Federal Student Loans: Key Weaknesses Limit Education's Management of Contractors
Published: 2015-11-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: During fiscal year 2014, Education issued more than $99 billion in Direct Loans to 9.4 million borrowers. Education contracts with and monitors the performance of servicers that handle billing and other services for borrowers, and entities that support rehabilitation of defaulted loans. In 1998, federal law established FSA as a performance-based organization, giving it more flexibility to manage operations, including Direct Loans.
GAO's testimony focuses on: (1) how effective FSA's instructions and guidance to servicers are, (2) how well FSA monitors and documents calls between Direct Loan borrowers and servicers, and (3) the status of FSA's oversight of the defaulted loan rehabilitation process. The first two questions address recently completed GAO work on FSA's oversight of servicers and communications with borrowers. The third question reflects results of GAO's previously issued work. GAO reviewed FSA's contracts, policies, procedures, instructions, and guidance; analyzed its monitoring reports and processes; and reviewed relevant federal laws and regulations. GAO also interviewed federal officials, including officials from FSA, servicers, and representatives from higher education associations. We shared our findings with FSA officials and incorporated their comments as appropriate.
section_title: What GAO Found
paragraphs: The Department of Education's Office of Federal Student Aid's (FSA) instructions and guidance to loan servicers are sometimes lacking, resulting in inconsistent and inefficient services to borrowers. While FSA has taken some steps to improve program instructions and guidance, six of the seven servicers GAO interviewed reported various issues resulting from absent, unclear and inconsistent guidance and instructions from FSA. For example, one servicer said there are no instructions for how to apply over- or underpayments to borrower accounts. In other cases, guidance is unclear; for example, according to one servicer, there is insufficient guidance on how to handle reporting certain types of adverse credit history to credit bureaus. Furthermore, in certain instances when FSA provided additional guidance or clarifications, it did not consistently share them with all servicers. Federal internal control standards state that information should be communicated in a form that enables entities to carry out responsibilities. Without improved guidance and instructions to servicers, borrower finances or the integrity of the Direct Loan program could be negatively affected. FSA monitors calls between servicers and borrowers, but there are weaknesses in the processes for selecting calls to be monitored and for documenting results. For example, FSA monitors far fewer outbound than inbound calls, even though one servicer said it makes 60 times more outbound calls than it receives inbound calls, and outbound calls are often made to borrowers who are delinquent and at risk of default. Also, the methodology for selecting recorded calls for review is not well-defined and relies on servicers to implement, with no verification from FSA to ensure its integrity. This does not align with the Office of Management and Budget's best practices for developing sample designs. In addition, the overall results of the call monitoring are poorly documented. For example, summaries of monitored calls did not consistently track errors over time. FSA's Strategic Plan calls for enhancing customer-facing processes, but FSA's call monitoring leaves management without complete information it needs to understand how well servicers interact with borrowers.
FSA has taken some steps to improve its oversight of the defaulted loan rehabilitation process in response to GAO's March 2014 report. Loan rehabilitation allows eligible borrowers who make nine on-time monthly payments within 10 months to have the default removed from their credit reports. In March 2014, GAO found that FSA was unable to provide most eligible borrowers who completed loan rehabilitation with timely benefits, such as removing defaults from their credit reports, for more than a year after upgrading the information system it uses to manage defaulted loans. As a result of limited planning and oversight of its system contractor, no rehabilitations were processed from October 2011 until April 2012, and FSA officials said they needed until January 2013 to clear the resulting backlog. GAO recommended that FSA take steps to track loan rehabilitation performance and improve oversight of its system contractor. FSA agreed with the recommendations and has begun taking action to address them.
section_title: What GAO Recommends
paragraphs: GAO is recommending that FSA (1) review and improve how it provides instructions and guidance to servicers, (2) improve its methodology for monitoring calls between servicers and borrowers, and (3) improve documentation of its call monitoring.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the results of our work  examining the Department of Education’s (Education) efforts to monitor  and oversee the Direct Loan program. Federal student loans play a  crucial role in ensuring access to higher education for millions of students  each year. In fiscal year 2014, Education issued more than $99 billion in  Title IV student loans to 9.4 million borrowers under the William D. Ford  Direct Loan (Direct Loan) Program. Through the Office of Federal Student  Aid (FSA), Education administers student financial aid programs— including the Direct Loan program—that are authorized under Title IV of  the Higher Education Act of 1965, as amended, and oversees the  performance of contractors supporting these programs. These contractors  include loan servicers responsible for billing and other services, as well as  companies managing the department’s defaulted loan information  system. Under the Direct Loan program, FSA issues and manages the  loans while contractors service them.
