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Foxx Statement: "Examining the Mismanagement of the Student Loan Rehabilitation Process"

Prior to 2010 the federal government authorized two loan programs through the Higher Education Act to help students and their families pay for college.  As part of the health care overhaul in 2010, the Democrat-led Congress eliminated the Federal Family Education Loan program, which offered student loans through private lenders, and shifted to 100 percent Direct Lending.

The federal government now originates and oversees every single federal student loan issued. However we aren’t here today to debate the merits of private lending or federal lending. We’re here to review whether the department is equipped to handle the enormous task it has taken on.  In particular, a significant number of borrowers have raised concerns about the department’s inability to manage the critical loan rehabilitation process.

In short, loan rehabilitation provides borrowers a one-time opportunity to get out of default. Once a borrower makes nine on-time monthly payments over a ten-month period, the loan returns to good standing, the default is removed from the borrower’s credit report, and eligibility for repayment options or additional financial aid are restored.

Ensuring the rehabilitation process is working in a timely and effective manner is critical to the well-being of the nation’s borrowers. Defaulting on student loans has serious consequences for a borrower’s credit rating, making it more difficult to obtain affordable credit, secure a job, or take out a mortgage. In an effort to better understand the problems plaguing the Direct Loan system, the committee began conducting oversight and soliciting feedback from borrowers.

The committee discovered widespread issues in the department’s management of the loan rehabilitation process; including security breaches, inaccurate reporting of payment statuses and loan delinquencies, and delays in accessing the department’s default loan management website.

For example, one borrower claimed to have made the required amount of on-time payments in an effort to rehabilitate his loan, but due to the department’s delays, was unable to remove the black mark of default from his credit report to take advantage of better repayment options.

Another borrower told the Chronicle of Higher Education she started a second job to cover the $1,350 monthly payment on her defaulted loan. But once she finally made her ninth payment in October 2011, she was informed the department was unable to update her loan status due to problems with the loan management system.

With thousands of borrowers stuck in financial limbo, Senate and House Republicans asked the Government Accountability Office to conduct a detailed review the Education Department’s capacity to move loans through the rehabilitation process.

According to the final report released today, the GAO found the department lacked appropriate monitoring over the upgrading of the default management system. Further, not a single loan rehabilitation was processed from September 2011 through March 2012 – affecting approximately 80,000 borrowers.

Additionally, the report sheds light on weaknesses within the department that raise questions about the department’s ability to manage the Direct Loan program itself.   When attempting to upgrade its default loan management system, the department failed to oversee the system upgrade effectively or prepare for any associated risks.

The department also failed to monitor complaints from borrowers or ensure resolution of these issues. And although the department has claimed any issues are resolved and borrowers are able to rehabilitate their loans, we will learn today that the resolutions put in place are work-arounds and not permanent solutions.

Policymakers have a serious responsibility to ensure student loans increase opportunity, not limit future success.  I look forward to continuing our oversight efforts today as we work to strengthen the federal student loan system and protect student borrowers.


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