Federal Student Loans: Better Oversight Could Improve Defaulted Loan Rehabilitation
Released: 2014-03-12T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: As of fiscal year 2013 about $94 billion—over 11 percent of federal student loan volume in repayment—was in default, which generally occurs when a borrower fails to make a payment for more than 270 days. Loan rehabilitation was established as an option to help Education collect defaulted student loans, and borrowers address the adverse consequences of default, such as repairing damaged credit. GAO was asked to review Education's loan rehabilitation process. This report examines how: (1) Education assists borrowers in rehabilitating defaulted student loans; (2) the upgrade of its defaulted loan information system affected loan rehabilitation; and (3) Education oversees private collection agencies in implementing loan rehabilitation.

GAO reviewed Education's policies, procedures and guidance; contracts and monitoring records for the defaulted loan information system contractor and 22 collection agencies; collections and rehabilitation data; and relevant federal laws and regulations. GAO interviewed Education officials, representatives of borrower advocacy groups, and visited 6 selected collection agencies, based on their loan volume and geographic location.

section_title: What GAO Found
paragraphs: The Department of Education (Education) relies on collection agencies to assist borrowers in rehabilitating defaulted student loans, which allows borrowers who make nine on-time monthly payments within 10 months to have the default removed from their credit reports. Education works with 22 collection agencies to locate borrowers and explain repayment options, including rehabilitation. From fiscal years 2011 to 2013, Education collected about $9 billion on over 1.5 million loans through rehabilitation, most of which was recovered by collection agencies.

For more than a year after the October 2011 upgrade of its defaulted loan information system, Education was unable to provide most borrowers who completed rehabilitation with timely benefits, such as removing defaults from their credit reports. GAO found the delays largely attributable to gaps in Education's oversight of its system contractor. For example, despite concerns about the contractor's unreliable performance on previous system development efforts, Education conducted limited oversight until the contractor began missing deadlines. In addition, system testing was not sufficient for Education to detect key problems prior to the upgrade. As a result, no rehabilitations were processed until April 2012, and officials said they needed until January 2013 to clear the resulting backlog. During this time period, Education reported rehabilitating loans for about 200,000 borrowers, but it has not developed performance data to assess the number or extent of individual borrower delays. Further, Education has acknowledged that the system still requires workarounds and a substantial amount of development work will need to be completed under a new contract, which was awarded in September 2013, to address remaining system issues.

Education has developed tools for overseeing collection agencies, but key weaknesses reduce its ability to effectively monitor their performance. Specifically, to ensure collection agencies provide borrowers with accurate information, Education monitors their interactions with borrowers through quarterly reviews of loan rehabilitation phone calls. However, GAO found that Education has not consistently completed such call reviews. While Education provides the results of its reviews to each collection agency, it does not ensure corrective actions are taken and does not systematically analyze results over time or across collection agencies to inform its oversight activities. As a result, it may be difficult for Education to ensure that borrowers receive accurate information regarding loan rehabilitation.

section_title: What GAO Recommends
paragraphs: GAO recommends that Education take steps to track loan rehabilitation performance data and improve oversight of its system contractor and collection agencies. Education agreed with GAO's recommendations.

section_title: Letter
paragraphs: To help students and their families pay for college, the Department of  Education (Education) provides billions of dollars in federal student loans  each year through programs authorized under Title IV of the Higher  Education Act (HEA) of 1965, as amended. However, as of September  2013, about one out of seven student loan borrowers had defaulted on  their loan within 3 years of beginning repayment, and approximately $94  billion of over $814 billion in outstanding federal student loans in  repayment was in default. Education has acknowledged that as its  student loan portfolio grows, more borrowers are expected to default,  increasing the financial risk to the federal government. Borrowers who  default on student loans face serious consequences, including damaged  credit ratings and difficulty obtaining affordable credit in the future.  However, one way borrowers can get their loans out of default is through  loan rehabilitation, a repayment option in which borrowers who make nine  on-time monthly payments within 10 months have the default removed  from their credit reports. 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 rehabilitate loans. In addition,  because Education relies on information in the system to manage the  work of collection agencies, questions have been raised about the impact  of the system upgrade on its ability to oversee debt collection activities. In  light of these questions, you asked us to examine Education’s  rehabilitation of defaulted student loans. This report examines: (1) how  Education assists borrowers in rehabilitating defaulted student loans; (2)  how the upgrade of Education’s defaulted loan information system  affected loan rehabilitation; and (3) how Education oversees collection  agencies in implementing loan rehabilitation.

