[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]





 
                     EXAMINING THE MISMANAGEMENT OF
                            THE STUDENT LOAN
                         REHABILITATION PROCESS

=======================================================================

                                HEARING

                               before the

                    SUBCOMMITTEE ON HIGHER EDUCATION
                         AND WORKFORCE TRAINING

                         COMMITTEE ON EDUCATION
                           AND THE WORKFORCE

                     U.S. House of Representatives

                    6ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, MARCH 12, 2014

                               __________


                           Serial No. 113-50

                               __________

  Printed for the use of the Committee on Education and the Workforce
  
  
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                COMMITTEE ON EDUCATION AND THE WORKFORCE
                
                
                

                    JOHN KLINE, Minnesota, Chairman

Thomas E. Petri, Wisconsin           George Miller, California,
Howard P. ``Buck'' McKeon,             Senior Democratic Member
    California                       Robert C. ``Bobby'' Scott, 
Joe Wilson, South Carolina               Virginia
Virginia Foxx, North Carolina        Ruben Hinojosa, Texas
Tom Price, Georgia                   Carolyn McCarthy, New York
Kenny Marchant, Texas                John F. Tierney, Massachusetts
Duncan Hunter, California            Rush Holt, New Jersey
David P. Roe, Tennessee              Susan A. Davis, California
Glenn Thompson, Pennsylvania         Raul M. Grijalva, Arizona
Tim Walberg, Michigan                Timothy H. Bishop, New York
Matt Salmon, Arizona                 David Loebsack, Iowa
Brett Guthrie, Kentucky              Joe Courtney, Connecticut
Scott DesJarlais, Tennessee          Marcia L. Fudge, Ohio
Todd Rokita, Indiana                 Jared Polis, Colorado
Larry Bucshon, Indiana               Gregorio Kilili Camacho Sablan,
Trey Gowdy, South Carolina             Northern Mariana Islands
Lou Barletta, Pennsylvania           Frederica S. Wilson, Florida
Joseph J. Heck, Nevada               Suzanne Bonamici, Oregon
Susan W. Brooks, Indiana             Mark Pocan, Wisconsin
Richard Hudson, North Carolina
Luke Messer, Indiana

                    Juliane Sullivan, Staff Director
                 Jody Calemine, Minority Staff Director
                 
                 
                 
                 

        SUBCOMMITTEE ON HIGHER EDUCATION AND WORKFORCE TRAINING

               VIRGINIA FOXX, North Carolina, Chairwoman

Thomas E. Petri, Wisconsin           Ruben Hinojosa, Texas
Howard P. ``Buck'' McKeon,             Ranking Minority Member
    California                       John F. Tierney, Massachusetts
Glenn Thompson, Pennsylvania         Timothy H. Bishop, New York
Tim Walberg, Michigan                Suzanne Bonamici, Oregon
Matt Salmon, Arizona                 Carolyn McCarthy, New York
Brett Guthrie, Kentucky              Rush Holt, New Jersey
Lou Barletta, Pennsylvania           Susan A. Davis, California
Joseph J. Heck, Nevada               David Loebsack, Iowa
Susan W. Brooks, Indiana             Frederica S. Wilson, Florida
Richard Hudson, North Carolina
Luke Messer, Indiana



                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on March 12, 2014...................................     1

Statement of Members:
    Foxx, Hon. Virginia, Chairwoman, Subcommittee on Higher 
      Education and Workforce Training...........................     1
        Prepared statement of....................................     3
    Hinojosa, Ranking Minority Member, Subcommittee on Higher 
      Education and Workforce Training...........................     3
        Prepared statement of....................................     4

Statement of Witnesses:
    Emrey-Arras, Melissa, Director, Education, Workforce and 
      Income Security Issues, Boston, Massachusetts..............     7
        Prepared statement of....................................     9
    Julius, Peg, Executive Director of Enrollment Management, 
      Kirkwood Community College, Cedar Rapids, Iowa.............    40
        Prepared statement of....................................    42
    Runcie, James, Chief Operating Officer, Federal Student Aid, 
      U.S. Department of Education, Washington, DC...............    33
        Prepared statement of....................................    35
    Tighe, Kathleen, Inspector General, U.S. Department of 
      Education, Washington, D.C.................................    22
        Prepared statement of....................................    24

Additional Submissions:
    Ms Julius:
        National Direct Student Loan Colition (NDSLC), prepared 
          statement of...........................................    56
        Response to questions submitted for the record...........    81
    Chairwoman Foxx: questions submitted for the record to:          77
    Miller, Hon. George, senior Democratic member, Committee on 
      Education and the Workforce: questions submitted for the 
      record.....................................................    79


               EXAMINING THE MISMANAGEMENT OF THE STUDENT



                      LOAN REHABILITATION PROCESS

                              ----------                              


                       Wednesday, March 12, 2014

                       House of Representatives,

                  Subcommittee on Higher Education and

                          Workforce Training,

               Committee on Education and the Workforce,

                            Washington, D.C.

                              ----------                              

    The subcommittee met, pursuant to call, at 2:32 p.m., in 
Room 2175, Rayburn House Office Building, Hon. Virginia Foxx 
[chairwoman of the subcommittee] presiding.
    Present: Representatives Foxx, Petri, Walberg, Hinojosa, 
Tierney, Bishop, Bonamici, and Loebsack.
    Also present: Representative Kline.
    Staff present: Janelle Belland, Coalitions and Member 
Services Coordinator; Amy Raaf Jones, Deputy Director of 
Education and Human Services Policy; Nancy Locke, Chief Clerk; 
Brian Melnyk, Professional Staff Member; Daniel Murner, Press 
Assistant; Krisann Pearce, General Counsel; Jenny Prescott, 
Legislative Assistant; Mandy Schaumburg, Senior Education 
Counsel; Emily Slack, Professional Staff Member; Alex 
Sollberger, Communications Director; Alissa Strawcutter, Deputy 
Clerk; Tylease Alli, Minority Clerk/Intern and Fellow 
Coordinator; Kelly Broughan, Minority Education Policy 
Associate; Eamonn Collins, Minority Fellow, Education; Jamie 
Fasteau, Minority Director of Education Policy; Rich Williams, 
Minority Education Policy Advisor; and Michael Zola, Minority 
Deputy Staff Director.
    Chairwoman Foxx. A quorum being present, the subcommittee 
will come to order.
    Good afternoon and welcome. I thank our panel of witnesses 
for joining us today to examine the Department of Education's 
management 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 are 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 10-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 understand better 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 of the 
Department of Education'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 risk. 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 
workarounds 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.
    I now yield to my distinguished colleague, the senior 
Democrat member of the Higher Education and Workforce Training 
Subcommittee, Mr. Ruben Hinojosa, for his opening remarks.
    [The statement of Chairwoman Foxx follows:]
    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.
                                 ______
                                 