To address longstanding management weaknesses – including  Education’s vulnerability to losses due to fraud, waste, abuse, and  mismanagement –the Higher Education Act was amended in 1998, to  establish FSA as the first federal performance-based organization  (PBO). A PBO is intended to transform the delivery of public services by  committing to achieving specific measurable goals with targets for  improvement, in exchange for being provided with more flexibility to  manage its operations. Accordingly, FSA’s strategic plan includes several  goals focused on monitoring contractors and serving the needs of  borrowers. However, recent questions have been raised about FSA’s  management of the Direct Loan program, including its oversight of  contractors. These include both loan servicers responsible for servicing  the needs of borrowers and contractors managing the department’s  defaulted loan information system.
My statement today provides findings from our recently completed work  on FSA’s management of the Direct Loan program and our prior  published work on loan rehabilitation and will focus on: (1) how well FSA  provides instructions and guidance to Direct Loan servicers, (2) how well  FSA monitors and documents calls between Direct Loan borrowers and  servicers, and (3) the status of FSA’s oversight of the defaulted loan  rehabilitation process.
The performance audit work to develop our analysis of FSA’s instructions  and guidance to loan servicers, as well as its monitoring and  documentation of calls between borrowers and loan servicers, was  conducted from May 2014 to November 2015. For this work, we assessed  FSA’s instructions and guidance to servicers and its call monitoring  procedures against federal internal control standards, FSA’s strategic  plan, and the Office of Management and Budget’s standards for statistical  research. In addition, we reviewed FSA’s policies, procedures,  instructions and guidance related to Direct Loan servicers; FSA’s  contracts and monitoring plans for Direct Loan servicers; and relevant  federal laws and regulations. We also analyzed information from FSA’s  monitoring of servicers’ calls with borrowers, and other compliance  monitoring documentation. We interviewed officials from FSA,  Education’s Office of the Inspector General, and the Consumer Financial  Protection Bureau. We also interviewed representatives from all four Title  IV Additional Servicers and three not-for-profit Direct Loan servicers –  which together represent over 90 percent of the federal student loan  portfolio – and reviewed documentation from each. In addition, we  interviewed representatives from several higher education and other  associations that include as members—or represent the interests of— schools, borrowers, loan servicers, or financial aid professionals. We  shared our findings with FSA officials and incorporated their comments as  appropriate.
The information regarding FSA’s oversight of the defaulted loan  information process is from our March 2014 report on this issue. For this  report, we reviewed policies, procedures, and guidance; contracts and  monitoring records for FSA’s system contractor; fiscal year 2011-2013  collections and rehabilitation data; and relevant federal laws and  regulations. We interviewed FSA officials, its defaulted student loan  system contractor, and borrower advocacy and consumer protection  groups. We also reviewed information FSA provided on actions it has  taken to address recommendations since March 2014.
The work upon which this statement is based was conducted in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Under the Direct Loan program, FSA issues several types of loans to  students and their parents, including Subsidized, Unsubsidized, and  PLUS Loans. The federal government sets limits on the interest rate,  loan origination fees and other charges, and annual and aggregate  amounts that can be borrowed. There are several repayment plans  available to borrowers, including a range of income-driven repayment  plans. In addition to being in repayment status, loans may be in: (1)  deferment: a period during which repayment of a loan is temporarily  suspended—such as while a student with undergraduate loans pursues  additional higher education, or in (2) forbearance: a temporary  postponement, extension, or reduction of loan payments for up to 12  months that is authorized when a borrower cannot make scheduled  payments for certain reasons, such as financial hardship. Interest  continues to accrue on loans in forbearance, while the government pays  the interest on subsidized loans in deferment. While loans are in  repayment, deferment, or forbearance status, they are serviced by  contracted service providers.