In conducting this work, we focused our review on loans included in  Education’s defaulted loan information system. We reviewed the  contract, contract modifications, and monitoring records for Education’s  system contractor. We also reviewed contract documentation applicable  to all 22 collection agencies. We reviewed relevant federal laws and  regulations to gain an understanding of requirements related to loan  default and rehabilitation and debt collection as well as Education’s  policies, procedures, and guidance related to defaulted student loans. We  interviewed officials from Education, its defaulted student loan system  contractor, and borrower advocacy and consumer protection groups.  During these interviews we examined issues related to Education’s  system upgrade, debt collection process, contractor management and  oversight, and communication with borrowers. We also reviewed  Education’s collections and rehabilitation data, from fiscal year 2011  through 2013, to gain a better understanding of rehabilitation before and  after the system upgrade. We assessed the reliability of these data by (1)  performing electronic testing of required data elements, (2) reviewing  existing information about the data and the system that produced them,  and (3) interviewing agency officials knowledgeable about the data. We  determined that the data were sufficiently reliable for the purpose of this  report. Finally, we conducted site visits to a nongeneralizable sample of  six collection agencies, selected based on factors such as loan volume  and geographic location, and reviewed Education’s monitoring records for  them.

We conducted this performance audit from August 2012 to March 2014 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
subsections: section_title: Student Loan Default Resolution, Including Loan Rehabilitation
paragraphs: Once a student loan goes into default the entire unpaid balance of the  loan plus accrued interest becomes due. The federal government has  several voluntary and involuntary methods for collecting on defaulted  loans (see table 1).

Borrowers who are unable to repay defaulted loans in full may be able to  negotiate a lower amount as a part of a compromise agreement with the  department. Education also provides borrowers with options to resolve  their defaulted loans through loan consolidation or loan rehabilitation by  making a series of voluntary on-time monthly payments. For example,  borrowers who make at least three on-time monthly payments can pay off  defaulted loans by consolidating one or more loans into a single loan with  a fixed interest rate. Borrowers who make nine on-time monthly  payments within 10 months may be eligible for loan rehabilitation, which  entitles them to have the default removed from their credit report.  However, borrowers may rehabilitate a loan only once. The loan  rehabilitation process is shown in figure 1.

Education has additional tools to collect on defaulted loans when  borrowers do not make voluntary repayment arrangements. For example,  the Treasury Offset Program allows the federal government to collect on  defaulted student loans by withholding money from certain federal or  state payments to borrowers, including federal or state income tax  refunds and Social Security benefits. Through wage garnishment,  Education is generally able to collect up to 15 percent of a borrower’s  disposable pay and apply those funds toward the defaulted loan. Before  using wage garnishment, Education must notify the borrower and provide  him or her with the opportunity to have a hearing to object to the  garnishment by showing, for example, that it would cause a financial  hardship. Payments made through involuntary collections do not count  toward payments borrowers must make to rehabilitate their loans. Also,  there is no limit on how long the government can attempt to collect on  defaulted student loans and, unlike other types of consumer debt, student  loans cannot be eliminated during bankruptcy proceedings unless the  court finds that repayment would constitute an undue hardship on the  borrower and the borrower’s dependents.

section_title: Education’s Common Services for Borrowers Contract
paragraphs: In 2003, Education entered into a 5-year, performance-based contract  known as Common Services for Borrowers (CSB) to improve the  management of student loans following disbursement, including loan  servicing, which includes tracking loans and accepting payments from  borrowers. The CSB contractor was the sole loan servicer for the  department’s Direct Loan program and was also expected to modernize  and integrate four separate information systems for loan servicing,  consolidation, disability discharge requests, and debt collection. The  base contract had an estimated cost of over $1 billion and allowed the  government to extend the contract up to 5 more years, increasing the  potential cost to about $2 billion.

After the CSB contract was awarded in 2003, we reported that Education  had not yet fully determined how the department would integrate the four  information systems. In response, Education officials said they would  rely on the contractor to develop these solutions. However, the  department’s CSB contractor experienced significant software  development delays and did not identify and resolve problems in a timely  manner. As a result, in fiscal year 2005 the department issued a cure  notice, which 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.  Subsequently, the department canceled the systems integration effort in  May 2007 through a contract modification and the remaining contract  work focused on loan servicing and maintenance and operation of the  separate systems.