    Mr. Hinojosa. Thank you, Chairwoman Foxx.
    Today's hearing will focus on student loan rehabilitation 
and the steps that the U.S. Department of Education has taken 
to strengthen that process. I want to thank our distinguished 
panel of witnesses for joining us this afternoon to provide 
some context for this discussion, and to share their views on 
how the federal government can continue to best serve student 
borrowers. Let me begin by saying that the U.S. Department of 
Education must do all it can to help student borrowers 
rehabilitate their student loans and build on the successes of 
the direct loan program. These responsibilities include 
effective management and oversight of federal student aid 
programs.
    In my view, the U.S. Department of Education's move to 100 
percent direct lending in 2010 continues to provide students 
with a streamlined loan origination system, a department with 
better oversight against waste, fraud and abuse, and taxpayers 
with a better deal.
    One of the issues before this committee today concerns the 
Department of Education's transition to the Debt Management 
System II and the glitches that the Department of Education 
encountered with this system through the year 2012. I 
understand that between that period of 2012 to 2013 the 
Department of Education's inspector general issued a series of 
alert memos to the student aid office about the glitches in the 
system, and provided recommendations to address the issues.
    To my knowledge, the FSA has taken these concerns very 
seriously and has corrected these weaknesses, including 
manually assisting borrowers in rehabilitating their student 
loans and clearing the backlog. By their fiscal year 2013 
audit, FSA had resolved most of the areas noted by the I.G. 
Furthermore, the GAO report released today makes three 
recommendations to ensure that the department is tracking that 
rehabilitation of defaulted loans, properly noting risk 
associated with contractors, and improving the monitoring of 
contractor performance. I encourage the department to heed 
these suggestions and make necessary adjustments to improve the 
program.
    Finally, I want to remind my colleagues on both sides of 
the aisle that not so long ago, under the prior administration, 
President Bush, this committee investigated and held oversight 
hearings that exposed and highlighted rampant conflicts of 
interest and unethical practices within the Federal Family 
Education Loan--better known as FFEL--program, especially 
lenders' use of bribes and kickbacks to curry favors with 
colleges. All that happened while I was here on this committee. 
As I recall, poor oversight of our federal student aid programs 
allowed inappropriate practices to go unchecked at the expense 
of student borrowers and their families.
    It was disgraceful at that time when the department did 
little to nothing to stop student loan companies from offering 
university financial aid officers things such as gifts, trips 
and more to buy their way onto college campuses and increase 
their access to student borrowers. My message to you today is 
simple. The Direct Loan Program is here to stay because it is 
the best option for student borrowers and their families. We 
are not retreating to the Wild Wild West and the days when 
monitoring oversight and accountability of our federal student 
aid programs were neglected and ignored.
    In terms of today's hearing, what is most important, it 
seems to me, is that the department has taken significant steps 
to fix these problems, and will continue to work effectively, 
manage and track the rehabilitation of those defaulted loans 
and federal student aid programs. I am looking forward to, and 
I am interested in exploring how the loan system can work even 
better for borrowers and taxpayers through upcoming contract 
negotiations between the department and its servicers and 
contractors.
    And with that, Madam Chair, I yield back.
    [The statement of Mr. Hinojosa follows:]
    Thank you, Chairwoman Foxx.
    Today's hearing will focus on student loan rehabilitation and the 
steps that the U.S. department of Education has taken to strengthen 
that process.
    I want to thank our distinguished panel of witnesses for joining us 
this morning to provide some context for this discussion and to share 
their views on how the federal government can continue to best serve 
student borrowers.
    Let me begin by saying that the U.S. Department of Education must 
do all that it can to help student borrowers rehabilitate their student 
loans and build on the successes of the Direct Loan Program. These 
responsibilities include effective management and oversight of federal 
student aid programs.
    In my view, the U.S. Department of Education's move to 100% direct 
lending in 2010 continues to provide students with a streamlined loan 
origination system, the Department with better oversight against waste, 
fraud and abuse, and taxpayers with a better deal.
    One of the issues before this committee today concerns the 
Department of Education's transition to the Debt Management Collection 
System 2 and the glitches that the department of Education encountered 
with this system through 2012.
    I understand that between 2012 and 2013, the Department of 
Education's Inspector General (IG) issued a series of alert memos to 
the Federal Student Aid Office (FSA) about the glitches in the system 
and provided recommendations to address the issues.
    To my knowledge, the FSA has taken these concerns seriously and has 
corrected these weaknesses, including manually assisting borrowers in 
rehabilitating their student loans and clearing the backlog. By their 
FY 2013 audit, FSA had resolved most of the areas noted by the IG.
    Furthermore, the GAO report released today makes three 
recommendations to ensure that the department is tracking the 
rehabilitation of defaulted loans, properly noting risk associated with 
contractors, and improving the monitoring of contractor performance. I 
encourage the department to heed these suggestions and make the 
necessary adjustments to improve the program.
    Finally, I want to remind my colleagues that not so long ago, under 
the Prior administration-- President Bush, this Committee investigated 
and held oversight hearings that exposed and highlighted rampant 
conflicts of interest and unethical practices within the Federal Family 
Education Loan (FFEL) program --especially lenders' use of bribes and 
kickbacks to curry favor with colleges.
    As I recall, poor oversight of our federal student aid programs 
allowed inappropriate practices to go unchecked at the expense of 
student borrowers and their families.
    It was disgraceful at that time--when the department did little to 
nothing to stop student loan companies from offering university 
financial aid officers gifts, trips, and more to ``buy'' their way onto 
college campuses and increase their access to student borrowers.
    My message to you today is simple: the Direct loan program is here 
to stay because it is the best option for student borrowers. We are not 
retreating to the Wild Wild West and the days when monitoring, 
oversight and accountability of our federal student Aid programs were 
neglected and ignored.
    In terms of today's hearing, what is most important to me is that 
the department has taken significant steps to fix these problems and 
will continue to work to effectively manage and track the 
rehabilitation of defaulted loans and federal student aid programs.
    Looking forward, I am interested in exploring how the loan system 
can work even better for borrowers and taxpayers through upcoming 
contract negotiations between the Department and its servicers and 
contractors.
    With that, I yield back.
                                 ______
                                 