subsections: section_title: Management of Defaulted Student Loan Information System Upgrade
paragraphs: In 2003, FSA entered into a 5-year, performance-based contract known  as Common Services for Borrowers to improve the management of  student loans following disbursement. The contractor was the sole loan  servicer for the Direct Loan program and was also expected to modernize  and integrate four separate information systems, including for loan  servicing and debt collection. However, the contractor experienced  significant software development delays and FSA canceled the systems  integration effort in May 2007. FSA then began exploring options for  upgrading the defaulted loan information system in 2009, and invited six  firms, including the original system contractor, to submit proposals. The  original contractor subsequently offered to upgrade the system at no  additional cost to the government. In June 2010, FSA canceled the  request for proposals and modified the original contract to include the  upgrade.
Beginning in 2009, FSA entered into performance-based contracts with  additional loan servicers. These contracts were awarded as part of FSA’s  strategy to improve servicing performance by fostering competition  among vendors. Currently, FSA has contracts with four Title IV Additional  Servicers (TIVAS) and six not-for-profit (NFP) servicers. Loan servicing  includes such activities as communicating with borrowers about the status  of their loans, counseling borrowers on selecting repayment plans, and  processing payments.
In administering the Direct Loan program, FSA uses numerous tools and  activities to oversee the performance of its contractors, including loan  servicers and others that provide services in support of student loan  administration. FSA issues instructions and guidance to servicers to  manage the program that range from guidance on day-to-day operations  to contractual changes servicers must implement. In addition to providing  written communications, FSA meets with servicers to discuss program  operations and policy. FSA also conducts various monitoring activities,  including monitoring selected calls between servicers and Direct Loan  borrowers to ensure both acceptable customer service and servicer  compliance with statutory, regulatory, and contractual requirements.
section_title: Lack of FSA Guidance and Instructions to Servicers Results in Inconsistent and Inefficient Services to Borrowers
paragraphs: Some FSA guidance and instructions to servicers is inadequate, resulting  in inconsistent and inefficient services to borrowers. While FSA has taken  some steps to provide more Direct Loan program guidance and  instructions to servicers, six out of the seven servicers we interviewed  reported various issues resulting from absent, unclear, and inconsistent  guidance and instructions from FSA. As a result, borrowers are likely to  have different experiences with the Direct Loan program.
FSA has made some effort to respond to servicers’ concerns about its  program instructions. For example, in a white paper to FSA, three  servicers suggested ways FSA could improve how it provides instructions  on program changes. In response to these suggestions, FSA officials told  us that they are planning to implement training on the current process for  providing instructions in November 2015, and that they now discuss each  new instruction with servicers, including any instruction that needs  clarification. In addition, FSA officials said they recently put a number of  processes in place to assist servicers with implementing a new income  driven repayment plan, including job aid documentation to help  servicers with their development of training and systems. Nevertheless,  we identified a number of inconsistencies caused by a lack of guidance  and instructions, such as the following:
One servicer we interviewed reported that there is a lack of  instructions from FSA for some aspects of the Direct Loan program,  such as how to apply borrower over- or underpayments to a  borrower’s balance. This servicer stated that it is clear how they  should generally apply borrower payments to student loan balances;  however, if borrowers do not provide specific instructions on how to  apply a payment that is over or under the monthly payment amount,  servicers then have to decide how to apply this to the borrowers’  balances. For example, according to this servicer, if a borrower has  multiple loans, some servicers spread an overpayment amount evenly  across all loans, but other servicers target the higher interest loans  first. This servicer also said that FSA has not communicated with  them on how to standardize application of such payments. FSA  officials stated that they are in the process of working with the  Consumer Financial Protection Bureau on establishing a consistent  approach for the application of over-and underpayments, but they do  not know when this will be finalized. They added that any related  requirements for servicers would likely be included when they  recompete servicer contracts in early 2016.