The CSB contractor was the department’s sole loan servicer until 2009,  when Education entered into contracts with four additional servicers to  handle increased loan volume following passage of the Ensuring  Continued Access to Student Loans Act of 2008. Education began  allocating Direct Loans to the additional servicers in 2010 following  passage of the SAFRA Act, which terminated the authority to make or  insure new FFEL loans after June 30, 2010. In addition, the SAFRA Act  required Education to award contracts to eligible not-for-profit servicers to  assist the department with servicing the increased number of Direct  Loans.

section_title: Education Relies on Collection Agencies to Assist Borrowers in Rehabilitating Defaulted Student Loans
paragraphs: Education provides information about loan rehabilitation and relies on  collection agencies to assist borrowers in rehabilitating defaulted student  loans. Education provides general information about loan rehabilitation on  its website, through its call center, and in written notices it sends to  borrowers when they default (see figure 2).

Borrowers who contact Education and make repayment arrangements  within 65 days of being notified of a default can rehabilitate their loans  without being turned over to a collection agency and incurring collection  costs. Education contracts with 22 collection agencies to locate and  explain repayment options to borrowers who do not make such  repayment arrangements. Collection agency representatives we  interviewed told us they use information from Education (e.g., home and  work phone numbers, mailing address) and proprietary databases to  locate borrowers. However, they said it can be difficult to contact  defaulted borrowers, because their contact information on file with  Education may be out-of-date or they may not answer the collection  agency’s phone calls. Education has taken steps to establish a data  matching agreement with the Internal Revenue Service to obtain mailing  addresses on borrowers with defaulted loans, and officials said they plan  to implement the agreement after making system changes. Education  officials also said they plan to use that agreement as the basis for  reestablishing an agreement with the Department of Health and Human  Services to obtain employer address and borrower salary information  through the National Directory of New Hires.

When collection agencies make contact with borrowers—usually by  phone—they discuss options for addressing default, including loan  rehabilitation. For example, representatives of five collection agencies we  interviewed said that, in speaking to such borrowers, they emphasize that  rehabilitating a defaulted student loan also removes the default from the  borrower’s credit report, a key benefit to the borrower. Officials from two  borrower advocacy associations agreed that removing the default is  indeed a key benefit of rehabilitation, but it may not be as advantageous  as some believe since the borrower’s history of missed payments remains  on the credit report. Collection agency representatives said they also  explain that a loan can only be rehabilitated once. The representatives  also said that borrowers they make contact with are generally receptive to  learning about loan rehabilitation, particularly once they understand there  are affordable payment options.

In July 2012, Education developed additional guidelines to better ensure  borrowers could rehabilitate their loans based on reasonable and  affordable monthly payments. While a standard monthly payment would  be about one percent of the loan balance, Education’s guidelines allow  certain borrowers to qualify for lower monthly payments. Depending on  their income and family size, borrowers’ monthly payments may be as low  as $5. In March 2013, Education also modified its contracts with collection  agencies to help ensure that they offer borrowers reasonable and  affordable payments. Previously, collection agencies earned a $150  administrative fee for lower payments. Representatives of a borrower  advocacy group we interviewed expressed concern that this practice  created an incentive for collection agencies to tell borrowers they had to  pay more than was actually required. Education now pays collection  agencies a flat commission for rehabilitated loans based on the type of  loan regardless of payment size. Education also lowered the commission  rates for rehabilitated loans from 12.5 to 11.75 percent for Direct Loans  and 15 percent to 13.25 percent for FFEL and other types of loans.  Education officials said the department lowered the commission rates  after observing a substantial increase in loan rehabilitation enrollment  following the introduction of the guidelines, explaining that if it is easier for  collection agencies to enroll borrowers they may incur lower costs.

From fiscal year 2011 through 2013, loan rehabilitation accounted for  more than half of the $15.6 billion Education collected on defaulted  loans—more than all other repayment options combined. With regard to  loan rehabilitation collections, collection agencies recovered 97 percent of  $9 billion collected on over 1.5 million defaulted loans, and collections in  fiscal year 2013 represented more than half of all rehabilitation collections  during the 3-year period (see figure 3).