    Chairwoman Foxx. Thank you, Mr. Hinojosa.
    Pursuant to committee rule 7(c), all subcommittee members 
will be permitted to submit written statements to be included 
in the permanent hearing record. And without objection, the 
hearing record will remain open for 14 days to allow 
statements, questions for the record, and other extraneous 
material referenced during the hearing to be submitted in the 
official hearing record.
    It is now my pleasure to introduce our distinguished panel 
of witnesses. Ms. Melissa Emrey-Arras serves as the director of 
education, workforce and income security issues, at the U.S. 
Government Accountability Office. The Honorable Kathleen Tighe 
serves as the inspector general of the U.S. Department of 
Education. Mr. James Runcie serves as chief operating officer 
of federal student aid at the U.S. Department of Education.
    I now recognize Mr. Loebsack to introduce our final 
witness.
    Mr. Loebsack. Thank you Chairwoman Foxx. I am pleased to 
introduce Peg Julius today, financial aid director at Kirkwood 
Community College. Kirkwood's main campus is located just 
outside my district in Cedar Rapids, although I did have 
Kirkwood in Cedar Rapids for 6 years prior to the last 
redistricting. But there is also a campus in Iowa City for 
Kirkwood Community College. You can correct me, Peg, but I 
think that the college enrolls around 16,000 or 17,000 students 
now. Is that correct, somewhere in that neighborhood?
    Ms. Julius. I have got 23,000.
    Mr. Loebsack. All right, I apologize. I have already 
offended one of our witnesses.
    [Laughter.]
    I should have known that. My staff person over here, 
Bonnie, is saying, ``I told you so.'' But it serves a lot of 
the counties in my district, as well. Peg is also a member of 
the executive council of the National Direct Student Loan 
Coalition. I have worked with her on college affordability 
issues since I have been in Congress the last eight years but, 
of course, I have known Peg for much longer than that. And I 
know that she is an expert in her field and, beyond that, she 
is my constituent to boot. So I look forward to her testimony.
    I look forward to all the testimony today, and I thank the 
chairwoman and I yield back. Thank you.
    Chairwoman Foxx. Thank you, Mr. Loebsack.
    Before I recognize you to provide your testimony, let me 
briefly explain our lighting system. You will have five minutes 
to present your testimony. When you begin, the light in front 
of you will turn green. When one minute is left, the light will 
turn yellow. When your time is expired, the light will turn 
red. At that point, I ask that you wrap up your remarks as best 
as you are able. After you have testified, members will each 
have five minutes to ask question of the panel.
    I now recognize Ms. Melissa Emrey-Arras for five minutes.

  STATEMENT OF MS. MELISSA EMREY-ARRAS, DIRECTOR, EDUCATION, 
     WORKFORCE AND INCOME SECURITY ISSUES, U.S. GOVERNMENT 
          ACCOUNTABILITY OFFICE, BOSTON, MASSACHUSETTS

    Ms. Emrey-Arras. Chairwoman Foxx, Ranking Member Hinojosa, 
and members of the subcommittee, I am pleased to be here to 
discuss our work examining the Department of Education's 
efforts to rehabilitate defaulted federal student loans. As of 
September 2013, about 94 billion, over 11 percent of federal 
student loans in repayment, were in default.
    Loan rehabilitation allows borrowers who make nine on-time 
payments in 10 months to have the default removed from their 
credit report. Education contracts with collection agencies to 
assist borrowers with this process.
    Education recently upgraded its defaulted loan information 
system because the old system had become costly to maintain and 
had many manual workarounds. My remarks will address two areas 
from our report, which is being released today. One, how the 
upgrade of Education's defaulted loan information system 
affected loan rehabilitation, and two, how Education oversees 
its collection agencies in implementing loan rehabilitation. 
Our review found that Education was unable to provide most 
borrowers who completed loan rehabilitation with timely 
benefits for more than a year following the upgrade.
    We found the delays largely due to gaps in Education's 
oversight of its system contractor. For example, despite known 
risks such as concerns about the contractor's unreliable 
performance on previous system development efforts, Education 
did not have plans for monitoring the upgrade. We also found 
the department's testing of the new system was insufficient to 
detect problems associated with loan rehabilitation. For 
example, the system did not recognize when borrowers had made 
nine on-time payments in 10 months because it was only tested 
for seven months.
    As Education worked to correct problems with the system, it 
took some steps to hold the contractor accountable. Education 
also established procedures to help eligible borrowers by 
removing defaults from their credit reports. However, borrowers 
had to request the help, and Education estimated helping less 
than 10 percent of the estimated 80,000 borrowers who were 
affected when the system was shut down. Education officials 
have reported that they are still using workarounds to run the 
system, and a substantial amount of development work will need 
to be completed under a new contract that was recently awarded.
    The system challenges the new contractor will be expected 
to resolve provide a compelling case for Education to 
strengthen its oversight. To address this issue, we recommended 
that Education take steps to ensure necessary oversight for the 
new system contract. We also found that Education lacks data 
and related performance measures to inform its management and 
oversight of loan rehabilitation.
    Education does not have data to assess the number or extent 
of borrower delays or the extent to which borrowers who 
rehabilitate their loans stay out of default. To address these 
data issues, we recommended that Education develop an approach 
for tracking loan rehabilitation performance.
    Our work also identified weaknesses in Education's 
oversight of its collection agencies. Although Education's 
monitoring procedures required quarterly reviews of collection 
agency phone calls with borrowers, we found that Education did 
not consistently complete these reviews. The call review 
reports we examined also documented a range of errors, 
including collection agencies providing borrowers with 
misleading information. For example, in one case a collection 
agency incorrectly told borrowers that a debit card was 
required to rehabilitate a loan.
    While Education provides feedback on the results of its 
call reviews to each collection agency, it does not assure that 
collection agencies actually take corrective actions. To 
address these issues, we recommended that Education improve its 
call review process. In conclusion, our findings highlight 
serious weaknesses in Education's management of the loan 
rehabilitation process. While Education has agreed with our 
recommendations and taken steps in response, it will be 
important to track how Education builds upon these actions to 
ensure it is providing appropriate oversight.
    Thank you. This concludes my statement.
    [The statement of Ms. Emrey-Arras follows:]
    
    
    
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    Chairwoman Foxx. Thank you very much.
    I now recognize the Honorable Kathleen Tighe for five 
minutes.

   STATEMENT OF HON. KATHLEEN TIGHE, INSPECTOR GENERAL, U.S. 
           DEPARTMENT OF EDUCATION, WASHINGTON, D.C.

    Ms. Tighe. Thank you very much. As members of this 
subcommittee know, the federal student assistance programs have 
long been a major focus of our audit and investigative work. 
Because of its significant student loan portfolio, FSA is, in 
fact, one of the largest financial institutions in the country. 
And, as such, effective oversight and monitoring of its 
programs and operations are critical. As I will discuss today, 
the Office of Inspector General has identified significant 
issues with FSA's debt management collection system.
    When loans being serviced by FSA's loan servicers reach 360 
days of nonpayment, they are transferred to FSA's debt 
management collection system, at which time FSA notifies the 
borrower that the loan is in default and asks the borrower to 
make repayment arrangements. If there is no response from the 
borrower, or if the borrower refuses to pay, FSA then assigns 
the loan to a collection agency. Since 2003, FSA has contracted 
with ACS Education Solutions to manage its debt management 
system. ACS was later purchased by Xerox, and in 2010 that 
company agreed to update the system.
    The updated system is known as the Debt Management 
Collection System II. That system went live in October 2011. In 
2012, we notified FSA that we had identified more than 190,000 
defaulted loans in certain categories totaling more than $1.1 
billion that could not be transferred from the FSA loan 
servicers to DMCS II. As a result, FSA was unable to undertake 
collection activities and eligible borrowers were unable to 
take steps to remove their loans from default status through 
loan rehabilitation. We also identified problems with 
transferring loans back from DMCS II to the FSA loan servicers.
    We made a number of recommendations to FSA to address the 
issues with DMCS II. FSA stated it was committed to resolving 
the problems, but has yet to provide us with an acceptable 
corrective action plan to address our recommendation on how it 
will ensure that it has a fully operational debt management 
system. The inability of DMCS II to process certain types of 
transactions and other system problems contributed to a 
material weakness in internal control over financial reporting 
in the fiscal year 2012 FSA financial statement audit. As 
reported in the fiscal year 2013 FSA financial statement audit, 
a full year after we had first identified problems with DMCS 
II, issues still remained with the transfer of some defaulted 
loans in the system, as well as other issues.
    Although the issue was designated now as a significant 
deficiency rather than a material weakness, the financial 
statement audit noted that as of September 30, 2013, although 
some functionality had been restored, 1.1 billion of defaulted 
loans still had not been transferred to DMCS II. In addition, 
action on four of the five recommendations made in the previous 
year's report were still in process and not yet completed. The 
problems with DMCS II, however, went beyond accounting for 
defaulted loans. In May 2013, we reported that DMCS II could 
not provide the information necessary for FSA to calculate 
actual commissions and bonuses for private collection agencies.
    As a result, in fiscal year 2012, FSA paid 448 million in 
commissions and 8.3 million in bonuses to private collection 
agencies based on estimates. My office is very concerned with 
the problems posed by DMCS II and FSA's inadequate oversight in 
monitoring of this system. As a result, we initiated additional 
work involving DMCS II and planned to take a broader look at 
FSA's oversight management and monitoring of its data systems 
overall. We also highlighted the problems with DMCS II in our 
most recent management challenges report and added a new 
management challenge related to the department's IT system, 
development and implementation. We will continue to closely 
monitor FSA's action to improve DMCS II.
    This concludes my statement. I am happy to answer any 
questions.
    [The statement of Ms. Tighe follows:]
    