A servicer reported that FSA does not provide sufficient guidance on  all documentation that is allowable for income-driven repayment  plans, and as a result, each servicer is left to interpret what some of  their borrowers submit for proof of income. For example, some  servicers treat retirement benefits as income, while others do not. This  could potentially cause similarly situated borrowers in the same  income-driven repayment plan to have different monthly payment  amounts or prevent some from qualifying, depending on who services  the loan. FSA officials acknowledged that due to difficulties in  deciphering alternative income documentation, servicers could  interpret income differently. They also stated that it is difficult to craft  guidance that would address the range of these issues. In addition,  officials told us that they have finalized a new income-driven  application protocol that further outlines processing rules and  guidelines. However, this protocol does not provide additional  guidance on how servicers should interpret income documentation.
Three of the servicers we interviewed said FSA has not provided  clarification on industry guidance for credit reporting that FSA has  directed them to follow. For example, because the industry guidance  does not account for specific aspects of the Direct Loan program, it is  unclear how servicers should handle credit reporting for unique,  program-specific borrower statuses, such as borrowers who had poor  credit reports filed right before they were approved to postpone or  reduce their payments. As a result, some servicers removed bad  credit reports for some borrower statuses while others did not. FSA  officials said they were aware of issues with inconsistent credit  reporting, and were coordinating with other federal agencies on a  review to better understand the impact of student lending on a  consumer’s credit score, and that it will  be the basis for issuing  guidance to create consistency in credit reporting. However, FSA  officials could not tell us when this review will be completed. They said  that when the review is finished, they expect to implement the new  guidance next year.
FSA is not consistently sharing all clarifications on Direct Loan  program instructions with all servicers. Servicers told us that when  they ask follow up questions about instructions from FSA, FSA does  not routinely share its responses with all servicers, resulting in  different servicers potentially receiving different information about the  same instructions. For example, one servicer we interviewed  expressed concern with the lack of clarity in FSA instructions to  address differences across servicers on how interest is applied to  loans. According to FSA officials and one servicer that we spoke with,  FSA has taken some action to address this lack of consistent  instructions, including implementing a new directive to standardize the  treatment of interest, developing test scenarios for servicers to use to  ensure requirements are consistently implemented, and forming a  work group of servicers and FSA staff on this issue. However, this  same servicer also pointed out that despite these efforts, additional  FSA guidance is in process and still outstanding, and FSA continues  not to share questions and answers or clarifications on this issue. FSA  officials stated that due to the complexity of the program not all  guidance was applicable to all servicers, however they plan to move  toward a more consistent process when they recompete servicer  contracts in early 2016.
Servicers expressed the need to further standardize certain aspects of  the Direct Loan program and offered several suggestions for  improving program servicing consistency through better guidance and  instructions. For example, five out of the seven servicers we  interviewed stated that overall, they would like FSA to provide more  information and clarity on FSA’s instructions. Four servicers also  expressed the need for a common manual for Direct Loan servicers,  similar to the one that exists for the Federal Family Education Loan  (FFEL) Program—a program under which loans were provided by  nonfederal lenders and repayment guaranteed by the federal  government that would describe and help clarify current student loan  requirements. While FSA and servicers share information about the  Direct Loan program with borrowers in multiple ways – including  online and by email and mail – there is no single manual like this that  servicers and borrowers have access to. One higher education  association representing financial aid professionals said such a  manual should be made widely circulated so borrowers can confirm  information on the Direct Loan program themselves. FSA officials told  us that when they begin the process of re-competing the contracts for  Direct Loan servicing next year, they will evaluate the need for a  common manual.