section_title: Limited Planning and Oversight of Education’s Defaulted Loan Information System Upgrade Adversely Affected Loan Rehabilitation
subsections: section_title: Education’s Limited Planning and Oversight Did Not Address Risks of System Upgrade
paragraphs: As a result of limited planning and oversight, Education was unable to  provide most borrowers who completed loan rehabilitation with timely  benefits, such as removing defaults from their credit reports, for more  than a year following the October 2011 upgrade of its defaulted loan  information system. Education reported that the 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 increased loan volume the department was  responsible for servicing. Education began exploring options for  upgrading the system in 2009, and selected six firms to participate in the  second phase of a two-phase request for proposals in December 2009.  The original CSB contractor, which was among the firms selected to  submit a proposal, subsequently offered to upgrade the system at no  additional cost to the government. The offer stipulated that Education  would guarantee the contractor a minimum of 5 million non-defaulted  borrowers to service through the end of the CSB contract. Despite  previous concerns about the contractor’s performance related to systems  development work, Education accepted the offer. Education officials  explained 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 through an existing contract, and the contractor’s  willingness to perform the work at no additional cost to the government. In  June 2010, Education modified the original system contract to include the  upgrade and canceled the request for proposals. Figure 4 presents a  timeline of key milestones related to the system upgrade discussed in this  report.

In moving forward with the upgrade, Education did not have plans for  monitoring the contract to ensure successful completion of the work and  increased its oversight only after the contractor began missing deadlines  for developing the system. Education’s Departmental Directive: Contract  Monitoring for Program Officials identifies several risk factors that indicate  greater contract oversight may be needed, and we found three of seven  risk factors were applicable to the system upgrade (see table 2).

Two of the three risks were associated with the selection of the CSB  contractor to perform the system upgrade. For example, the contractor  had an unreliable performance history on the contract. From 2004 to  2006, Education documented concerns regarding the contractor’s ability  to identify and resolve software development issues. After issuing a cure  notice in 2005 requiring the contractor to complete certain steps or risk  defaulting on the contract, Education modified the contract in 2007 to  remove the systems development work. In addition, the contractor was  acquired by another company that had no prior experience working with  Education in February 2010, a few months before the contract was  modified. Also, the contractor reported that it relied on nine sub- contractors to provide a range of services for the upgrade, including  project management, database administration, and system development.

The degree to which the system was interrelated with other contracts  presented a third risk that would have supported greater monitoring.  Specifically, Education’s loan servicers are contractually required to  transfer defaulted loans that are 360 days past due to the system.  Education officials said they expected additional loan servicers would be  needed to handle the increased volume of Direct Loans following the  termination of the authority to make or insure new FFEL loans after June  30, 2010. Education instructed the new not-for-profit loan servicers that  were expected to begin servicing loans in October 2011 to ensure their  systems were compatible with the specifications for the upgraded  defaulted loan information system. In addition, Education relies on the  system to support its contracts with 22 collection agencies. Specifically,  information in the defaulted student loan information system is critical for  managing collection activities, including compensating collection agencies  and assessing their performance.

Despite these risks, Education officials said they did not create a formal  monitoring plan for the system upgrade. While Education had a  monitoring plan in place for the 2003 CSB contract, officials  acknowledged that it was not relevant for overseeing the upgrade work.  Education updated its contract monitoring plan in 2011, about a year after  the upgrade work began and performance problems, such as missed  deadlines, had occurred. For example, the system development work the  contractor was scheduled to complete in December 2010 was not finished  until February 2011, and the system was launched 3 months later than  scheduled. Education reported increasing its oversight during this time  period, for example, by getting more frequent updates from the  contractor.

However, we found limited evidence of oversight in our review of contract  documentation related to the upgrade. Federal regulations require the  government to conduct quality assurance activities, such as monitoring, to  ensure that the services received conform to contract requirements.  Education’s Directive also outlines contract monitoring activities, such as  reviewing or inspecting deliverables, reviewing invoices, and placing  telephone calls, among other things. This guidance also notes that  Education officials must document any instances where the official learns  the contractor is failing to perform as required or make sufficient progress.

Education officials said they initially monitored the upgrade by tracking  the contractor’s progress in meeting deadlines. However, they said they  shifted their focus to reviewing the quality and timeliness of deliverables  after the contractor expressed concern that progress reporting, among  other things, affected its ability to focus on the required work. Education  officials also acknowledged that they did not document many of these  monitoring activities.