    
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    Chairwoman Foxx. Thank you both very much. You come in 
under time.
    Mr. Runcie, you have a challenge. I now recognize you for 
five minutes.
    [Laughter.]

STATEMENT OF MR. JAMES RUNCIE, CHIEF OPERATING OFFICER, FEDERAL 
  STUDENT AID, U.S. DEPARTMENT OF EDUCATION, WASHINGTON, D.C.

    Mr. Runcie. Well, thank you, Chairman Kline, Chairwoman 
Foxx, Ranking Member Hinojosa, and members of the subcommittee 
for inviting me to testify today. My name is James Runcie, and 
I am the chief operating officer of the Department of 
Education's Federal Student Aid office. Our organization is 
responsible for administering the federal student aid programs 
that annually enable millions of students to pursue higher 
education.
    While managing defaulted loans is a significant, important 
part of our work at FSA, it is only one part of a successful 
public-private partnership encompassing over 1,300 government 
employees and more than 10,000 employees of private 
contractors. Together, we administer the federal student aid 
programs. We do this by, among other things, processing more 
than 20 million financial aid applications each year, 
dispersing $138 billion in grants and loans, providing 
management and oversight of a loan portfolio of more than 1 
trillion--representing 40 million borrowers--and collecting on 
defaulted student loans, the topic of this hearing.
    We have worked closely with the GAO and the department's 
I.G. over the last several years. We appreciate their insights 
and concur with the three recommendations presented by GAO in 
its most recent report. We acknowledge that there were major 
challenges, and I hold myself accountable for these issues. 
Today, the major challenges presented by the new DMCS system 
have been addressed. Collections on defaulted loans are at 
record levels, and have grown from $3.4 billion in 2011 to $8.5 
billion in 2013.
    However, to provide a broader context for this hearing, I 
would like to review with the committee how we got to where we 
are today. Since 1994, there have been two primary federal 
student loan programs, the FFEL program and the Direct Loan 
Program. In 2007, the DL Program's share of the annual 64 
billion in federal student loan disbursements was approximately 
20 percent. Around that time, the decline in the financial 
markets began to directly affect student lending by severely 
restricting the availability of private capital. Many schools 
began moving from the FFEL to the DL program. As the number of 
schools moving to the DL program increased, we took steps to 
insure FSA had sufficient capacity.
    Beginning in 2008, we increased our loan origination 
capacity to ensure that it could handle the projected volumes. 
We also augmented our servicing capacity with the awarding of 
loan servicing contracts to four private sector companies. In 
addition, we began the process of upgrading an antiquated 30-
year-old default management system called DMCS. In 2010, we 
successfully implemented the transition to full, direct 
lending. And last year, FSA disbursed approximately $100 
billion in direct loans to over 10 million students and parent 
borrowers. This is an increase of almost 700 percent in just 
five years.
    In order to successfully manage this exponential growth, we 
successfully upgraded legacy systems and processes and 
developed many new ones. Some examples include the 
implementation of the TIVAS not-for-profit servicers, IRS 
automated data retrieval, and new total and permanent 
disability system. We successfully oversee dozens of major 
systems and process tens of millions of transactions, 
leveraging our employees and numerous private contractors. 
Having said that, FSA's transition to a new DMCS system faced 
difficulties, particularly during its initial months of 
operations.
    Our management team immediately took steps to assess the 
problem and to restore key functions. Our efforts prioritized 
restoring borrower services, such as loan rehabilitation and 
refund processing, and minimizing disruptions to the collection 
activities. As a result of these efforts, the system is working 
today and we are processing a greater number of rehabilitations 
than any time in our history. We have also instituted 
regulatory, contractual, and process improvements since 2012 
that make loan rehabilitation easier for borrowers.
    The new debt management system has replaced a system that 
was 30 years old, technologically and functionally limited, and 
subject to a number of security issues and audit findings. The 
new system was designed to be more secure, more robust, and 
less costly. We also levied appropriate and necessary sanctions 
against a contractor for poor performance. These actions 
included the issuance of a cure notice and the imposition of 
significant financial penalties. Late last year, we moved into 
the final phase of ending our relationship with the original 
contractor and awarded a new contract for DMCS.
    The new system's loan rehabilitation functions were 
restored in April of 2012, and the backlog of borrowers whose 
loan rehabilitation was delayed was resolved by January 2013. 
Over 525,000 borrowers have rehabilitated defaulted loans, with 
a value of more than $9 billion since functionality was 
restored. As a result of these efforts, we are processing 
record numbers of collections in all categories. Defaulted 
borrowers have better service and more options than at any time 
in the history of our programs. We have learned from the system 
transition, and are incorporating lessons into the management 
improvements across the organization.
    I want to thank the committee for providing me the 
opportunity to discuss this very important issue, and look 
forward to answering any questions that you may have this 
afternoon.
    [The statement of Mr. Runcie follows:]
    
    
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    Chairwoman Foxx. Thank you, Mr. Runcie.
    I now recognize Ms. Peg Julius for five minutes.