One of FSA’s strategic goals is to “develop efficient processes and  effective capabilities that are among the best in the private and public  sectors,” and federal internal control standards state that information  should be communicated to those who need it, in a form and within a  timeframe that enables them to carry out their responsibilities. Without  clear, sufficient, and transparent guidance and instructions to ensure that  the Direct Loan program is executed more efficiently and effectively  among servicers, borrowers may continue to have inconsistent  experiences with the program.
section_title: FSA’s Monitoring of Calls between Servicers and Borrowers Has Methodological Weaknesses and Is Poorly Documented
paragraphs: Key weaknesses limit FSA’s ability to monitor servicers’ interaction with  borrowers and ensure servicers provide accurate information and good  customer service. FSA’s Strategic Plan includes a goal to provide  superior service and information to borrowers, including taking a data- driven approach to better understanding customers and enhancing  customer-facing processes to improve the customer experience. As part  of its oversight of Direct Loan servicers, FSA monitors a sample of live  and recorded telephone calls between servicers and borrowers, with the  stated aim of ensuring exceptional customer service with the greatest  accuracy. FSA officials told us they began call monitoring in 2004, but  until recently, the agency only monitored incoming calls, which are calls  that servicers receive from borrowers. It also did not include any calls  from a subcontractor one large servicer was using, even though the  subcontractor made most of that servicer’s calls to delinquent borrowers.  In January 2015, in response to a report from Education’s Office of  Inspector General, FSA began monitoring incoming calls to all  subcontractors, and soon afterward began monitoring outbound calls from  servicers and subcontractors.
However, we found that FSA’s approach to call monitoring contains  notable methodological weaknesses. Our analysis of FSA’s monthly  reports since it started reporting on outbound calls in March 2015 through  July 2015 shows that, of all calls FSA monitored, outbound calls  constituted an average of only 9 percent. FSA officials told us they do not  know how many outbound calls servicers make, but noted they are far  more prevalent than inbound calls. They added that some outbound calls  result in a servicer leaving a message rather than having direct contact  with a borrower. However, one servicer told us it participates in over 60  times more outbound calls than inbound calls, and all seven servicers we  spoke to said outbound calls were a primary method of contacting  borrowers in delinquency and approaching default. Therefore, by focusing  its efforts primarily on inbound calls, FSA may not be focusing its call  monitoring on the most frequent and critical types of calls.
In addition, FSA relies on servicers to select recorded calls for its review  but has not developed a rigorous methodology that would produce a  consistent process among servicers. FSA officials told us that, in the  aggregate, approximately 60 percent of the calls they review are live,  while the other 40 percent are recorded, though the percentages vary by  servicer. For recorded calls, the only guidance FSA provides servicers is  that calls should be random; the office does not further delineate how it  wishes servicers to select calls to ensure they follow a comparable  process. Specifically, FSA’s Monitoring Procedures guide states that FSA  will review a sample “taken from randomly provided recorded calls,”  without defining additional parameters, such as whether to draw a  random sample from all calls or to ensure the sample includes calls on  specific topics. FSA officials confirmed that they do not have specific  methods for how servicers should select calls to send, nor do they verify  the servicers’ call selection process to ensure both its integrity and that  calls are being selected in a consistent manner over time and across  servicers. The Office of Management and Budget’s (OMB) best practices  for conducting data collection state that agencies should ensure sample  designs will yield the data required to meet the data collection effort’s  objectives — in this case, ensuring servicers provide exceptional  customer service to borrowers with the greatest accuracy. Without a  more rigorous methodology and verification process, FSA cannot ensure  it reviews a good representation of calls between borrowers and  servicers, or that its review is comparable across servicers and across  time. FSA officials said they are in the process of implementing more  detailed guidance to servicers on selecting recorded calls for review, and  they hope to finalize it before the end of the year. According to the draft  guidance, servicers will provide a large sample of calls from which FSA  will select a subsample. If implemented, this method of selection could  provide greater consistency than the current process. However, FSA  plans to instruct servicers to include only half as many outbound calls as  inbound calls in their sample.