In 2011, we reported that Education had not developed and implemented  detailed procedures essential to ensuring that its contract monitoring  policy directives are effectively carried out, including documenting  contract monitoring activity. Based on our recommendation, Education  issued a new policy in June 2011 that outlined how contract monitoring  activities and results should be documented, retained, and shared. In our  review of contract files related to the system upgrade, which included files  from May 2007 through December 2012, we found emails in which  Education officials questioned the contractor’s justifications for specific  tasks in their proposals; however, we did not find documentation of status  reports, deliverables received, or plans for addressing upgrade-related  problems as required by Education’s Directive and June 2011 policy.

section_title: System Testing Was Insufficient to Detect Loan Rehabilitation Problems
paragraphs: Education began pilot testing the upgraded information system with  several thousand borrower accounts in February 2011 to ensure the  system worked correctly. According to officials, Education did not expect  to test every function through its full lifecycle before going live, but instead  focused on testing key functions with a limited number of new borrower  accounts to reduce the potential for account duplication between the new  and old systems. While the system was tested to ensure that monthly  billing was correctly established for borrower accounts entering  rehabilitation, its ability to identify and process loans that were eligible for  rehabilitation was not tested. Officials reported that using accounts for  new defaulted borrowers and conducting testing in a 7-month time frame  did not allow loan rehabilitation to be fully tested because a borrower  would need to make nine on-time payments in 10 months before the loan  could be rehabilitated. While some system issues were found during the  pilot tests, Education officials reported that key functions, such as loan  rehabilitation, were working sufficiently to justify proceeding with the  launch to ensure the system was ready by October 2011. Officials said  the timing was intended to coincide with the department’s conversion to a  new loan servicing system for non-defaulted borrowers and  implementation of contracts with the not-for-profit servicers.

Education realized shortly after the launch that two key functions  necessary for loan rehabilitation were not working as intended. The  system was not accepting transfers of defaulted loans from Education’s  loan servicers, which delayed the start of collection activities, including  rehabilitation. In December 2012, Education’s Office of Inspector General  reported that servicers accumulated more than $1.1 billion in loans that  should have been transferred to Education for management and  collection. Also, while Education continued collecting on defaulted loans  that were already in the system, loans were not being rehabilitated  because the system did not recognize when borrowers had satisfied the  requirements.

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. Education processed about 20,000 to 30,000 loan rehabilitations  a month in fiscal year 2011, prior to the upgrade (see fig. 5). While  Education was not able to track loan rehabilitations by borrower prior to  the upgrade, officials estimated that approximately 80,000 borrowers  were affected during the time the system was not processing  rehabilitations.

While Education worked with its CSB contractor to identify and correct the  problems, it also took steps to assist borrowers. Although Education could  not process rehabilitated loans through the system, it 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 in order to receive the assistance. Education officials said they  provided such benefits to about 7,600 borrowers beginning in November  2011, but the rehabilitations were not processed through the system until  April 2012 or later. Moreover, Education officials acknowledged they did  not systematically track when this assistance was provided.

Education took some steps to hold the contractor accountable for the  system problems. In September 2011, Education began assessing the  contractor financial penalties due to implementation delays, as specified  in the contract modification for the upgrade. 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,  operating the defaulted loan information system and providing Education  with access to its data centers. 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. Education officials reported that the cure notice  resulted in increased contractor efforts, such as the contractor providing  weekly status updates on the most critical upgrade issues at meetings  between senior contractor and department officials. As of November  2013, Education reported that it has withheld approximately $14 million  from total payments to the contractor for other services rendered under  the contract. Education also planned to continue withholding $125,000  per month until the contractor made the agreed-upon system  enhancements and upgrades.

section_title: Education Has Made Progress Addressing Problems since System Upgrade, but Lacks Data to Measure Its Performance
paragraphs: 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 began manually processing loan rehabilitations. This  required collection agencies to identify and provide the department with  information on borrowers eligible for rehabilitation, which Education staff  then verified before recording the rehabilitation in the system. According  to officials, the system was processing 90 percent of all eligible borrowers  for rehabilitation by October 2012, with the remaining 10 percent being  processed through a workaround that required some manual processing.  Education officials reported that they used manual processing until the  workaround was automated in September 2013. They acknowledged that  a substantial amount of development work needs to be completed to  address the remaining issues; work they expect to be completed under  the new contract. For example, officials reported that the new system  contractor will need to complete development work to ensure that the  system identifies all rehabilitation-eligible borrowers. While Education  awarded a new contract in September 2013, a bid protest challenging the  contract award was filed with GAO in November 2013. At the time of our  review, the new contract award had not been finalized, and Education did  not have timelines for when work might begin or a final contract  monitoring plan in place that we could review. To help manage the  transition of the system to the new contractor, Education extended the  CSB contract through June 2014 through a contract modification.

