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YELLOW SHEET Office of the State Auditor of Missouri |
Report No. 2000-27
April 21, 2000
The following areas of concern were discovered as a result of an audit conducted by our office of the Department of Higher Education, State Guaranty Student Loan Program.
The Department of Higher Education contracts with a loan program servicer to maintain records, process loans and claims, and collect on defaulted loans guaranteed through the Federal Family Education Loans program.
The reauthorization by the federal government of the Higher Education Act, in October 1998, replaced preclaims assistance and supplemental preclaims assistance with a single activity, default aversion assistance. Default aversion assistance consists of the activities of a guaranty agency that are designed to prevent defaults by borrowers who are at least 60 days delinquent.
The Department of Higher Education has experienced some difficulties in implementing the default aversion billing process and errors have caused some loans to be billed more than once. Contributing to this problem was the fact that, prior to the issuance of its final regulations on October 29, 1999, the U. S. Department of Education twice issued preliminary guidance to guaranty agencies that changed the method for calculating default aversion fees. To ensure default aversion fees are not under or over billed, the Department of Higher Education should consult with the U.S. Department of Education and ensure they are properly calculating the fees. In addition, they should ensure no duplicate billing occurs.
The final regulations included a prohibition against conflicts stating that an outside entity to whom a guaranty agency contracts may not perform default aversion activities and hold or service a loan, or collect on a defaulted loan within three years of the claim payment date. Although the department has entered into a contract with an entity other than its loan servicing contractor to perform default aversion activities, as of December 22, 1999, the Department of Higher Education had not assigned accounts to the new contractor. Allowing the loan servicer to continue providing preclaims assistance while servicing and collecting on the same loans appears to violate the provision against conflicts.
To ensure the collection of all default aversion fees, the Department of Higher Education should contact the U.S. Department of Education to determine if the department is eligible to receive default aversion fees when the loan program servicer performs some of the default aversion assistance activities.
