Companies that service federal student loans have come under increased scrutiny by government agencies in recent years, but a report released on Thursday by the Department of Education’s Office of Inspector General suggests that the division of the department that oversees loan servicers has not been doing its job properly.
The inspector general’s office audited nine of the 112 invoices submitted by loan servicers to the department’s Office of Federal Student Aid from January 2009 to September 2011, plus additional materials related to the servicing contracts from June 2009 to December 2012. The invoices audited totaled more than $29-million in taxpayer funds paid to servicers.
For all nine invoices audited, the inspector general found that staff members in the Office of Federal Student Aid, known as FSA, neglected to check the volume of loans serviced as listed on the invoices against the servicers’ data.
For three of the invoices audited, FSA staff members compared the volumes to the previous month’s invoice “to determine whether the borrower volumes in the current invoice seemed reasonable,” according to the report, even though the invoices used for comparison had not been properly checked either.
Not verifying invoices led to mistakes in payment that went unnoticed by FSA. In two examples listed in the report, one servicer, Nelnet Servicing, was underpaid by $8,310, while another, Great Lakes Educational Loan Services, was overpaid by more than $459,000. Both servicers subsequently identified the errors themselves and arranged for a repayment and a refund, respectively.
The audit also found that FSA staff members did not verify that the invoices contained complete information and documentation, or confirm that related materials—such as collection-activity reports—were complete or delivered on time. For six of the invoices, auditors found no indication that FSA staff members had checked the math that led to the total payment amounts.
The report also notes that initially FSA did not include a provision in its contract with servicers to handle colleges’ challenges to their annual cohort-default rate, as determined by the Education Department. Adding the requirement to the contracts led to an additional cost to the government of $600,866 through the end of 2012. Additional changes made in contracts cost an extra $2.9-million, and 18 of those changes—costing a total of more than $1.2-million—were improperly documented.
FSA conceded a majority of the inspector general’s findings. In its written responses to the audit, it disputed the potential impact of the contract changes regarding cohort-default-rate challenges, but the agency agreed to validate all invoices paid to servicers during the audit period—more than $337-million—and to update its procedures.
In March the Consumer Financial Protection Bureau proposed a rule that would bring oversight of loan servicers under that agency. Adoption of the rule is still pending.