While Education has made progress in developing data on the number of  borrowers it has assisted with loan rehabilitation since the upgrade, it  lacks data that would inform its performance with respect to its strategic  goals for providing superior service and information to borrowers and  safeguarding taxpayer interests. 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. For instance,  while Education reported rehabilitating about 600,000 loans for 200,000  borrowers from April 2012 to January 2013, it does not have other data to  track its loan rehabilitation performance, such as the number of borrowers  that experience delays in having their loans rehabilitated or the length of  delays. Similarly, Education does not have data on the extent to which  borrowers who rehabilitate their loans stay out of default. Without these  data and related performance measures, Education cannot assess its  performance in serving borrowers using loan rehabilitation or how  effective rehabilitation is in minimizing the risk defaulted loans present to  the federal government.

section_title: Oversight Weaknesses Reduce Education’s Ability to Effectively Monitor Collection Agency Performance
paragraphs: Education has developed several mechanisms for overseeing collection  agencies, but key weaknesses reduce its ability to effectively monitor their  performance related to loan rehabilitation and other collection activities.  Education tracks the overall performance of collection agencies using  data that measures loan rehabilitations as well as other collection  activities. Specifically, Education calculates a performance score for  each agency based on the total dollars collected, the number of accounts  serviced, and the number of accounts that are resolved through other  means such as administrative resolutions. The department uses these  data to determine how efficiently collection agencies manage the  borrower accounts they are allocated and to allocate more accounts to  higher-performing collection agencies. However, Education has  experienced delays in assessing collection agencies’ performance  because quarterly data on the number of accounts managed by each  collection agency have been unavailable since the defaulted loan  information system was upgraded in October 2011. As a result, Education  has not been able to measure collection agency performance on a  quarterly basis as contractually required. In addition, there have been  implications for Education’s ability to accurately determine collection  agency compensation. In May 2013, Education’s Office of the Inspector  General issued an Alert Memorandum raising concerns that Education  paid commissions and bonuses to collection agencies based on  estimated data. In the absence of quarterly data, Education established  a temporary workaround and modified collection agency contracts in June  2013 to retroactively assess collection agencies’ fiscal year 2012  performance based on the cumulative number of accounts assigned to  each collection agency throughout the year. As of November 2013,  Education officials reported plans to retroactively assess collection  agencies’ fiscal year 2013 quarterly performance after completing and  validating system repairs in April 2014.

Beyond tracking quantitative measures of performance, Education also  monitors the quality of collection agency interactions with borrowers by  reviewing borrower complaints against collection agencies. When  collection agencies receive a verbal or written complaint from borrowers  they are required to suspend collection activity on the account and  forward a copy of the complaint and their response to Education for  review. However, Education’s Office of Inspector General issued an Alert  Memorandum in May 2013 after finding that three collection agencies it  visited were not reporting verbal complaints to the department as  contractually required. Education subsequently addressed the Inspector  General’s recommendations to develop a quality assurance program to  verify that it is receiving all verbal complaints and begin enforcing contract  requirements related to verbal complaints.

While Education also monitors collection agencies’ interactions with  borrowers by reviewing their phone conversations with borrowers, its  approach to conducting these reviews limits its ability to determine if  collection agencies are providing borrowers with accurate information  about loan rehabilitation. For example, Education has not conducted  quarterly reviews of each collection agency as stated in its guidance and  procedures since it began reviewing loan rehabilitation calls in 2011.  Specifically, we examined call review reports issued between September  2011 and March 2013 for the six collection agencies we visited. Although  Education officials told us that quarterly reviews should have been  conducted during this period, they were unable to provide documentation  for 11 of the 42 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. In addition, we found  Education’s guidance for conducting rehabilitation call reviews was limited  in that it did not specify key information, such as how calls should be  selected or the number of calls that should be reviewed. In contrast,  Education’s guidance for reviewing all other collection agency  conversations with borrowers says that staff should randomly select an  initial sample of 40 calls per agency and review 30 of those calls.  Education staff we interviewed did not use a consistent approach for  selecting calls for the initial sample, and not all were using random  sampling techniques. In addition, staff varied in the number of calls they  reviewed, from as few as 10 to as many as 30. After we discussed these  issues with the department in November 2013, Education revised its  guidance to specify that staff should typically review 20 calls from an  initial sample of at least 40 calls randomly selected from a list of all calls  made by each collection agency on one day in the prior quarter.

