POLITICS
10/29/2014 05:05 pm ET Updated Oct 29, 2014

Education Department Investigation Clears Student Loan Companies, Sources Say

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In May, Education Secretary Arne Duncan ordered his investigators to conduct a "thorough review" of the nation's four largest student loan servicers, following allegations that the companies may have cheated active duty troops out of millions of dollars by overcharging them on their federal student loans.

The official results of the review are still pending. But according to people with knowledge of the investigation, the review has found little evidence of wrongdoing -- a conclusion that has surprised senior Education Department and Justice Department officials and called into question the Education Department's ability to supervise the student loan companies with which it contracts to collect borrowers’ monthly payments.

Under the federal Servicemembers Civil Relief Act, active duty service members are allowed to have the interest rate on their student loans capped at 6 percent. But in October 2012, the Consumer Financial Protection Bureau said it had received complaints from troops who had called their loan servicers and been steered away from invoking their right to a lower interest rate.

Based on some of those complaints, the Justice Department launched an investigation into Sallie Mae, the nation's largest student loan servicer. That investigation culminated in a May 13 complaint against Sallie Mae and Navient Corp. (a student loan specialist that until this year was part of Sallie Mae), which charged the two companies with cheating some 60,000 troops out of $60 million over several years. The companies settled the lawsuit without admitting wrongdoing.

Alarmed by the allegations, the Education Department sought to determine whether any of its student loan servicers were breaking the law by misleading active duty troops, and the extent of such wrongdoing. While the Justice Department's investigation had been limited to Sallie Mae and Navient, the Education Department's review was expanded to include its other student loan contractors: Nelnet, Inc., Great Lakes Higher Education Corp. & Affiliates, and the Pennsylvania Higher Education Assistance Agency.

Federal officials expected the results of the Education Department's review to mirror the Justice Department's findings. Instead, sources close to the probe said investigators in the Education Department's Federal Student Aid office found the opposite: Few troops had been improperly denied their benefits under federal law.

The conclusion is based on a review in which a handful of FSA compliance staff combed through loan files of dozens of borrowers at each of the Education Department’s four major loan servicers.

“We all thought that this was going to be low-hanging fruit,” one FSA employee, who requested anonymity because he was not authorized to discuss the investigation, told The Huffington Post. “It appears not to be the case.”

The conclusion has apparently startled senior officials in Washington and raised concerns about how the FSA office has conducted its investigation. As a result, the Education Department has asked investigators from the FSA's Financial Institution Oversight Service Group to conduct a broader review of student loan borrowers' files, according to federal officials with knowledge of the investigation. The department is also considering hiring a private-sector auditor to conduct a separate probe.

Dorie Nolt, an Education Department spokeswoman, declined to comment on the investigation. Dena Iverson, a Justice Department spokeswoman, also declined to comment. Representatives for the four loan companies did not respond to repeated requests for comment.

The disconnect between what the Justice Department expected and what the FSA found has led some FSA employees to challenge the validity of the reported harm detailed in the Justice Department’s complaint against Sallie Mae and Navient, federal officials told HuffPost.

FSA employees pointed out that the Justice Department’s estimate of harmed troops was based on what Navient described as a “high-level independent review." It was “not a formal audit of approval rates, nor was it a comprehensive file-by-file account review,” Navient said. Rather, the review was “undertaken to quickly identify” the number of potentially cheated borrowers.

According to confidential documents obtained by HuffPost, the auditor that conducted the review was Deloitte & Touche LLP. Dan Mucisko, a spokesman for Deloitte, didn’t respond to requests for comment.

If the Education Department indeed did not find any violations, part of the reason may have been due to to how the department defined wrongdoing.

Federal law requires troops to request the interest rate benefit in writing and to provide their loan companies with a copy of their military orders calling them to active duty. When FSA investigators looked for instances in which troops had requested a lower interest rate in writing but didn’t receive it, they found few lapses, according to people involved with or briefed on the results of the review.

But the Education Department didn’t look into whether borrowers had called their loan companies to discuss their rights under federal law, or whether they had verbally expressed any interest in a reduced interest rate.

In some cases, according to people familiar with the results of the review, FSA investigators found that loan companies had allowed active-duty troops to postpone their required monthly payments, but didn’t bother to reduce the interest rate on their loans.

According to the consumer bureau's earlier inquiry, one of the reasons troops didn't formally request the interest rate benefit was because student loan companies had steered them away from doing so when the troops called the companies on the phone seeking information.

As a result of the Justice Department's settlement with Sallie Mae and Navient, the Education Department earlier this year instructed its student loan companies to automatically reduce borrowers' rates upon learning that the borrowers are on active duty. That rule change may help current borrowers, but it doesn’t cover all troops who may have been harmed previously.

Navient agreed as part of its settlement to refund aggrieved troops who didn't receive a reduced interest rate but were eligible for it. The Education Department has examined its own potential liability if it were to issue refunds to cheated troops, according to department records obtained by HuffPost.

It’s unclear why the Education Department's review, as sources described it, did not include troops who had contacted student loan companies about the interest rate benefit by telephone.

The FSA investigators' findings risk embarrassing the Education Department, which is under scrutiny for how it supervises the loan servicers and debt collectors it pays to interact with the roughly 40 million borrowers with federal student loans, and how it responds to concerns that borrowers are routinely mistreated and given bad information.

Sen. Elizabeth Warren (D-Mass.) last year said the department risks becoming a “lapdog” -- rather than a watchdog -- as a result of its allegedly deficient supervision and past decisions to not punish wrongdoing.

Earlier this year, the Government Accountability Office and the Education Department’s inspector general pilloried the department’s supervision of its debt collectors, reprimanding the department for ignoring borrowers’ complaints and looking the other way when wrongdoing was found.

In another case, the department said last month it would continue pursuing borrowers over their unpaid debts while shielding their former schools from crippling sanctions that would have resulted from high student loan default rates.

And in August, in response to worries from student advocates and consumer groups about its contractors mistreating borrowers, the department decided to pay them more money in hopes that increased funding would lead to better customer service.

To regulators, however, the mistreatment of active duty troops is of particular concern.

“Servicer breakdowns for the military population may be a canary in the coal mine for systemic problems facing all student loan borrowers,” Rohit Chopra, student loan ombudsman at the CFPB, said in an interview. “If a servicer is unable to provide adequate service to those who have special protections under the law, it does raise real questions about whether there is more widespread harm to the broader borrower population.”

HuffPost

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