2010). 

Limited Planning and 

Oversight of 

Education’s Defaulted 

Loan Information 

System Upgrade 

Adversely Affected 

Loan Rehabilitation
Page 3 GAO-14-426T Federal Student Loans

through an existing contract, and the contractor’s willingness to perform 

the work at no additional cost to the government.

In moving forward with the upgrade, Education did not conduct 

appropriate levels of oversight to ensure successful completion of the 

work. Specifically, Education’s own Departmental Directive: Contract 

Monitoring for Program Officials identifies several risk factors that indicate 

greater contract oversight may be needed, and we found three were 

applicable to the system upgrade as shown in table 1.

Table 1: Risk Factors Associated with the Defaulted Student Loan System Upgrade

Risk factor Explanation

Contractor with no performance history or an unreliable or 

unstable performance history or financial condition

The contractor had an unreliable performance history and in fiscal year 

2005 Education issued a cure notice to address concerns about its 

performance on the original system contracta . In addition, the 

contractor was subsequently acquired by a company that had no 

performance history with the department.

Whether multiple subcontractors provided services to the 

contractor

Multiple subcontractors provided a range of services to the contractor 

during the upgrade.

Degree of interrelatedness with other contracts or projects The system is set up to receive transfers of defaulted student loans 

from Education’s loan servicers and provides reports that are used to 

calculate compensation for collection agencies.

Source: GAO analysis of Education documentation.

Note: Education’s directive identifies four additional potential risk factors that we determined did not 

apply to the system upgrade: (1) a variable-price contract (the contract was fixed-price, presenting 

less cost risk to the government); (2) newly-incorporated or emerging organizations; (3) a high dollar 

amount (the contractor agreed to upgrade the system at no-additional cost to the government as part 

of broader negotiations on this contract); and (4) a contract with poorly defined objectives, unclear 

acceptance criteria, or contract requirements that are constantly changing.

a

A cure notice informs the contractor that the government considers the contractor’s failure to make 

progress as endangering performance of the contract or the contractor has failed to perform 

contractual provisions other than delivery of supplies or performance of services. The cure notice 

specifies a period (typically 10 days) for the contractor to remedy the condition. If the condition is not 

corrected within this period, the cure notice states that the contractor may face termination of its 

contract for default. 48 C.F.R. § 49.402-3.

Despite these risks, Education did not have plans in place for monitoring 

the upgrade, and we found limited evidence of oversight conducted. 

Although Education officials acknowledged the monitoring plan for the 

original system contract was not relevant for overseeing the upgrade 

work, Education did not update it until 2011, about a year after the 

upgrade work began and performance problems, such as missed 

deadlines, had occurred. Education officials also acknowledged that they 

did not document many of their monitoring activities. In our review of 

contract files from May 2007 through December 2012, we found emails in 

which Education officials questioned the contractor’s justifications for 
Page 4 GAO-14-426T Federal Student Loans

specific tasks in their proposals. However, we did not find required 

documentation of status reports, deliverables received, or plans for 

addressing upgrade-related problems.

Moreover, we found the department’s testing of the new information 

system, which began in February 2011, was insufficient to detect 

problems associated with loan rehabilitation. For example, Education did 

not learn until shortly after the launch that the system did not recognize 

when borrowers had made nine on-time payments in 10 months because 

it did not test this function. Officials explained that testing in a 7-month 

time frame did not allow loan rehabilitation to be fully tested.

As a result of the system challenges, no loan rehabilitations were 

processed from September 2011 through March 2012, and Education 

officials said they needed until January 2013 to clear the resulting backlog 

(see fig. 1).

Figure 1: Number of Loan Rehabilitations Processed, Fiscal Years 2011 through 2013
Page 5 GAO-14-426T Federal Student Loans

Education worked with the contractor to identify and correct the problems 

and took some steps to hold the contractor accountable and assist 

borrowers.

• Efforts to hold the contractor accountable. While the system 

upgrade was completed at no additional cost to the government, the 

contractor also provided other services under the contract, such as 

loan servicing and providing Education with access to its data centers. 

In September 2011, Education began assessing the contractor 

financial penalties due to implementation delays. In February 2012, 

when the problems were still not resolved, Education notified the 

contractor via a cure notice that it could default on the contract unless 

adequate progress was made on the upgrade issues.6 As of 

November 2013, Education reported withholding approximately $14 

million from total payments to the contractor for other services 

rendered under the contract.7

• Efforts to assist borrowers. Education established procedures in 

November 2011 to assist eligible borrowers by removing defaults from 

their credit reports or reinstating their eligibility for student aid. 

However, borrowers had to contact the department or their collection 

agency to receive the assistance. Officials said they provided such 

benefits to about 7,600 borrowers—less than 10 percent—of the 

estimated 80,000 borrowers who were affected during the time the 

system was not processing rehabilitations.

8 Education officials said 

they did not systematically track when assistance was provided, and 

these rehabilitations were not processed through the system until April 

2012 or later.

 6

A cure notice informs the contractor that the government considers the contractor’s 

failure to make progress as endangering performance of the contract or the contractor has 

failed to perform contractual provisions other than delivery of supplies or performance of 

services. The cure notice specifies a period (typically 10 days) for the contractor to 

remedy the condition. If the condition is not corrected within this period, the cure notice 

states that the contractor may face termination of its contract for default. 48 C.F.R. § 

49.402-3.

7

Education documented the settlement agreement it reached for withholding payments 

from the contractor based on implementation delays in a December 2012 contract 

modification. 

