The U.S. Department of Education conducted a bogus investigation into allegations that student loan giant Navient Corp. violated its lucrative government contract, leading the Obama administration to mislead the public last year when it proclaimed the company didn’t cheat servicemembers on federal student loans, according to an audit by the department’s inspector general released Tuesday.
The scandal is likely to revive concerns about the department’s sloppy policing of the student loan industry and its cozy relations with loan contractors, many of which have employed former department officials. These contractors together receive about $800 million annually from taxpayers to collect borrowers’ monthly payments and counsel them on their repayment options.
The inspector general’s findings also could complicate the Obama administration’s efforts to convince the Senate to confirm acting Education Secretary John King Jr. for the post. President Barack Obama has repeatedly pushed the department to improve its oversight of loan contractors and their treatment of borrowers. The department, however, has renewed contracts with companies that its own investigators and other federal authorities determined had misled borrowers. Accountability has been rare.
"Today’s report is a stunning indictment of the Department of Education's oversight of student loan servicers, exposing the extraordinary lengths to which the department will go to protect these companies when they break the law," Sen. Elizabeth Warren (D-Mass.) said in a prepared statement.
The department’s internal probe was prompted by a 2014 Justice Department lawsuit accusing Navient of violating the Servicemembers Civil Relief Act by intentionally and systematically overcharging troops on student loans for nearly a decade. The Education Department investigated Navient and three other major loan contractors to determine whether the companies had complied with the law and reduced the interest rate on active-duty servicemembers' federal student loans to 6 percent.
The Education Department’s contracts with companies such as Navient specify that violating any relevant laws would constitute a violation of their contract.
The Education Department, under fire for continuing to send business to Navient -- which was known at the time as Sallie Mae -- said in 2014 that its internal investigation "will inform our arrangement with Sallie Mae going forward." Then-Education Secretary Arne Duncan punctuated the point when he said "every option is on the table." Navient has recorded $378 million in revenue off its Education Department contract over the past three years, securities filings show.
But the audit from Inspector General Kathleen Tighe suggests it was all a ruse.
The department’s internal investigation was marred by statistical errors and faulty sampling techniques, according to Tighe. In one case, more than half of the borrower accounts reviewed already had interest rates under 6 percent. In Navient’s case, the department improperly credited the company for modifying some troops’ loans when records show that the interest rate reductions had been backdated.
The department eschewed a review of its loan servicers’ records to identify the extent of wrongdoing, instead relying on its own incomplete database, Tighe said. Department officials didn’t consult with a statistician to help design its reviews, which wasn’t even designed to determine how many troops were cheated.
The department’s boast that troops were incorrectly denied their federal right to a cheaper loan "in less than 1 percent of cases" was inaccurate and not supported by its review, according to the inspector general. In fact, the error rate was 16 times higher.
Worse, the department’s student loans division, Federal Student Aid, "did not make any effort" to require its loan contractors to identify -- let alone compensate -- all military members who were incorrectly denied their right to a reduced interest rate, Tighe said.
Senior officials at the Education Department made the decision to not hold its loan contractors fully accountable for overcharging troops in violation of federal law, according to the audit. That decision, it noted, "was not primarily based on a statistical analysis."
Dorie Nolt, an Education Department spokeswoman, said in a prepared statement that the department takes the audit "very seriously." It prompted the department to ask its loan contractors last month to review their records to determine whether any troops had been incorrectly denied their right to a cheaper loan since 2008.
The Education Department's view on what constitutes an incorrect denial, however, is far more limited than that of authorities at the Consumer Financial Protection Bureau, DOJ and other banking agencies, sources have said.
For example, the Education Department, unlike other federal authorities, didn’t review call recordings between Navient and troops to spot instances in which military personnel were illegally told they were ineligible for the interest rate benefit. Borrowers primarily communicate with their loan servicers over the phone.
Nolt refused to make Rohit Chopra, a former federal consumer bureau official hired to advise the department on the servicemembers law, available for an interview.
A trio of Democratic lawmakers -- Sens. Warren, Patty Murray (D-Wash.) and Richard Blumenthal (D-Conn.) -- requested the inspector general investigate the department’s handling of the servicemembers probe.
On Tuesday, Blumenthal said the Education Department's "sham study" represented a "shameful abdication of responsibility."
The lawmakers' request was prompted in part by several reports that the Education Department had failed to protect troops or other borrowers mistreated by its loan contractors, and in some cases ignored warnings.
For example, in 2013 the Education Department told Navient that it planned to renew its loan servicing contract months after federal investigators discovered evidence showing the company had overcharged servicemembers on federal student loans.
In 2014, following the DOJ’s settlement with Navient -- the company neither admitted nor denied wrongdoing -- Education Department officials told members of Congress and others that it still planned to renew the company’s contract even though the department had barely begun its own review to determine whether the company violated the terms of its federal contract.
Later that year, a preliminary review by the Education Department cleared Navient of wrongdoing, prompting the department to hire audit firm Ernst & Young.
The American Legion, an influential veterans organization, criticized the Education Department last March for seeming more concerned about its loan contractors than troops.
Holly Petraeus, a senior official at the federal consumer bureau, warned troops the following month that they couldn’t rely on student loan companies, including Education Department contractors, to give them accurate information.
In November, another official at the federal consumer bureau said that hundreds of thousands of troops have been forced to make at least $100 million in student loan interest payments that they actually were exempt from.
The Education Department has taken limited steps to ensure that servicemembers with federal student loans receive the benefits they’re entitled to. The department now pays its loan contractors a bit more money to handle military members’ loans, and it recently began quarterly reviews to make sure troops are getting the interest rate benefit.
Murray on Tuesday criticized the department for conducting an investigation that "papered over mistreatment of military borrowers."
But while Obama’s Education Department has thus far seemed unconcerned about accountability, there are signs that his successor may take a more aggressive approach in policing the student loan industry. Presidential hopeful Hillary Clinton said last month that she was "totally appalled" by what she described as Navient’s "outrageous" behavior toward borrowers.