We also found that Education is not making full use of the results of call  reviews to inform its oversight. The 31 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 or use the information to assess collection agencies’  performance. Education officials reported that the department monitors  collection agencies to ensure corrective actions are taken. However,  Education’s call review guidance does not include procedures for such  monitoring, and Education staff we interviewed told us they rely on  collection agencies to address problems identified during the call review  process. Education officials reported that its process for assessing  collection agency performance relies on objective metrics, such as the  amount of collections and the number of borrowers reached. Officials said  that while the current collection agency contracts were established with  the main goal of maximizing collections for the government, they expect  new contracts to be awarded in 2014 to include additional language about  call monitoring and actions the department can take against a collection  agency if problems are identified in the call review process. Education  officials told us they have examined call review results for selected  agencies to determine the types of errors agencies are making, although  they acknowledged that they have not done so systematically for all  collection agencies. Without a systematic approach to monitoring the  results of call reviews, Education may be missing opportunities to target  its oversight and improve program performance by identifying  performance issues across collection agencies or over time.

section_title: Conclusions
paragraphs: Education collects more funds on defaulted loans through loan  rehabilitation than any other collection method, making rehabilitation an  important tool for helping borrowers get out of default and reducing the  financial risk to the federal government. Given the challenges Education  has in reaching borrowers who have defaulted on their loans and the one- time opportunity rehabilitation presents, it is important to ensure that  borrowers seeking to rehabilitate their loans have a seamless experience  throughout the process. As Education worked with its contractor to  address problems following the upgrade of its defaulted loan information  system, it monitored overall loan rehabilitation levels and took steps to  process the backlog of loans eligible for rehabilitation. However, absent  accurate data regarding the timeliness of loan rehabilitation and the  number of borrowers affected by rehabilitation delays it will be difficult for  Education to assess its progress in addressing system challenges related  to loan rehabilitation.

Education relies substantially on contractors and collection agencies to  provide key functions in support of the management and collection of  defaulted loans, including loan rehabilitation. To ensure that Education is  addressing its strategic goals for providing the highest levels of customer  service to borrowers and safeguarding taxpayer interests, it is critical for  Education to effectively oversee contract performance. The substantial  delays that many borrowers experienced getting their loans out of default  after satisfying the requirements for rehabilitation are largely attributable  to Education not providing oversight appropriate for the risks associated  with the system upgrade. 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. Moreover, as Education is  transitioning the defaulted loan information system to a new contractor,  the ongoing system challenges the new contractor will be expected to  resolve provide a compelling case for Education to take steps to  strengthen its oversight. Education’s oversight is also important to  ensuring that collection agencies provide accurate information to  borrowers. However, the results of Education’s reviews of selected  recorded phone calls between collection agencies and borrowers provide  little such assurance, given the number of incomplete call reviews and the  limited use of the information.

section_title: Recommendations
paragraphs: To strengthen Education’s oversight of the loan rehabilitation process, we  recommend the Secretary of Education direct the Office of Federal  Student Aid’s Chief Operating Officer to take the following three actions:  1.  develop an approach for tracking loan rehabilitation performance. This  approach could include options for developing data and related  performance measures for tracking timely rehabilitation of loans;  2.  take steps to ensure that the final monitoring plan for the new  defaulted loan information system contract identifies risks presented  by the contractor or contract work and the oversight activities planned  to address those risks; and  3.  take steps to improve its collection agency call review process. For  example, Education could take steps to ensure that quarterly  rehabilitation call reviews are completed, establish procedures for  monitoring collection agency corrective actions, and utilize call review  results to inform its oversight of collection agencies activities.

section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft copy of this report to Education for review and  comment. In written comments, Education agreed with our  recommendations, stating that it shares the concerns raised in the report  and recognizes its key role in ensuring borrowers receive high-quality  service and serving as an effective steward in managing the student loan  portfolio. Education stated that it has already taken some actions in  response to the recommendations and has plans in place to further  improve its oversight of the loan rehabilitation process. For example,  Education reported it has begun developing additional metrics for  overseeing loan rehabilitation performance, including information on the  extent to which borrowers with rehabilitated loans default again and  statistics to help it more quickly identify and resolve rehabilitation process  issues. To strengthen its oversight of the defaulted loan information  system, Education stated that it has established a contract monitoring  plan that tracks key risk areas and identifies risk mitigation strategies, and  is implementing new project management tools to enhance its monitoring.  Finally, Education highlighted steps it has taken to strengthen its  oversight of the collection agency call review process, including revising  its procedures to improve documentation of corrective actions taken by  collection agencies and developing a database to track collection agency  errors and associated corrective actions. While these are positive steps,   given their preliminary nature, 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. Education’s written comments appear in  appendix I. Education also provided technical comments which we  incorporated into the report as appropriate.