8

Education processed about 20,000 to 30,000 loan rehabilitations a month in fiscal year 

2011, prior to the upgrade. While Education was not able to track loan rehabilitations by 

borrower prior to the upgrade, officials said they have estimated that borrowers who use 

loan rehabilitation typically have two to three defaulted loans.
Page 6 GAO-14-426T Federal Student Loans

When Education’s upgraded information system began processing loan 

rehabilitations in April 2012, the system still did not always recognize that 

eligible accounts had satisfied the requirements for loan rehabilitation. As 

a result, Education had to implement system workarounds and begin 

manually processing loan rehabilitations. While Education officials 

reported they stopped using manual processing in September 2013, they 

acknowledged that the system still requires workarounds and a 

substantial amount of development work will need to be completed to 

address remaining issues. Education expects the work to be completed 

under a new contract, which was awarded in September 2013. The 

system challenges the new contractor will be expected to resolve provide 

a compelling case for Education to strengthen its oversight. Without 

incorporating a risk-based approach to oversight into its planning for 

systems contracts and modifications, the department may continue to 

receive products and services that are delivered late and of unacceptable 

quality.

We also found that Education lacks data and related performance 

measures to inform its management and oversight of loan rehabilitation. 

According to The Office of Federal Student Aid’s Fiscal Year 2011-2015 

Strategic Plan, Education needs to be able to collect, analyze, and use 

customer data to achieve its goals of providing superior service and 

information to students and ensuring program integrity and safeguarding 

taxpayers’ interests. Education reported rehabilitating about 600,000 

loans for 200,000 borrowers from April 2012 to January 2013, as it 

worked to address the backlog of loan rehabilitations. However, 

Education has not developed performance data to assess the number or 

extent of individual borrower delays, or the extent to which borrowers who 

rehabilitate their loans stay out of default. Without such data and related 

performance measures, Education cannot assess its performance in 

serving borrowers or how effective rehabilitation is in minimizing the risk 

of defaulted loans to the federal government.

To address these issues, we recommended that Education strengthen its 

oversight by:

• developing an approach for tracking loan rehabilitation performance;

and

• taking steps to ensure that the final monitoring plan for the new 

defaulted loan information system contract identifies risks and the 

oversight activities planned to address them.
Page 7 GAO-14-426T Federal Student Loans

Education concurred with the recommendations and highlighted actions it 

is taking in response to them. For example, Education stated that it has 

begun developing additional metrics for overseeing loan rehabilitation 

performance, and that it has established a monitoring plan for the new 

system contract that tracks key risk areas and identifies risk mitigation 

strategies.

We also found that key weaknesses reduce Education’s ability to 

effectively monitor collection agency performance and ensure borrowers 

receive accurate information about loan rehabilitation. While Education’s 

monitoring procedures call for quarterly reviews of each collection 

agency’s phone conversations with borrowers, we found Education had 

not consistently completed such call reviews. For example, we examined 

call review reports issued between September 2011 and March 2013 for 

the six collection agencies we visited; however, Education was unable to 

provide documentation for 11 of the 42 call reviews that should have been 

performed. Education officials said the reviews may not have been 

completed due to competing priorities, such as needing to reassign staff 

to manually process loan rehabilitations following the system upgrade.

The call review reports we examined documented a range of errors for 

each of the six collection agencies we visited, including providing 

borrowers with inaccurate or misleading information about rehabilitation 

program requirements and options. Among other things, Education 

documented instances where collection agency representative(s):

• did not explain rehabilitation provisions such as the one-time 

opportunity to rehabilitate a loan, that payments must be made within 

20 days of the due date to be considered on time, or options for 

obtaining a reasonable and affordable payment;

• continued to push loan rehabilitation after the borrower said he was 

unemployed and was unable to make payments; and

• provided false or misleading information, such as incorrectly telling 

borrowers that a down payment or 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 ensure that collection agencies take 

corrective actions and does not systematically analyze the results over 

time or across collection agencies to inform its oversight activities. 

Without a systematic approach to monitoring the results of call reviews, 

Oversight 

Weaknesses Reduce 

Education’s Ability to 

Effectively Monitor 

Collection Agency 

Performance
Page 8 GAO-14-426T Federal Student Loans

Education may be missing opportunities to target its oversight and 

improve program performance.

To address these issues we recommended that Education take steps to 

improve its collection agency call review process. Education concurred 

with the recommendation and stated that it is revising its procedures to 

improve documentation of corrective actions and developing a database 

to track collection agency errors and associated corrective actions.

In conclusion, the findings in our report highlight serious weaknesses in 

Education’s management and oversight of the loan rehabilitation process. 

The substantial delays that many borrowers experienced getting their 

loans out of default are largely attributable to Education not providing 

oversight appropriate to the risks associated with the system upgrade. 

While Education took steps to process the backlog of loans eligible for 

rehabilitation, it does not have performance data to provide assurance 

that borrowers are no longer experiencing delays. In addition, Education’s 

oversight of collection agencies provides little assurance that borrowers 

are provided accurate information about loan rehabilitation. Education has 

taken some steps to strengthen its oversight in response to our 

recommendations. However, given the preliminary nature of these efforts, 

it will be important to track how Education builds upon and sustains these 

actions over time to ensure it is providing appropriate levels of oversight.

Chairwoman Foxx, Ranking Member Hinojosa, and Members of the 

Subcommittee this concludes my statement. I would be pleased to 

respond to any questions that you or other Members of the Subcommittee 

may have.

For questions about this statement, please contact Melissa Emrey-Arras 

at (617) 788-0534 or emreyarrasm@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this statement. Individuals making key contributions to 

this statement include Debra Prescott, Assistant Director; Kurt Burgeson, 

Maria Gaona, Amy Moran Lowe, and Jason Palmer.

GAO Contact and 

Staff 

Acknowledgments

(131304)
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