 STATEMENT OF MS. PEG JULIUS, EXECUTIVE DIRECTOR OF ENROLLMENT 
   MANAGEMENT, KIRKWOOD COMMUNITY COLLEGE, CEDAR RAPIDS, IOWA

    Ms. Julius. Chairwoman Foxx and members of the 
subcommittee, thank you for the opportunity to speak to you 
today. My name is Peg Julius and I am a member of the executive 
council of the National Direct Student Loan Coalition, and 
executive director of enrollment management and financial aid 
at Kirkwood Community College in Cedar Rapids, Iowa.
    We are a 2-year public institution, enrolling approximately 
23,000 students annually. Fifty-one percent of them receive 
student financial aid, and 34 percent receive Pell grants. 
Kirkwood joined the direct lending program in the second year, 
1995. I believed strongly then, and I continue to believe now, 
that direct lending is the best student loan option for our 
students. It is understandable for students and their families, 
it is simple, and it works. When borrower benefits were being 
used to entice schools away from direct lending in the late 
1990s, my administration moved out of direct lending and back 
to the Federal Family Educational Loan Program.
    After 3 years of participation in FFEL and many concerns 
about the level of service that was provided to our student 
borrowers, the opportunity presented itself for us to move back 
to direct lending and my staff and I happily made that change. 
The direct loan program continues to be the best student loan 
option. The switch to 100 percent direct lending in 2010 was an 
enormous undertaking by the Department of Education. As with 
any change of this magnitude, fine tuning continues to happen. 
The coalition believes that servicing of loans could be 
improved with the following changes.
    Borrowers need a single point of contact for all their loan 
repayment activities. The new option for students to choose 
their servicer during consolidation provides opportunities for 
abuse and fraud in the industry, and should be eliminated. 
Service levels, loan terms and borrower benefits must be equal 
and uniform. Performance measures should be relevant and 
uniformly applied to all servicers. We encourage the department 
to take advantage of the opportunity by the renewal of 
servicing and collection contracts to move that system to the 
best practices of the industry as a whole.
    The department has worked hard and accomplished much, 
correcting the issues with private collection agencies and the 
loan rehabilitation process. Despite the simplicity of the 
direct loan program, there are still challenges for students 
making repayments. And when students don't pay their loans, the 
resulting default is concerning both for them and for the 
taxpayers of this nation. We suggest that all correspondence 
from servicers use the identification of the Federal Direct 
Stafford Loan Program as the primary identifier. Students need 
to understand that this is a federal loan provided by Congress, 
and not a loan from a servicer.
    We believe that these changes will make the current model 
for direct lending and servicing even better than it is today. 
We are encouraged by improvements made in the consolidation 
process for students on studentloans.gov. Real-time information 
about all the loans that a student has and an easy process for 
pulling IRS information for income-based repayment options will 
no doubt reduce defaults. Yet still, students find themselves 
with defaulted loans for a variety of reasons. The need for the 
rehabilitation of these loans is not uncommon.
    While the process is not quick, it is also not daunting. 
Most can navigate the process on their own. When students ask 
for our help, it is a fairly easy handoff from the repayment 
counseling that we provide to the processes required by the 
department to put the loan in a rehabilitated status. There 
were serious reporting problems for rehabilitated loans when 
the change in debt collection servicing occurred. The systems 
are operating properly now, and those problems have been 
resolved.
    I want to thank you, Madam Chairman, for the opportunity to 
speak with you today. I am honored to give you some perspective 
on this very important issue from the student borrower and 
school viewpoint. And I am happy to answer any questions.
    [The statement of Ms. Julius follows:]
    
