GAO Report: Shadowy Industry is Manipulating Student Loan Borrowers, Default Rates
Reps. Takano, DeLauro call for improvements to Cohort Default Rate in response to GAO findings
Washington, D.C. – Today, the Government Accountability Office (GAO) released a report – commissioned by Rep. Mark Takano (D-Calif.) and Rep. Rosa DeLauro (D-Conn.) – revealing how the little-known but increasingly harmful “default management industry” is using misleading information, coercion, and even $25 gift cards to manipulate student loan default rates. In response to the report’s findings, Mr. Takano and Ms. DeLauro joined the GAO in calling for improvements to the Cohort Default Rate (CDR) formula, which is a critical metric for holding schools accountable to students and taxpayers.
Specifically, the GAO report found that a number of default management consulting firms are
pushing borrowers into prolonged forbearance as a method of helping schools artificially lower their Cohort Default Rates. The current CDR formula measures the share of students who default within three years of beginning repayment. The report describes how forbearance has been exploited as a tool to delay potential loan defaults beyond the three-year window while adding thousands of dollars to the cost of student loans and putting borrowers at greater risk of eventual default.
Borrowers who interact with these firms are rarely made aware of their conflict of interest.
There is currently no specific legal requirement for default management firms to provide students with accurate and complete information.
“The GAO’s report reveals an astonishing lack of accountability and transparency in the default management industry that results in borrowers owing thousands of dollars in additional debt and facing a greater risk of default,” said Rep. Takano. “The Department of Education must use the full extent of its authority to rein in abusive firms and protect student loan borrowers and taxpayers. I strongly support the GAO’s recommendation to strengthen the formula used to calculate the Cohort Default Rate, which is an important and proven tool for ensuring schools are taking responsibility for their students’ futures.”
The Department of Education uses Cohort Default Rates to determine schools’ eligibility for Direct Loans and Pell Grants. According to the GAO’s analysis, simply removing borrowers in forbearance from the CDR equation – rather than the current practice of counting their loans as not in default – would substantially limit the ability of consulting firms to manipulate the data.
“Congress and the Department of Education need to step up immediately to stop default management consultants from taking advantage of student loan borrowers,” said Rep. DeLauro. “These companies are giving borrowers bad advice in order to protect their own bottom line and to make sure certain schools’ default rates do not raise any red flags at the Department of Education. Some consultants have even falsely threatened that the government will take people’s away nutrition and Supplemental Security Income benefits if they default on their loans. Their reckless disregard for people’s lives is shameful—and it needs to stop.”
The report found that the share of borrowers who were in forbearance at some point during their first three years of repayment rose to 68 percent in 2013, from just 39 percent four years earlier.
In addition to data analysis, the report features anonymous interviews with executives of default management firms as well as a review of internal documents. It details a handful of egregious practices used to push borrowers to enter forbearance, including offering $25 gift cards to borrowers or providing misleading information intended to make borrowers feel as if they have no other option. In one case, a firm sent letters to delinquent borrowers inaccurately claiming that their SNAP benefits could be taken away if they default on their loan.
In a written response to the GAO’s report, the Department of Education claimed limited legal authority in regulating default management firms and shifted responsibility for taking action to Congress. In December, Republicans on the House Committee on Education and the Workforce advanced the PROSPER Act, a reauthorization of the Higher Education Act, which eliminates the use of Cohort Default Rates, along with several other accountability measures, rather than addressing loopholes and strengthening enforcement.
The Consumer Financial Protection Bureau, which is responsible for regulating student loans and other consumer financial products, appears similarly disinclined to protect borrowers. Under the leadership of CBO Director Mick Mulvaney, the CFPB is currently the subject of an inquiry from four Democratic Senators over reports that it is seeking a cozy settlement with Navient, a student loan servicing company that is accused of systematically defrauding borrowers.
A full version of the report is available here.
Josh Weisz, 202-225-2305
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