Education Department Finds Numerous Problems At Sallie Mae, Levies No Fines

Education Department Finds Numerous Problems At Sallie Mae, Levies No Fines

The U.S. Department of Education has declined to levy any fines on student loan giant Sallie Mae despite secret determinations over the past 10 years that allege the company has harmed borrowers, incorrectly billed the department and had other servicing failures.

The allegations, detailed in a Dec. 9 letter from the Education Department to Sen. Elizabeth Warren (D-Mass.), for the first time provide a glimpse into the extent of problems plaguing the $1 trillion federal student loan portfolio, and the apparently lackluster department response to faulty behavior by companies that interact with borrowers on its behalf and collect payments on government-backed student debt. The letter was obtained by The Huffington Post.

The findings come as Education Secretary Arne Duncan battles accusations that his department tolerates wrongdoing by companies it pays to service federal student loans, most notably Sallie Mae. The nation’s largest handler of student debt, Sallie Mae is under investigation by at least three federal agencies for allegedly violating borrowers’ rights. At least one of them -- the Federal Deposit Insurance Corporation -- has told Sallie Mae it intends to publicly accuse the company of harming borrowers.

But the pending investigations and likely enforcement action didn’t stop the Education Department from telling Sallie Mae in October that it intends to renew its lucrative contract to service federal student loans. The department told Warren that it was “not aware” of any issues or findings that would warrant any fines or termination of its existing contract with the company. Poor servicing of federal student loans has contributed to some policymakers’ fears that the nation’s $1.2 trillion in unpaid student debt risks curtailing economic growth in the coming years.

Warren declined to comment, though last week she said the department should not be a “lapdog” when it comes to protecting student borrowers. Stephen Spector, Education Department spokesman, said the department’s letter “speaks for itself.” Sallie Mae did not respond to requests for comment.

Since 2009, the Education Department has found that Sallie Mae had defective practices when adjusting borrowers’ accounts, incorrectly calculated borrowers’ incomes who were in a federal program designed for low wage-earners, and erroneously tabulated household income for borrowers applying for a separate federal repayment plan meant for borrowers struggling with their monthly payments, the letter said.

Over the last 10 years, according to its letter to Warren, the Education Department and its inspector general have concluded that Sallie Mae incorrectly billed the department for its services, failed to report certain fees, failed to pay other parties rightful fees, filed untimely claims when borrowers defaulted on their debts, and reported incorrect repayment terms. More broadly, the Education Department wrote, it has found “general management and reporting deficiencies” as well as “due diligence errors.”

But the Education Department didn't seem too concerned. James Runcie, Office of Federal Student Aid chief operating officer, described the various findings as “compliance issues” in the letter. He told Warren, who had asked whether the department would terminate its Sallie Mae contract or fine the company as punishment for wrongdoing, that the issues had not “risen to the level where these penalties were considered appropriate, and they were resolved through the implementation of corrective action plans.”

The Education Department doesn’t know how many borrowers were harmed by the destructive practices, it conceded in its letter to Warren. Borrower advocates, such as Deanne Loonin, director of the National Consumer Law Center's Student Loan Borrower Assistance Project, have claimed that borrowers with federal student debt are routinely treated poorly, with distressed borrowers often receiving treatment that appears to violate at least the spirit of Education Department rules.

“These are all serious issues that make a huge difference for borrowers,” Loonin said, after reviewing the Education Department’s description of its findings. “I’m not surprised because I’ve seen a lot of this.”

For example, the income errors associated with borrowers in the government’s Income-Based Repayment plan, which caps monthly payments relative to income, “could mean the difference between borrowers staying current on their loans versus being hammered by debt collectors,” Loonin said.

“From the borrower’s point of view, what happens is they’ll often get a denial when applying for Income-Based Repayment, but there’s no clear process to appeal or challenge,” she added. “This makes all the difference in the world for borrowers.”

In the letter to Warren, Runcie wrote that the various problems detailed "have affected a very small percentage of individuals relative to the overall borrower population. The incidence of and responsiveness to issues of this kind by Sallie Mae has been consistent with our experience with other federal loan servicers.”

The Education Department's approach to Sallie Mae, Runcie explained, was “consistent with that used for all department loan servicers.” The government could terminate a loan servicing contract if a company such as Sallie Mae “fails to provide the government, upon request, with adequate assurances of future performance,” the letter offered.

It’s unclear whether the Education Department has ever requested such assurances.

The Education Department told Warren that it has fined 11 companies that participate in the Federal Family Education Loan program, the bank-based lending initiative that Congress and the Obama administration ended in 2010, and collected $747,500 in penalties.

Sallie Mae is not among them. In fact, the Education Department has not publicly reprimanded Sallie Mae for any of the alleged failings it has documented in its roughly two dozen reviews of the company over the past 10 years.

“Contrast what Sallie Mae has been able to get away with versus how the department treats borrowers,” Loonin said. “It’s outrageous.” The department has faced criticism for its aggressive pursuit of defaulted debt from struggling borrowers, and its deficient efforts in enrolling distressed borrowers into easier repayment plans.

In its letter, the Education Department said that as part of its reviews of Sallie Mae, it “ensures that appropriate corrective action has been taken by Sallie Mae, including any necessary restitution of funds to the department.” The department added that it generally recoups funds by reducing what it pays companies when they submit invoices.

The Education Department didn’t specify whether any such funds were recovered from Sallie Mae. However, the department determined Sept. 25 that it was time to recoup some $22 million in improper payments made to Sallie Mae several years ago, following a 2009 recommendation by the department’s inspector general that it recover the money.

Support HuffPost

Popular in the Community