    
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    Chairwoman Foxx. Thank you very much.
    I am now going to recognize members for questions, and I 
would like to recognize the chairman of the committee, 
Congressman Kline.
    Mr. Kline. Thank you, Madam Chair. Thank the witnesses for 
being here. A question I just want to get really clear for the 
record here. Ms. Emrey-Arras, you touched on it in your 
testimony, but I want to get from you and Inspector General 
Tighe a straight yes or no answer here. I will start with you--
we always start with the GAO. And thank you for your work, by 
the way. I know that this committee and others, we just lay a 
lot of work on the GAO, and we appreciate the high quality of 
the work.
    So can you say, with certainty, that the department's 
default management system is fully functioning without any 
workarounds, and that all loan rehabilitations are now being 
properly processed within the appropriate time frames?
    Ms. Emrey-Arras. No. Education continues to rely on system 
workarounds. In addition, Education has put together a long 
list of functional deficiencies with the system that will need 
to be addressed by the new contractor. And, in addition, 
Education lacks data to know for sure that there are no longer 
delays in the process.
    Mr. Kline. Thank you.
    Inspector General Tighe, same question?
    Ms. Tighe. No.
    Mr. Kline. Exactly. Okay, thank you for that. And now again 
to the Inspector General. I have a nifty package put together 
here for us. I have got a couple of these alert memoranda dated 
May 8 and May 15 from your office to FSA. And in these, you 
point out significant oversight lapses by the department, which 
you have touched on. In both instances, the department's 
response indicated they agreed with your concerns and listed 
action items they would undertake to address the concerns in 
your memoranda. In your follow up, has the department 
demonstrated it has met the stated corrective actions?
    Ms. Tighe. Thank you. Regarding the alert memo on DMCS II, 
we had a number of recommendations. The department has 
submitted a corrective action plan on all but one, but has not 
completed action. On the most significant recommendation we 
made, which is the recommendation that basically they need to 
do a plan to demonstrate that they have a fully functional debt 
management collection system, we do not have a corrective 
action plan on that yet.
    Mr. Kline. So, work to be done.
    Ms. Tighe. Work yet to be done, yes.
    Mr. Kline. Well, again, I want to thank you for your work, 
for your testimony. And that is what we are getting at here. We 
understand that there are people of good will here trying to 
get things done. But the point of the matter is, the fact of 
the matter is, we still got big problems. And so I appreciate 
all of you being here today and your testimony.
    And with that, Madam Chair, I will yield back.
    Chairwoman Foxx. My goodness, this chairman is setting a 
great example also.
    Mr. Bishop, I now recognize you for five minutes.
    Mr. Bishop. Thank you very much, Madam Chair. And thank you 
very much for holding this hearing. This is a very important 
area, and I thank you for shedding light on it. And thank you 
to the panel.
    My first question is, it is my belief that this is a 
systems problem correction as opposed to there being something 
inherent in direct lending that contributed to this problem. Is 
it exclusively a systems problem?
    Ms. Tighe. Based on our work, it is a systems problem.
    Mr. Bishop. Okay. Mr. Runcie, you would concur with that?
    Mr. Runcie. Yes, this is a systems issue that we have taken 
great effort to address. And we believe we have addressed it. 
But it is not a direct lending policy issue.
    Mr. Bishop. Chairman Kline just asked if there were 
problems that remain. Ms. Emrey-Arras, you said yes. Ms. Tighe, 
you said yes. Mr. Runcie, you said in your testimony that, 
quote--``functionality has been restored,'' close quote. And I 
know that is a different matter than whether problems remain. 
Can you tell us how your department is addressing the problems 
that continue to exist, that have been highlighted by the 
Inspector General and by GAO?
    Mr. Runcie. Yes. First of all, the rehab issue. We put a 
fix in April of 2012. And then we cleaned out the backlog by 
the end of the year. So that issue is addressed. And so on a 
go-forward basis, you know, that functionality has been 
restored. In terms of the issue about workarounds, they're 
supporting processes--we have always had supporting processes. 
In the old system we had many workarounds, or supporting 
processes, to address issues that couldn't be handled directly 
by the system.
    We have less workarounds now than we did before we had the 
system. In our definition of a supporting process, a workaround 
that works is one that addresses the issue on a timely basis. 
So therefore, our workarounds are not creating any backlogs. So 
if there is a workaround process, there are no backlogs, so the 
borrower is not experiencing a detrimental situation.
    So this issue of fully-functioning or functioning system I 
think it can also be evidenced by the fact that we have 
increased the amount of collections, rehabs and collections in 
total, to a level of almost $9 billion since we put in that 
functionality. So from an operational definition of success, we 
would point to that as empirical evidence.
    Mr. Bishop. Okay. Let me ask this question, and I would ask 
this of the GAO and the Inspector General. Are you confident 
that the department has put in place the appropriate remedial 
action and the appropriate oversight steps to see to it that if 
Madam Chair were to bring us all back together 6 months from 
now or 9 months from now we would be viewing a different 
landscape than we are viewing right now?
    Ms. Tighe. From us, I am not confident. We actually have 
ongoing work right now on DMCS II. One of those is to 
basically, you know, look over FSA's shoulder and look at what 
they have set as functional and not functional. That work is 
still ongoing and will not be out for a little while, but we 
are checking on their claims of functionality. We also had 
started a job that we put aside because there was a big protest 
related to the follow on contract that is at issue here, that 
we would have looked at FSA's plans to sort of deal with all 
these issues. We haven't yet decided what to do with that job.
    Mr. Bishop. So your monitoring is ongoing.
    How about the GAO?
    Ms. Emrey-Arras. We are also monitoring. While Education 
has agreed with our recommendations, we need to monitor them to 
see that those steps that they have promised are taken and that 
they fulfill the requirements of the recommendations.
    Mr. Bishop. Okay. Thank you all very much.
    Chairwoman Foxx. Thank you very much, Mr. Bishop.
    Mr. Walberg, you are recognized for five minutes.
    Mr. Walberg. Thank you, and thanks to the panel for being 
here.
    Ms. Emrey-Arras, let me ask you first if you could, in more 
detail, describe the department's lack of oversight in its 
system--over its system contractor? And more specifically, what 
did you find when you looked through the department's contract 
files?
    Ms. Emrey-Arras. Thank you for that important question. We 
found that Education did not create a monitoring plan for the 
upgrade prior to the beginning of the work on the system, and 
only became involved after the contractor began missing 
deadlines, and created a monitoring plan about a year after 
everything got going.
    Mr. Walberg. Is that normal for--
    Ms. Emrey-Arras. That should not be normal. Actually, the 
department has guidance for contracting, and it recommends that 
people look to what risks are involved. And if a contractor has 
past performance problems, there should be more monitoring in 
place to mitigate those risks. And this contractor had those 
past performance problems, and oversight was not put in place 
up front when it needed to be to appropriately monitor the 
contractor.
    In terms of looking at the files, we did not find that 
monitoring documentation that the department requires of its 
employees in terms of status reports, other documents to show 
that they were really monitoring the contractor.
    Mr. Walberg. Interesting. Seems common sense was missing 
there, to a point. But who am I to know about that?
    Ms. Tighe, in your opinion, should the issues highlighted 
in your May 2013 alert memorandum have been spotted by the 
department if they had proper oversight and monitoring 
practices in place?
    Ms. Tighe. Yes, I do believe those issues should have been 
spotted. I think the principal problem, other than the 
underlying problem regarding the loans that would not transfer 
that we observed, was the failure to do proper testing of the 
system before it went live. That is a problem we recognize was 
also a problem recognized by the financial statement auditor in 
2013. That is, the fact that they only tested certain functions 
and didn't test all the way through the process of a loan and 
through rehabilitation, I think, created problems. I think if 
those things had been done we wouldn't have the problems we 
have today.
    Mr. Walberg. How much of your office's time has been spent 
in dealing with this issue of this contract?
    Ms. Tighe. Well, we have had two alert memos and we have 
ongoing work. We have spent just under a million dollars on 
staff time, on travel, and on related overhead for this work.
    Mr. Walberg. Well, that is certainly part of your 
responsibility. But if it doesn't have to be done. Are there 
any other audits that have been delayed because of this work?
    Ms. Tighe. Well, we prioritize our work according to the 
issues that we think are important. And this, when it burbled 
up, clearly became a top issue for us. So we did put some 
things aside and decided to give priority to this.
    Mr. Walberg. Okay.
    Mr. Runcie, contracting for services, as you would readily 
admit, is an important obligation, especially when it obligates 
millions of dollars of taxpayers' funds. Why did the department 