Furthermore, the results of FSA’s call monitoring are poorly documented,  limiting their usefulness for management purposes. Standards for Internal  Control in the Federal Government state that information should be  recorded and communicated to management and others who need it, in a  form and within a timeframe that enables them to carry out their internal  control and other responsibilities. However, although FSA began call  monitoring in 2004, it did not summarize the results of its call reviews until  September 2014. When we asked FSA officials why there was no earlier  documentation of call monitoring results, they said they had always  shared results verbally with individual servicers and have only recently  begun further formalizing the process, including providing written  feedback to individual servicers starting in June 2015. We examined the  11 monthly summary reports, from September 2014 through July 2015,  that were available at the time of our review. These reports are used for  FSA management purposes and summarize results from all servicers,  and we found they lacked some key information. For example, one  month’s summary did not include the total number of calls monitored or  the number of calls that did not pass the review. Furthermore, report  information sometimes appeared inaccurate or conflicted from month to  month. For example, the January 2015 report notes that 10 percent of  calls that did not pass review had forbearance issues (such as the  representative not properly qualifying a borrower for forbearance), and  noted that this is a decrease from previous months.  However, the  November 2014 and December 2014 reports do not list forbearance as a  reason calls did not pass the review, and as a consequence, any  decrease cannot be confirmed through FSA’s reports.
In addition, the monthly summary reports do not capture the full extent of  specific problems, because they only focus on issues that surface in calls  that do not pass the review. FSA officials said the database used to  record its call monitoring results automatically designates a call as having  failed the review when the reviewer notes four or more errors. These  errors can range from breaches of etiquette — such as the customer  service representative not conducting the call in a pleasant manner — to  issues of accuracy, such as the representative providing incorrect  information about repayment options. Because the monthly summary  reports only note the reasons for calls that fail the review, they do not  reflect issues that occur in calls with 3 or fewer errors. For example, if a  customer service representative fails to answer all of a borrower’s  questions, but does not compound this problem with 3 additional errors in  the same call, the summary report does not capture this information.  Standards for Internal Control in the Federal Government state that  internal control monitoring should assess the quality of performance over  time. Because not all errors identified in call monitoring are captured in  FSA’s monthly reports, the reports do not reflect the actual prevalence of  particular problems in the calls the agency monitors, and consequently,  are insufficient for FSA to analyze the results of its call monitoring over  time to inform its management activities. FSA officials said they are aware  of the issues with the summary reports and are working to improve their  accuracy, consistency, and utility for managers.
FSA’s monitoring of servicer phone calls is designed to assist the agency  in meeting its goal of providing superior service and information to  borrowers, by providing a direct opportunity to monitor how servicers  interact with borrowers. However, without a systematic approach to  conducting reviews of both inbound and outbound calls and documenting  the results of all call reviews, FSA is missing opportunities to target its  oversight and improve services to borrowers.
section_title: FSA Has Taken Some Steps to Improve Oversight of Loan Rehabilitation
paragraphs: FSA has taken some steps to improve its oversight of loan rehabilitation  in response to our March 2014 report. In March 2014, we found that,  because of limited planning and oversight, FSA 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.
As of March 2014, FSA 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. FSA officials said it was also necessary  to upgrade the system to handle the increased loan volume that the office  was responsible for servicing. However, we found that in moving forward  with the upgrade, FSA 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  identified several risk factors that indicated greater contract oversight may  be needed, and we found three were applicable to the system upgrade,  as shown in table 1.
Despite these risks, in March 2014, we reported that FSA did not have  plans in place for monitoring the upgrade, and we found limited evidence  of oversight conducted. For example, FSA had not updated its monitoring  plan for the system contract until about a year after the upgrade work  began and performance problems, such as missed deadlines, had  occurred. FSA officials also acknowledged that they had not documented  many of their monitoring activities. Moreover, we found FSA’s testing of  the new information system, which began in February 2011, was  insufficient to detect problems associated with loan rehabilitation. For  example, FSA had not learned until shortly after the launch that the  system did not recognize when borrowers had made nine on-time  payments in 10 months because it had not tested 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 FSA officials  said they needed until January 2013 to clear the resulting backlog (see  fig. 1).
As we previously reported, soon after the upgrade began, FSA 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 FSA with access to its data centers. In  September 2011, FSA began assessing the contractor financial  penalties due to implementation delays. In February 2012, when the  problems were still not resolved, FSA notified the contractor via a cure  notice that it could default on the contract unless adequate progress  was made on the upgrade issues. In November 2013, FSA reported  withholding approximately $14 million from total payments to the  contractor for other services provided under the contract.
Efforts to assist borrowers. FSA 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.
