Borrowers who make nine on-time monthly  payments within 10 months may be eligible for loan rehabilitation, which  entitles them to have the default removed from their credit report. Education Relies on Collection Agencies to Assist Borrowers in Rehabilitating Defaulted Student Loans

Education provides information about loan rehabilitation and relies on  collection agencies to assist borrowers in rehabilitating defaulted student  loans. Education contracts with 22 collection agencies to locate and  explain repayment options to borrowers who do not make such  repayment arrangements. With regard to  loan rehabilitation collections, collection agencies recovered 97 percent of  $9 billion collected on over 1.5 million defaulted loans, and collections in  fiscal year 2013 represented more than half of all rehabilitation collections  during the 3-year period (see figure 3). Limited Planning and Oversight of Education’s Defaulted Loan Information System Upgrade Adversely Affected Loan Rehabilitation

		Education’s Limited Planning and Oversight Did Not Address Risks of System Upgrade

As a result of limited planning and oversight, Education was unable to  provide most borrowers who completed loan rehabilitation with timely  benefits, such as removing defaults from their credit reports, for more  than a year following the October 2011 upgrade of its defaulted loan  information system. Despite  previous concerns about the contractor’s performance related to systems  development work, Education accepted the offer. Education updated its contract monitoring plan in 2011, about a year after  the upgrade work began and performance problems, such as missed  deadlines, had occurred. As a result of the system challenges, no loan rehabilitations were  processed from September 2011 through March 2012, and Education  officials said they needed until January 2013 to clear the resulting  backlog. Education officials reported that they used manual processing until the  workaround was automated in September 2013. They acknowledged that  a substantial amount of development work needs to be completed to  address the remaining issues; work they expect to be completed under  the new contract. For instance,  while Education reported rehabilitating about 600,000 loans for 200,000  borrowers from April 2012 to January 2013, it does not have other data to  track its loan rehabilitation performance, such as the number of borrowers  that experience delays in having their loans rehabilitated or the length of  delays. Oversight Weaknesses Reduce Education’s Ability to Effectively Monitor Collection Agency Performance

Education has developed several mechanisms for overseeing collection  agencies, but key weaknesses reduce its ability to effectively monitor their  performance related to loan rehabilitation and other collection activities. For example, Education has not conducted  quarterly reviews of each collection agency as stated in its guidance and  procedures since it began reviewing loan rehabilitation calls in 2011. While Education provides feedback on the results of its call reviews to  each collection agency, it does not ensure that collection agencies take  corrective actions or use the information to assess collection agencies’  performance. Education officials reported that the department monitors  collection agencies to ensure corrective actions are taken. This  approach could include options for developing data and related  performance measures for tracking timely rehabilitation of loans;  2.  take steps to ensure that the final monitoring plan for the new  defaulted loan information system contract identifies risks presented  by the contractor or contract work and the oversight activities planned  to address those risks; and  3.  take steps to improve its collection agency call review process.
Why GAO Did This Study

As of fiscal year 2013 about $94 billion—over 11 percent of federal student loan volume in repayment—was in default, which generally occurs when a borrower fails to make a payment for more than 270 days. Loan rehabilitation was established as an option to help Education collect defaulted student loans, and borrowers address the adverse consequences of default, such as repairing damaged credit. GAO was asked to review Education's loan rehabilitation process. This report examines how: (1) Education assists borrowers in rehabilitating defaulted student loans; (2) the upgrade of its defaulted loan information system affected loan rehabilitation; and (3) Education oversees private collection agencies in implementing loan rehabilitation.
GAO reviewed Education's policies, procedures and guidance; contracts and monitoring records for the defaulted loan information system contractor and 22 collection agencies; collections and rehabilitation data; and relevant federal laws and regulations. GAO interviewed Education officials, representatives of borrower advocacy groups, and visited 6 selected collection agencies, based on their loan volume and geographic location.

What GAO Found

The Department of Education (Education) relies on collection agencies to assist borrowers in rehabilitating defaulted student loans, which allows borrowers who make nine on-time monthly payments within 10 months to have the default removed from their credit reports. Education works with 22 collection agencies to locate borrowers and explain repayment options, including rehabilitation. From fiscal years 2011 to 2013, Education collected about $9 billion on over 1.5 million loans through rehabilitation, most of which was recovered by collection agencies.
For more than a year after the October 2011 upgrade of its defaulted loan information system, Education was unable to provide most borrowers who completed rehabilitation with timely benefits, such as removing defaults from their credit reports. GAO found the delays largely attributable to gaps in Education's oversight of its system contractor. For example, despite concerns about the contractor's unreliable performance on previous system development efforts, Education conducted limited oversight until the contractor began missing deadlines. In addition, system testing was not sufficient for Education to detect key problems prior to the upgrade. As a result, no rehabilitations were processed until April 2012, and officials said they needed until January 2013 to clear the resulting backlog. During this time period, Education reported rehabilitating loans for about 200,000 borrowers, but it has not developed performance data to assess the number or extent of individual borrower delays. Further, Education has acknowledged that the system still requires workarounds and a substantial amount of development work will need to be completed under a new contract, which was awarded in September 2013, to address remaining system issues.
Education has developed tools for overseeing collection agencies, but key weaknesses reduce its ability to effectively monitor their performance. Specifically, to ensure collection agencies provide borrowers with accurate information, Education monitors their interactions with borrowers through quarterly reviews of loan rehabilitation phone calls. However, GAO found that Education has not consistently completed such call reviews. While Education provides the results of its reviews to each collection agency, it does not ensure corrective actions are taken and does not systematically analyze results over time or across collection agencies to inform its oversight activities. As a result, it may be difficult for Education to ensure that borrowers receive accurate information regarding loan rehabilitation.

What GAO Recommends

GAO recommends that Education take steps to track loan rehabilitation performance data and improve oversight of its system contractor and collection agencies. Education agreed with GAO's recommendations.