Key Weaknesses Limit Education’s Management of Federal Student Loan Servicers

By Rachel Fenton

The U.S. Government Accountability Office (GAO) recently conducted a study of the U.S. Department of Education’s Office of Federal Student Aid’s oversight of its contracted loan servicers.  GAO found that the Office of Federal Student Aid (FSA) did not provide clear and consistent instructions to its loan servicers, lacked a sound methodology for monitoring phone calls between servicers and borrowers and did not properly document its call monitoring.

GAO’s findings are of particular concern given the essential role federal students loans have in providing access to postsecondary education for millions of students.  In fiscal year 2014, the Department of Education issued more than $99 billion in federal student loans to 9.4 million borrowers.  The FSA administers the federal student loan programs, including the Direct Loan program, and oversees contracted loan servicers who communicate with borrowers about the status of their loans, counsel borrowers on selecting repayment plans and process borrowers’ payments.

Among the study’s key findings:

  • Six out of seven loan servicers interviewed by GAO said that FSA provided unclear and inconsistent guidance, resulting in borrowers having varying experiences with the Direct Loan program. For example, the servicers reported that:
    • FSA did not provide clear guidance on the proof-of-income documentation borrowers must submit under the income-driven repayment plans (i.e. whether retirement benefits count as income). This could result in similar borrowers potentially having different monthly payment amounts or preventing some borrowers from qualifying.
    • It was unclear how they should handle credit reporting for borrowers facing unique circumstances, resulting in some servicers removing bad credit reports for some but not others.
    • FSA did not provide instructions on how to apply over- or underpayments to a borrower’s balance, potentially causing some borrowers to have their overpayments spread across all loans while other borrowers had their overpayments applied to loans with the highest interest rate.
  • Loan servicers suggested that FSA create a “common manual” for Direct Loan servicers, similar to one that exists for the Federal Family Education Loan (FFEL) program, to clarify student loan requirements and improve consistency in servicing borrowers.
  • FSA lacked a standard methodology for reviewing phone calls between servicers and borrowers. For example, FSA began call monitoring in 2004, but only monitored incoming calls, which are calls that servicers receive from borrowers, and not, until recently, outgoing calls, which servicers say are more prevalent than incoming calls and are the primary method for contacting borrowers in delinquency and approaching default.
    • FSA allowed servicers to select recorded calls for its review and did not have a rigorous methodology for a consistent approach among servicers.
  • FSA failed to document the results of its call monitoring from 2004 to 2014. Instead, they relied on verbally sharing results with individual servicers.  Since June 2015, FSA has provided written feedback to servicers, but the summaries have lacked key information and do not reflect issues that occur in calls with three or fewer errors.
  • GAO also revisited FSA’s oversight of loan rehabilitation, per GAO’s March 2014 report. A June 2015 analysis found that all loans were being rehabilitated within one week of eligibility, a positive step, which means that borrowers’ defaults are being removed from their credit reports in a timely manner.


The study concludes that the difficulties FSA has in managing the Direct Loan program could have financial consequences for borrowers.  GAO recommends that the Secretary of Education direct the Chief Operating Officer of FSA to take three actions: (1) Review the guidance provided to loan servicers; (2) Implement a more rigorous methodology for reviewing recorded phone calls; and (3) Better document phone call monitoring results.