As we reported in March 2014, when FSA’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, FSA had to implement system  workarounds and begin manually processing loan rehabilitations. While  FSA officials reported they stopped using manual processing in  September 2013, they acknowledged that the system still required  workarounds and a substantial amount of development work was needed  to address remaining issues. At the time of our March 2014 report, FSA  expected the work to be completed under a new contract, which was  awarded in September 2013.
To strengthen FSA’s oversight of the defaulted student loan information  system contract, in our March 2014 report we recommended that FSA  take steps to ensure that the final monitoring plan for the new contract  identified risks and the oversight activities planned to address them. FSA  agreed with the recommendation and reported that it has developed a  contract monitoring plan that tracks explicit deliverables related to key risk  areas and is using a management approach that includes risk monitoring  and mitigation strategies. FSA also reported working with an independent  verification and validation service to ensure that the new system  contractor establishes the appropriate controls and processes. While  these are positive steps, Education’s Office of Inspector General recently  reported ongoing concerns regarding Education’s oversight of the  system contract. For example, the Inspector General found that FSA did  not update its plan for correcting the defaulted loan information system  deficiencies until more than 9 months after the new contract work began,  a delay that raises questions about the level of oversight FSA is  providing. Accordingly, we will continue to monitor how FSA builds upon  and sustains these efforts over time to ensure it is providing appropriate  levels of contract oversight.
In March 2014, we also found that FSA lacked data and related  performance measures to inform its management and oversight of loan  rehabilitation. According to FSA’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.  Even though FSA was able to track the number of loans being  rehabilitated during the system transition, it had 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. To address this issue, we recommended that FSA develop  an approach for tracking loan rehabilitation performance. FSA agreed  with the recommendation and reported that it had developed reports to  track whether eligible borrowers had actually completed the loan  rehabilitation process, and a June 2015 analysis showed all loans were  being rehabilitated successfully within one week of becoming eligible.  While this is a positive step, we are awaiting additional information from  FSA regarding its methodology and the steps it has taken to ensure they  fully address rehabilitation process issues.
section_title: Conclusions
paragraphs: Education’s Office of Federal Student Aid faces challenges in the  management of the Direct Loan program that affect its ability to function  effectively as a performance-based organization. If the agency fails to  strengthen its instructions and guidance to servicers, there will continue to  be areas of inconsistent implementation, and differences between  servicers could have financial consequences that hurt borrowers or risk  the integrity of the program. Furthermore, without a robust, systematic  process for monitoring and documenting calls between borrowers and  servicers, FSA may miss opportunities to ensure program integrity and  improve services to borrowers.
section_title: Recommendations
paragraphs: To strengthen management of the Direct Loan Program and ensure good  customer service for borrowers, we recommend the Secretary of  Education direct the Office of Federal Student Aid’s Chief Operating  Officer to take the following three actions:  1.  Review its methods of providing instructions and guidance to  servicers, identifying areas to improve clarity and sufficiency, and  ensure consistent delivery of instructions and guidance to ensure  program integrity and improve service to borrowers. For example, the  Department could consider implementing a detailed, common  servicing manual for the Direct Loan program.  2.  Implement a more rigorous methodology for selecting recorded calls  between servicers and borrowers to review, including a clearer  definition of the sample servicers should select, a sample that targets  more critical and more frequent types of calls, and a verification  process to ensure integrity of the call selection process.  3.  Better document call monitoring results to allow analysis of trends  over time and facilitate the sharing of complete and consistent  information from these efforts with FSA management.
Chairman Meadows and Chairwoman Foxx, Ranking Members Connolly  and Hinojosa, this completes my prepared statement. I would be pleased  to respond to any questions that you may have at this time.
section_title: GAO Contacts and Staff Acknowledgments
paragraphs: If you or your staff have any questions about this testimony, please  contact me 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. Key contributors to this  testimony were Kris Nguyen (Assistant Director), Kristy Kennedy, Timothy  Shaw, Mark Ward, and Rebecca Woiwode. Providing legal or technical  assistance were James Bennett, Jessica Botsford, Jean McSween, and  Charlie Willson. For contributors to our report on defaulted loan  rehabilitation, see GAO-14-256.
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