[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 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Available via the World Wide Web: www.gpo.gov/fdsys/browse/ committee.action?chamber=house&committee=education or Committee address: http://edworkforce.house.gov ________________ U.S. GOVERNMENT PUBLISHING OFFICE 86-974 PDF WASHINGTON : 2015 _________________________________________________________________________________ For sale by the Superintendent of Documents, U.S. Government Publishing Office, Internet:bookstore.gpo.gov. Phone:toll free (866)512-1800;DC area (202)512-1800 Fax:(202) 512-2104 Mail:Stop IDCC,Washington,DC 20402-001 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:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 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:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 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:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 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:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 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:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] [Questions submitted for the record and their responses follow:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] [Mr. Runcie response to questions submitted follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] [Whereupon, at 3:38 p.m., the subcommittee was adjourned.]