award a contract for these important services to an entity that 
had demonstrated failures of its own in the past?
    Mr. Runcie. Okay. Well, we did not award a contract. There 
was an existing contract that we modified. So we did not award 
a contract, so there wasn't a process. We ended up awarding a 
contract this past year. So it was considered almost more of an 
upgrade.
    Mr. Walberg. But the contract was continued. It wasn't, as 
you say, the word wasn't ``awarded.''
    Mr. Runcie. There was an existing contract that was 
modified to provide for an upgrade of the system that was 
already there.
    Mr. Walberg. With known problems from the contractor.
    Mr. Runcie. Well--
    Mr. Walberg. Was it modification meant to take of those 
known problems and to address those?
    Mr. Runcie. Well, the issue about its past performance had 
to do with systems integration work, not with the debt 
management collection system. There was some systems 
integration work involving four disparate systems that was a 
part of a contract, or an obligation. And that is what was not 
addressed. The actual operations and maintenance in delivery 
cycles around DMCS was not the issue that resulted in the past 
performance.
    Mr. Walberg. As I understand it, 80,000 borrowers were 
impacted by this failure. Could you quantify what that means to 
each of those individuals, and even to the economy?
    Mr. Runcie. The 80,000 borrowers that were not able to get 
loan rehab, by definition they were rehabilitated. But the 
clearing of their credit and the eligibility for Title IV funds 
was not an automatic process. The borrower relief process that 
was--
    Mr. Walberg. What does that mean?
    Mr. Runcie. It means that we put in place a borrower relief 
process. So they would contact us and we would contact the 
credit agencies to clear their credit, or if they needed a 
letter or any clearance for Title IV eligibility, we would 
provide that. And we provided that to about 8,000 people who 
called us.
    Mr. Walberg. I see my time has expired, Madam Chair.
    Chairwoman Foxx. Thank you, Mr. Walberg.
    Ms. Bonamici, you are recognized for five minutes.
    Ms. Bonamici. Thank you very much, Madam Chairwoman. Thank 
you for holding this hearing, which provides an opportunity for 
us to highlight the important work that is being done to make 
sure that Americans who have defaulted on their student loans 
aren't victimized and are given a reasonable chance to return 
to good standing. And I appreciate the work that has been done 
so far. It looks like there is still some work to do.
    I wanted to make sure, Ms. Honorable Tighe, you set out the 
procedure here: 360 days of nonpayment, and then it goes to the 
FSA debt management. And then if there is no response, or a 
refusal to pay, then it goes to a collection agency. Is that 
all correct?
    Ms. Tighe. Yes, that is correct.
    Ms. Bonamici. And can I ask you, Ms. Tighe or Mr. Runcie, 
how is the collection agency chosen? How do you decide which 
collection agencies to use?
    Ms. Tighe. I would defer to Mr. Runcie.
    Ms. Bonamici. Mr. Runcie, how do you make that 
determination?
    Mr. Runcie. There is an allocation process, I believe, 
based on performance. I don't have the details on that, but 
that is what I believe.
    Ms. Bonamici. And do you look at their record of whether 
they have been sued under the Fair Debt Collection Practices 
Act, for example?
    Mr. Runcie. Yes. As a part of the oversight process, we 
review them for compliance under the terms of the contract, any 
other issues that might impact their ability to collect on 
behalf of the Department of Education.
    Ms. Bonamici. So Ms. Emrey-Arras, you said in your report 
that there was an effort to assist borrowers. You said that 
there were procedures in November 2011 to assist eligible 
borrowers by removing defaults from the credit reports or 
reinstating their eligibility. However, borrowers had to 
contact the department or their collection agency to receive 
the assistance. So then it said that less than 10 percent were 
actually affected. So can you talk about whether there was 
follow up? You or Mr. Runcie or Ms. Tighe, was there follow up 
with these borrowers to make sure that they got the assistance 
they needed to reinstate their eligibility?
    Mr. Runcie. All of the backlog was cleared. So the 
remaining--you know, if you subtracted the 8,000 from the 
82,000--say, 72,000 were cleared out of backlog. So if they 
were eligible for being rehabilitated and getting their credit 
cleared, or the default cleared, entitled for eligibility, they 
would have received that by now.
    Ms. Bonamici. Okay. So there has been, you know, plenty 
written about the practices of certain debt collection 
agencies. Mr. Runcie, does your organization comply with the 
Fair Debt Collection Practices Act?
    Mr. Runcie. I assume so. I mean, all of our debt collectors 
have to comply with the Fair Debt Collection Act or they would 
not be--you know, that would be violation, I assume, of their 
contract terms.
    Ms. Bonamici. So since there has been the direct loan 
program, has there been an increase or decrease in borrowers' 
complaints?
    Mr. Runcie. Based upon one metric, there was, at the time 
that we put the system in, complaints jumped from .07 to .08 of 
a percent. And subsequently, it has gone down to a lower level 
than it was prior to the actual installation of the system.
    Ms. Bonamici. So now it is a lower level?
    Mr. Runcie. It is a lower number.
    Ms. Bonamici. And what does the FSA do to help borrowers 
avoid going to a collection agent, being referred a collection 
agency? Are there efforts to encourage them to negotiate early 
on? Are there steps taken to warn them that if you do not 
handle this or make arrangements it will go to a collection 
agency?
    Mr. Runcie. Yes. Yes, there are a number of financial 
literacy activities and tools. There is also entrance and exit 
counseling, some in-school counseling. We also have contractual 
terms that motivate, you know, the servicers to provide a level 
of education and process that would help defer or avoid, you 
know, students going into default. In addition, when the loans 
are turned over to us there is a sort of a 60-day period where 
we will reach out before we actually even send it out to the 
collection agency.
    So, you know, we can always do more, and we are constantly 
putting more in the way of financial literacy and outreach out 
there. But we do have a pretty rigorous approach to trying to 
help students avoid default.
    Ms. Bonamici. And you also talked about the regulatory 
change to help define what a reasonable and affordable payment 
is. And it is my understanding that becomes effective in July. 
Is that correct?
    Mr. Runcie. Yes, of previous year. So it allows default. It 
makes it easier for defaulted borrowers to rehabilitate their 
loans. Because their payments, the nine payments that they 
would make over a 10-month process, is now based upon a 
percentage of their income. So there is a higher likelihood 
that they can pay those amounts, rehabilitate their loan, get 
title IV eligibility, and get the default off of their credit. 
So before, there was some judgment and there was some 
negotiation.
    But you know, after that point we were able to put that in 
place. And so you will also notice that after that became the 
standard, there was an increase in the amount of rehab. So it 
is actually, it is working.
    Ms. Bonamici. Terrific. Thank you. My time has expired.
    I yield back. Thank you, Madam Chairwoman.
    Chairwoman Foxx. Thank you, Ms. Bonamici.
    Mr. Tierney, you are recognized for five minutes.
    Mr. Tierney. Thank you very much.
    Mr. Runcie, I note that in Ms. Tighe's report she indicates 
that there is a continuing problem of the non-report from the 
private contracting agencies, non-reporting on verbal 
complaints. Where does that stand now?
    Mr. Runcie. That has been addressed. I mean, there was--you 
know, the PCAs thought that if they handled the verbal 
complaint, if they handled the verbal complaint over the 
phone--someone had an issue and they handled it--they felt that 
they didn't have to report that. We have provided much clearer 
guidance in terms of what must be reported, and we have noticed 
that we are getting notifications, and logging, you know, 
verbal complaints. So that has been addressed.
    Mr. Tierney. Well I tell you, it bothers me that it took a 
report to get it addressed. I mean, that is a large part--you 
know, we have got great protections in this bill to go after 
and chase people who are in default, many of them facing 
circumstances that just the vicissitudes of the life put them 
in there. And we are beating them up. We garnish their wages, 
we take their tax funds, we go after Social Security benefits. 
Pretty onerous stuff.
    And then for us to have to have a report to find out that 
these private contracting agencies aren't even reporting verbal 
complaints doesn't seem justified to me. And I hope that you 
are doing a better job of oversight, and not waiting for some 
report to come down the pike. Because I tell you, you know, I 
am gonna ask you whether or not you think that some of these 
collection agencies are just being unfairly difficult on people 
that are trying to get back from default or avoid default on 
that, and whether or not they are just being too onerous in the 
way they do it. What is your thought on that?
    Mr. Runcie. Well, what we are looking at right now is, it 
was something that was noted in the report, the level 
monitoring of the PCAs. So we have increased the level of 
monitoring. Before, we were monitoring--we are supposed to 
monitor, you know, once a quarter. And based upon some of the 
workloads and some of the issues and resource contentions, we 
weren't consistent in doing that. We have now increased to four 
times a quarter, where we would listen in on calls and we would 
provide a higher level of oversight to make sure that borrowers 
aren't being harmed.
    Mr. Tierney. Understand, I hear horror stories--you know, 
my constituents calling me--that would stand your hair on end 