As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Secretary of  Education, relevant congressional committees, and other interested  parties. In addition, this report will be available at no charge on GAO’s  Web site at http://www.gao.gov.

If you or your staff have any questions about this report, 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 report. GAO staff who made key contributions to this  report are listed in appendix II.

section_title: Appendix I: Comments from the Department of Education

section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, individuals making key  contributions to this report were Debra Prescott, Assistant Director; Kurt  Burgeson; Maria Gaona; and Jason Palmer. In addition, key support was  provided by James Bennett, Deborah Bland, Jessica Botsford, Jason  Bromberg, Timothy DiNapoli, Holly Dye, Hedieh Fusfield, Kristine  Hassinger, Anne McDonough-Hughes, Melissa Jaynes, Lara Laufer,  Charlene Lindsay, Jean McSween, Christie Motley, Kathryn O’Dea  Lamas, Dae Park, David Perkins, Kenneth Rupar, Linda Sanders, Sylvia  Schatz, Brian Schwartz, and Charles Youman.


Question-summary annotations: questions: question: What is the relationship between Education and collection agencies?
answer: The Department of Education (Education) relies on collection agencies to assist borrowers in rehabilitating defaulted student loans, which allows borrowers who make nine on-time monthly payments within 10 months to have the default removed from their credit reports.
child_questions: question: How does Education work with collection agencies?
answer: Education works with 22 collection agencies to locate borrowers and explain repayment options, including rehabilitation.

question: What did Education collect through rehabilitation?
answer: From fiscal years 2011 to 2013, Education collected about $9 billion on over 1.5 million loans through rehabilitation, most of which was recovered by collection agencies.

questions: question: What was the impact of the upgrade of Education's defaulted loan information system?
answer: For more than a year after the October 2011 upgrade of its defaulted loan information system, Education was unable to provide most borrowers who completed rehabilitation with timely benefits, such as removing defaults from their credit reports.
child_questions: question: What was the reason for the delays?
answer: GAO found the delays largely attributable to gaps in Education's oversight of its system contractor. For example, despite concerns about the contractor's unreliable performance on previous system development efforts, Education conducted limited oversight until the contractor began missing deadlines.

question: What characterized Education's system testing during this time?
answer: In addition, system testing was not sufficient for Education to detect key problems prior to the upgrade. As a result, no rehabilitations were processed until April 2012, and officials said they needed until January 2013 to clear the resulting backlog.

question: To what extent has Education tracked its rehabilitation loans?
answer: During this time period, Education reported rehabilitating loans for about 200,000 borrowers, but it has not developed performance data to assess the number or extent of individual borrower delays.

question: What problems has Education acknowledged regarding its system?
answer: Further, Education has acknowledged that the system still requires workarounds and a substantial amount of development work will need to be completed under a new contract, which was awarded in September 2013, to address remaining system issues.

questions: question: In what ways does Education oversee collection agencies?
answer: Education has developed tools for overseeing collection agencies, but key weaknesses reduce its ability to effectively monitor their performance.
child_questions: question: How does Education monitor collection agencies' interactions with borrowers?
answer: Specifically, to ensure collection agencies provide borrowers with accurate information, Education monitors their interactions with borrowers through quarterly reviews of loan rehabilitation phone calls.
child_questions: question: What did GAO find regarding call reviews?
answer: However, GAO found that Education has not consistently completed such call reviews.

question: What did GAO find regarding the collection agency reviews?
answer: While Education provides the results of its reviews to each collection agency, it does not ensure corrective actions are taken and does not systematically analyze results over time or across collection agencies to inform its oversight activities.

question: What are the implications of these shortcomings?
answer: As a result, it may be difficult for Education to ensure that borrowers receive accurate information regarding loan rehabilitation.

questions: question: To what extent are loan defaults a problem for federal student loans?
answer: As of fiscal year 2013 about $94 billion—over 11 percent of federal student loan volume in repayment—was in default, which generally occurs when a borrower fails to make a payment for more than 270 days.
child_questions: question: How is Education addressing this problem?
answer: Loan rehabilitation was established as an option to help Education collect defaulted student loans, and borrowers address the adverse consequences of default, such as repairing damaged credit.

question: What was GAO asked to review?
answer: GAO was asked to review Education's loan rehabilitation process.
child_questions: question: What does this report examine?
answer: This report examines how: (1) Education assists borrowers in rehabilitating defaulted student loans; (2) the upgrade of its defaulted loan information system affected loan rehabilitation; and (3) Education oversees private collection agencies in implementing loan rehabilitation.