Featured Reports

Improving the U.S. Department of Education’s Direct Loan Servicing

30 June 2016 In Featured Reports

Improving the U.S. Department of Education’s Direct Loan Servicing

 

By Rachel Fenton

The U.S. Government Accountability Office (GAO) recently released a study looking at customer service and oversight issues with the U.S. Department of Education’s Direct Loan program.  The U.S. Department of Education (ED) relies upon 10 contractors— student loan servicers— to facilitate repayment of more than 30 million borrowers’ Direct Loans.  Loan servicers are the primary point of contact between borrowers and the federal government once a student borrower leaves school.

In conducting the study, GAO interviewed a non-generalizable sample of 24 borrowers and reviewed ED’s summaries of customer satisfaction surveys of borrowers from 2014 and 2015.  GAO also conducted interviews with all four Title IV Additional Servicers (TIVAS) and the three largest (of the six total) not-for-profit (NFP) Direct Loan servicers, which combined service 95 percent of borrowers with Direct Loans.  In addition, GAO reviewed borrower complaints collected by the Office of Federal Student Aid’s Ombudsman and ED’s tracking system

Key results from the study are as follows:

  • GAO found that borrowers had difficulty reaching their loan servicers by telephone, particularly if the borrower and loan servicer were located in a different time zone.
    • ED allows servicers to set their own call center hours, leading to wide variation. For example, only one of the 10 servicers operates its call center 24 hours per day (and also 7 days per week), but three others close by 6 PM Eastern time (3 PM Pacific time).
  • GAO noted that, while ED has improved its tracking of borrower complaints, ED lacks a systematic way to collect and resolve complaints.
    • GAO found that ED records borrower complaints in a dozen different systems and each of the 10 servicers also receives complaints in their own system.
    • Notably, under the Student Aid Bill of Rights, a Presidential Memorandum, ED is required to develop and implement a unified complaint system by July 1, 2016.
  • ED evaluates servicers using five performance measures designed to improve customer service and prevent default. GAO raised concerns that these performance measures may not align with ED’s compensation for servicers.
    • GAO cited the example of servicers not taking the time to counsel borrowers on the Public Service Loan Forgiveness program since it may result in the transfer of a borrower’s loan to a specific servicer with no further compensation for the current servicer.
  • GAO found that no performance measures relate to servicer compliance with ED’s loan servicing requirements. Servicers with a high number of compliance errors may receive no reduction payments or assigned loans.
    • GAO cited the example of servicers not giving borrowers a full, six-month grace period before beginning repayment. This had no impact on whether the servicer was assigned additional loans.

 

GAO recommended that ED “(1) implement a minimum standard for servicer call center hours, (2) ensure its complaint tracking captures comprehensive and comparable information from servicers, and (3) evaluate and adjust its performance metrics and compensation.”

 

Note:  This GAO report builds upon GAO’s November 2015 Congressional testimony, summarized in PNPI’s previous Featured Report.