about the way they are being treated by folks like that who end 
up putting them in a worse situation than they would otherwise 
be if somebody gave them the right attention and helped them 
out from the very beginning. We just can't have that on that 
basis. I will tell you what. I want your opinion of the 
Educational Credit Management Corporation and the way they go 
after people who may have had a health issue, or a loss of job 
and a health issue, trying to seek bankruptcy through the one 
small window that allows for any bankruptcy filing at all.
    And the reports of the courts having to tell this agency 
that they are just being abusive and that they are stepping 
outside the bounds. What are you doing about that?
    Mr. Runcie. Well, we use them for--I think that had to do 
with the guarantee agency side of their business and not the 
direct loan side of the business. Because our litigation goes 
through the Department of Justice, so that wouldn't have been 
an issue that we would have oversight on.
    Mr. Tierney. So you don't deal with that at all?
    Mr. Runcie. Not those issues related to the guarantee 
agency.
    Mr. Tierney. All right. Because that should be troubling 
for all of us on that basis. What is your thought about, you 
know, letting some people have relief of these enormous loans, 
and they have had a problem for one reason or another with the 
system or with the PCAs overstepping their bounds or whatever? 
What can we do for those folks to get them back on track that 
doesn't leave them in the situation being 55 years old, having 
98,000 worth of debt, and never be able to get out of this 
thing?
    Mr. Runcie. Yes. I mean, I think there are some things that 
have been done in terms of, you know, income-driven repayment, 
you know. And then, you know, they have certain entitlements. 
But, I mean, I think some of those things are less operational 
and may be more policy. But there certainly are, you know, 
borrowers who have, you know, issues making the payments.
    Mr. Tierney. Ms. Tighe, do you have any ideas of how you 
might help the department, you know, monitor this thing in a 
better way that gives people a fairer disposition of their 
situations?
    Ms. Tighe. The alert report you noted dealing with verbal 
complaints that we brought forward is actually done while we 
were out doing--we noticed that problem when we were out doing 
field work for an audit we have ongoing right now on borrower 
complaints against PCAs. So we should have a report out on 
that. I don't know the timetable, but perhaps sometime over the 
summer.
    Mr. Tierney. Well, that will be helpful and I appreciate 
that. Thank you.
    I will yield back.
    Chairwoman Foxx. Thank you, Mr. Tierney.
    I now recognize myself for five minutes. I wait until the 
end because I have to be here. Other folks can leave if they 
need to. I wanted to ask Ms. Emrey-Arras a question. You talked 
about--and I read your report really, very carefully--you 
talked about the need--and Ms. Tighe, you may want to respond 
to this also, of how the department sets up its data collection 
process. The inadequacy of the setting up the data collection 
process to begin with. And I know people have said over the 
years that things are close enough for government work.
    But is there any way that the department can be alerted in 
advance of how to do the appropriate--set up the appropriate 
evaluation to begin with? We know that is the real key to 
getting the kind of information that you need. And we are 
dealing with people who aren't necessarily experts in this 
area. So does GAO have a mechanism for helping the department 
set these programs up in advance so that we are not 
retrospectively asking why aren't we collecting this 
information?
    Ms. Emrey-Arras. That is a good question. The department 
actually has good guidance to help people identify when there 
may be risks involved and when more oversight is needed. So 
Education's own guidance suggests certain factors that would 
necessitate more attention being paid. Those include if a 
contractor has an unreliable performance history, if there are 
multiple subcontractors involved, and the degree to which the 
project is interrelated with other contracts or projects.
    So I think looking at that departmental directive can help 
Education staff realize when a contract may be more risky, and 
be more attuned to putting monitoring steps in place early on.
    Chairwoman Foxx. All right. And follow up just a little bit 
about that. Without putting words in Mr. Runcie's mouth, there 
was something said earlier about the fact that the department 
didn't award more contracts to the contractor that was not 
doing its work properly. But they did benefit by being allowed 
to stay on, as I recall from reading the report. So they did 
get a benefit by being allowed to do the additional work. Is 
that correct?
    Ms. Emrey-Arras. That is correct. Although the contract 
modification was technically no cost, there was also an 
arrangement made where the system contractor was guaranteed $5 
million in non-defaulted loans to service.
    Chairwoman Foxx. Thank you.
    Ms. Tighe, would you like to respond to those questions?
    Ms. Tighe. Well, I would agree with everything GAO said. 
And note that, you know, we have had concerns. Rather than sort 
of hit these contracts and these systems in onesies and 
twosies, you know, we really need to step back and look at 
where FSA is in terms of looking at these whole processes. 
Which is why we put these two jobs on our audit plan for this 
year. It is, let's look at, overall, at how their IT systems 
develop. DMCS II doesn't seem like a good example of how a 
system should be developed.
    And I think that to the extent, as an example of how other 
systems may be handled now or in the future, it would be nice 
to come up with recommendations to FSA on how to do that 
better. Similar on its contracting processes, we have certainly 
gone in over the years and looked at onesies and twosies on 
contracts. We really want to look at the process more from a 
wider standpoint and make recommendations for improvement.
    Chairwoman Foxx. Thank you.
    Mr. Runcie, I appreciate the statements of commitment that 
you have made about wanting to do this work right and to make 
sure that the taxpayer is getting its appropriate payback on 
what is done in the department. And I appreciated also very 
much Mr. Bishop's comments. Can you tell us when there will be 
a plan that would be able to be evaluated to correct the 
problems that have been talked about here today?
    Mr. Runcie. Yes. Well, we submitted a plan recently, and my 
understanding it is under review by the inspector general, the 
most recent plan. And I think, you know, that review might be 
tied to the other audit that is going on. But that 
notwithstanding, you know, we have put a plan in place that has 
resulted, I think, in some of the performance that we have 
talked about in terms of debt collections and clearing the 
rehab.
    In addition, we have taken to heart what the I.G. and the 
GAO has said about making sure that we have a level of 
oversight on contracts going forward. So the new debt 
management collection system that we awarded does have 
independent verification, a validation vendor that is going to 
checkpoint all the milestones and go through the process to 
make sure that there is a level of quality assurance that is 
going on as the project is being developed. In addition to 
that, we are running it through our life cycle management 
methodology, which is a very rigorous process where we have 
risk logs and we track and we have remediation.
    And so we have incorporated some of the lessons that we 
have learned as well as the guidance from the I.G. and GAO to 
make sure that as we move forward we can mitigate the risk and 
perform at the highest level possible.
    Chairwoman Foxx. Thank you very much. Okay.
    Well, I want, on behalf of all of the members of the 
subcommittee, to thank our witnesses for being here today. I 
think we have had a good hearing. Again, when Mr. Bishop left, 
he thanked me again for having the hearing. And I believe you 
all have helped us understand these issues a little bit better. 
I particularly appreciate, again, the report from the GAO. I 
appreciate what the I.G. is doing. Mr. Runcie, I appreciate 
your commitment to making things better here in terms of the 
service that we give to the students.
    I also am very grateful for the comments that Mr. Hinojosa 
made in his opening remarks that he pointed out that we have a 
need for oversight. And we agree with him on our side of the 
aisle that we need this oversight no matter which 
administration is in place. It is our job as members of 
Congress to see that hardworking taxpayer money is being spent 
appropriately, and that the people that we are servicing 
through the Department of Education are treated appropriately.
    I believe that this program is going to stay in place. And 
my major concern is that we not mistreat any students in any 
way or any people who are former students who had loans who 
want to get them rehabilitated. Our responsibility is just to 
make sure that they are treated appropriately.
    Unfortunately, when you do this in the government there 
aren't usually very many incentives for getting the job done 
right and getting it done in a timely fashion. I wish we had a 
better way to do that than we have now.
    But I will accept your commitment, Mr. Runcie, that the 
department wants to do these things right and will set in place 
a plan to make sure that everyone who is affected, has been 
affected, and will be affected in the future, will be treated 
appropriately.
    There being no further business, the subcommittee stands 
adjourned. And thank you, again.
    [Additional Submissions by Julius follow:]
   
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    [Questions submitted for the record and their responses 
follow:]


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    [Mr. Runcie response to questions submitted follows:]
    
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    [Whereupon, at 3:38 p.m., the subcommittee was adjourned.]