The Department of Education may have misled the public when it cleared its favored student loan contractors of wrongdoing in their treatment of active-duty troops, a trio of Senate Democrats alleged on Wednesday. The three are calling for an investigation into the department's internal audit, which ignored previous damning findings from the Department of Justice and the Federal Deposit Insurance Corp., the senators said.
The issue threatens to further embarrass Education Secretary Arne Duncan, who has been accused of coddling the department's loan contractors in spite of growing evidence that they routinely mistreat borrowers. The alleged mistreatment has worsened to the point that President Barack Obama has instructed the department to improve oversight of its loan contractors, rework their contracts and consider new rules to strengthen borrower protections.
In May, the Education Department announced that its four largest student loan servicers -- companies that process borrowers' monthly payments and counsel them on their repayment options -- largely complied with the Servicemembers Civil Relief Act, the federal law that caps interest rates at 6 percent on many consumer loans to troops on active duty and gives them additional protections to alleviate financial burdens. The four servicers -- Navient Corp; Nelnet Inc.; Great Lakes Higher Education Corp. & Affiliates and Pennsylvania Higher Education Assistance Agency -- "incorrectly" denied troops’ requests "in less than 1 percent of cases," the department said.
The audit's results directly contradict evidence unearthed by the DOJ and FDIC, which in May 2014 accused Navient Corp., formerly known as Sallie Mae and the nation's largest student loan servicer, of intentionally cheating service members on their federal and private student loans over several years. The company agreed to refund 77,795 troops a total of $60 million to settle the allegations. Of those, some 19,000 active-duty troops were overcharged on loans owned by the Education Department, according to DOJ data. Navient neither admitted nor denied wrongdoing in the settlement.
The Education Department audit sought to quell concerns that its loan servicers may have systematically overcharged active-duty troops on their federal student loans. The department pays companies such as Navient hundreds of millions of dollars annually to interact with borrowers. Navient's contract in particular was at stake because of the DOJ allegations: violating the service members law almost certainly constituted a breach of its contract. Duncan’s department had missed the alleged misconduct that occurred under its watch.
But in absolving contractors of wrongdoing, the audit likely missed thousands of violations of federal law by Navient alone, according to federal regulators and prosecutors. The Huffington Post in June detailed the investigation's shortcomings, such as the Education Department's refusal to listen to recordings of calls between its loan contractors and troops attempting to assert their rights. The Justice Department and FDIC investigations were based partly on a review of call recordings, which showed that Navient had wrongly told active-duty troops they had to be deployed in order to receive the interest rate benefit under the service members law.
Navient cheated active-duty military personnel by misleading them about the law’s benefits, ignoring their requests for a reduced interest rate, and generally making it harder for them to secure a lower rate, the DOJ and FDIC alleged.
A majority of troops who were illegally charged higher interest rates had provided Navient with military documents indicating their eligibility for reduced rates, federal prosecutors said.
But the Education Department ignored those findings, according to an analysis of the department's audits released Wednesday by Sen. Elizabeth Warren's (D-Mass.) staff. The department's own audit allowed Navient to keep its lucrative federal contract to collect borrowers' payments.
Three Senate Democrats are calling on Kathleen Tighe, the department's inspector general to investigate the Education Department's audit and the "deeply flawed" way it sold the results to the public. Sens. Warren, Patty Murray (D-Wash.) and Richard Blumenthal (D-Conn.) made the demand in a letter Tuesday.
"Unfortunately, the review the department conducted has left us with more questions than answers," the lawmakers said.
Murray is the top Democrat on the Senate education committee, while Blumenthal is the top Democrat on the Senate veterans committee. Warren, the former law professor who conceived of the federal Consumer Financial Protection Bureau, sits on the Senate education and banking committees.
"We share the commitment of the Senators to our servicemembers, and we welcome any review of our results," said Dorie Nolt, an Education Department spokeswoman, in an email. The department's audit differed from the Justice Department's because the Education Department had previously told its loan contractors that service members had to request the interest rate benefit in writing before they could receive it, the department has said. It has since scrapped this requirement.
Still, that doesn't explain why the department chose not to listen to call recordings that could shed light on why so few eligible service members submitted sufficient paperwork to meet the guidelines at the time.
The Senate Health, Education, Labor and Pensions Committee is investigating why the department chose to ignore evidence compiled by other federal authorities and why it limited its probe only to files in which service members, many of whom served in an era marked by wars in Iraq and Afghanistan, had perfect paperwork. The committee has yet to receive an adequate answer from the Education Department explaining why it didn't listen to call recordings, congressional aides said.
Out of a sample of 597 borrowers' files, the Education Department found that just 55, or less than 10 percent, submitted sufficient paperwork to qualify for the interest rate reduction, according to an analysis by Warren's staff.
"Meaning that over 90 percent of potentially eligible borrowers did not know they could obtain relief, were discouraged from pursuing relief, or could not correctly navigate the barriers to obtain relief," Warren's staff said in the analysis. "This suggests significant problems with the design or the administration of the program, and depending whether the servicer’s conduct contributed to borrowers’ failure to apply, this in itself could have indicated that there were violations of [the service members law]."
Service members have complained to the CFPB that after contacting their student loan servicers they were "guided" into repayment plans that temporarily delayed their monthly payments, rather than lowering the monthly amount in accordance with the service members law.
The Education Department's audits discovered servicing errors in 29 percent of cases where borrowers requested the interest rate benefit, according to Warren's office. While some of the errors ultimately favored the borrower -- for example, some borrowers received the benefit for longer than they should have -- the errors highlight inconsistent servicing practices, suggesting deeper problems.
Navient's 48 percent error rate, the highest among the four companies that were audited, skewed the group's error rate much higher. Patricia Christel, a Navient spokeswoman, didn't respond to a request for comment.
Last month, Holly Petraeus, assistant director for service member affairs at the CFPB, said that troops can't rely on student loan companies to give them accurate information about their legal protections -- even the companies that work for the Education Department.
The Education Department's audits also revealed that in the few cases where active-duty troops submitted proper paperwork that should have resulted in a reduced interest rate, the department's servicers incorrectly denied the benefit 8 percent of the time, according to Warren's office.
That figure sharply contrasts with the way the department sold the results -- an error rate of less than 1 percent -- leading the three Senate Democrats to state that Warren's staff analysis "raises doubts regarding whether [Education Department] officials adequately reported the results of these reviews to the public."
Concerns over the Education Department's handling of the service members probe is likely to dog Duncan's final months in office, congressional aides said.
Senate education committee staff have met with Education Department officials and executives from Ernst & Young, an outside audit firm the department hired to double-check its own probe into Navient's compliance with the service members law, to learn why the department limited the scope of its review to the point that it missed evidence found by other federal authorities.
But answers have been hard to come by. One barrier has been the Office of Federal Student Aid's refusal to share information or documents, according to congressional aides. FSA is the unit inside the Education Department that runs the federal student loan program. It's run by James Runcie, a former banker who spent nearly 20 years on Wall Street at firms including Donaldson, Lufkin & Jenrette; Bank of America and UBS. Nolt, the Education Department spokeswoman, said the department is in "active and ongoing dialog" with the education committee and looks forward "to continuing to be responsive to requests."
Runcie told the Senate education committee last year that the department worried over the potential “dislocation” that borrowers would face if the department were to boot Navient, then known as Sallie Mae, and transfer its accounts to other companies.
The remark prompted then-Sen. Tom Harkin (D-Iowa) to retort, "It sounds like your answer, Mr. Runcie, was that they’re too big to fail."
This article has been updated with comment from the Education Department.