The Education Department failed to hold Xerox Education Solutions, a company it had contracted to track defaulted student loans, accountable for fixing persistent problems in its student-debt-management system, the agency’s inspector general said in an audit report released on Thursday.
According to the report, the department failed to ensure that Xerox met milestones for fixing the system and routinely offered extensions when the company missed its deadlines. At the same time, the agency did not “independently verify” that fixes had been made, the report said.
Thursday’s report is the latest in a string of audits and investigations criticizing the Education Department’s oversight of the companies that service and collect on federal student loans.
The department’s debt-management system is responsible for handling the more than $94 billion in defaulted loans owed by millions of borrowers. The system was upgraded, at no cost to the government, by the department’s longtime servicer, Affiliated Computer Services, in September 2011. (Xerox acquired ACS in 2012, and changed its name to Xerox Education Solutions).
From the start, the new system was plagued with problems. Servicers couldn’t transfer some defaulted loans to the department, and the department couldn’t transfer loans that had been “rehabilitated” through on-time payments back to the servicers. Wage-garnishment orders, which direct employers to withhold up to 15 percent of a defaulter’s pay, stopped being sent out.
By December 2012, more than $1 billion in defaulted debt — close to 200,000 loans — languished with servicers, unable to be sent to the department for collection, according to a 2012 report by the inspector general.
Meanwhile, an estimated 80,000 borrowers who tried to rehabilitate their defaulted loans by making nine on-time repayments were unable to clear their credit histories, since their rehabilitated loans couldn’t be transferred to a servicer. It took the department until January 2013 to clear the backlog.
The combined problems cost taxpayers millions of dollars in unrecovered debt and left thousands of borrowers in financial limbo for months.
At the same time, the government was paying its private debt-collection agencies based on self-reported estimates of their commissions and bonuses, since the system couldn’t provide the information necessary to calculate the actual amounts due.
Last year, Kathleen S. Tighe, the inspector general, told members of Congress that the agency had yet to take many of the “corrective actions” it promised her office in 2012 and 2013, including recovering past overpayments to debt collectors. She said her office would “continue to look over FSA’s shoulder” in the coming months.
According to the latest report, the debt-management system was still not “fully functional” last summer, when the department ordered Xerox to stop working on it, and revoked the company’s contract. Efforts to improve the system continue under a new contract with Maximus Inc.
