Education Department Fails to Hold Loan Management Firm Accountable

The U.S. Department of Education’s Office of the Inspector General has issued an audit report stating the department failed to hold a student loan management company, Xerox Education Solutions LLC, accountable for correcting deficiencies in its Debt Management Collection System (DMCS).

The audit was conducted to determine if Federal Student Aid’s (FSA) plan for Xerox Education Solutions to improve the collection system included benchmarks to ensure the company fixed system deficiencies. The audit also reviewed whether Xerox was held accountable if it did not have a fully functional system at the end of the original contract with the department on Dec. 31, 2013.

In July, Education Department COO James Runcie issued a response to a draft audit report from the Office of the Inspector General, stating that Federal Student Aid is committed to addressing any deficiencies in the DMCS and already had taken several steps to support the effort.

"We agree with the recommendations included in your draft report that build on and complement these initial steps," Runcie said.

According to the Office of Inspector General, FSA never “explicitly agreed nor disagreed with the finding” in the audit, just the recommendations.

“We found that FSA could not ensure that Xerox delivered a fully functional system because it did not develop an adequate plan, ensure milestones were met, or use appropriate systems development tools,” according to the audit.

The history of the contract began in November 2003 when FSA entered into a Common Services for Borrowers (CSB) contract with ACS Education Solutions (now known as Xerox) to service direct loans.

"In addition to servicing Direct Loans, the CSB contract required Xerox to perform default management activities, which included tracking defaulted student loan balances, borrowers’ payments, repayment agreement information, and loan servicer information, using the Debt Management Collection System,” according to the audit report.

“Under the terms of the CSB contract, Xerox agreed to provide, at a minimum, the DMCS functionality and enhanced functionality FSA identified. The enhanced functionality included, but was not limited to, applying financial transactions to a debt account, electronically referring the borrower’s account to a private collection agency, and protecting certain accounts from private collection agency placement (for example, accounts that were in bankruptcy or assigned to the Department of Justice),” according to the audit report.

In June 2010, FSA and Xerox agreed to a CSB contract modification in which required Xerox to “enhance, upgrade or replace,” the DCMS by Jan. 1, 2011. The entities agreed to extend the deadline for the modifications to Feb. 1, 2011, but Xerox missed that deadline and FSA approved the full transition from DMCS to DMCS2 in October 2011. 

"FSA did not require Xerox to validate system functionality, which would have included system testing for an entire loan life cycle, including through default and debt rehabilitation. Many of the deficiencies in the DMCS2 system were directly related to default and debt rehabilitation functions,” according to the audit report.

In February 2012, FSA issued a notice to Xerox to allow the company the opportunity to address the issues with the DMCS and provide a corrective action plan.