The Challenge of Running the Office of Federal Student Aid ‘More Like a Business’

The U.S. Department of Education building is seen in Washington, D.C., on July 22, 2019.

See also: Ensuring Accountability and Effectiveness at the Office of Federal Student Aid” by Ben Miller and Jason Delisle

All too often, policymakers suggest that the government needs to run “more like a business.” The allure is understandable, since private companies are usually known for being adaptive and placing a greater emphasis on performance, efficiency, and customer service. But recent history proves that mixing business and government is more complex and fraught than originally understood. Done poorly, it could even make government less accountable and responsive.

One of the clearest examples of this comes from the Office of Federal Student Aid—an agency within the U.S. Department of Education that oversees the collection of all federal student loans. In 1998, Congress passed legislation to classify the office as a “performance-based organization,” granting it the authority to operate more like a private business.

The hope was that this classification would let the office focus solely on day-to-day operations—such as processing financial aid applications, dispersing student loans, and managing contracts with outside servicers. Therefore, the office was granted additional flexibility and independence compared with a typical government agency.

For example, a chief operating officer (COO) now leads the Office of Federal Student Aid, and he is exempt from many federal rules. This makes it easier for the office to mirror practices that are commonplace in the corporate world—such as offering bonuses to high-performing employees. Additionally, the COO can only be fired by the president—not the secretary of education—or for cause, making him much more insulated than even the second- and third-highest-ranking officials within the Department of Education.

The distinction between operations and policy is not always clear

Many lawmakers believed that the business-like setup at the Office of Financial Aid would work seamlessly. In their eyes, the COO would be insulated from outside political pressures, making it possible to efficiently carry out all operational duties within the office. Policymaking, on the other hand, would be left to Congress and other political leaders at the Department of Education.

But this arrangement assumed that the distinction between operations and policy would always be clear. Unsurprisingly, the sharp line between the two began to blur in practice—and it has been a challenge for the agency ever since.

In 2016, for example, the Office of Federal Student Aid released a solicitation for new loan servicing contracts. Selecting contractors is clearly an operational function, falling under the duties of the COO. But the substance of those contracts—and the incentives they create—have large policy implications for how borrowers repay their debt. Here, the line is less clear: Is designing contracts operation or policy?

Ultimately, political leaders could not run the Office of Federal Student Aid’s contract process. Instead, all they could do was release a 50-page memo laying out their desired policy direction for student loan servicing.

How policymakers can better separate operations and policy

There are no hard-and-fast rules for separating the business-like operations from the governmental policy functions. Given some of the recent criticisms of the Office of Federal Student Aid, policymakers would be wise to take note of the office’s special status as a performance-based organization and learn from the efforts of previous administrations.

To start, Congress should outline clear expectations for the office’s goals—something it has not substantively done in 20 years. Greater emphasis needs to be placed on transparency around loan program outcomes, and less emphasis should be put on integrating systems that the office fixed years ago. This will require setting goals that measure success in these areas and moving away from the current overemphasis on program compliance.

Additionally, senior leadership at the Department of Education should more actively hold the COO accountable for metrics outlined in annual performance contracts. In the past, these contracts have been short and vague. The secretary of education should outline expectations, goals, and concrete ways to measure progress in meeting desired objectives.

Conclusion

None of this will be easy. It will require a careful balance of independence and oversight. But demands for government to operate more efficiently and effectively by emulating the private sector will not go away, and while there are benefits to flexibility, the recent history of the Office of Federal Student Aid shows that flexibility can also pose significant management challenges. Modernizing the office’s goals and exercising real management oversight are important first steps to helping the millions of Americans with student loans and protecting the taxpayers who fund the program.

Ben Miller is the vice president for Postsecondary Education at the Center for American Progress. Jason D. Delisle is a resident fellow at the American Enterprise Institute, where he works on higher education financing with an emphasis on student loan programs.