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Introduction and Summary
The fifth-largest bank in the United States does not occupy a fancy office tower in Manhattan, nor does it employ hundreds of thousands of individuals in offices around the country. Instead, most of its 1,300 employees sit in an 11-story building on a small street tucked away behind Washington, D.C.’s Union Station. From that base of operations it manages a massive portfolio that affects 1 out of every 6 adult Americans.
In fact, the bank is not even a financial company but rather the Office of Federal Student Aid (FSA), a unit within the U.S. Department of Education. This office disburses roughly $120 billion each year in grants and loans to help millions of students access and afford an education beyond high school. It also oversees a total loan portfolio of $1.4 trillion. It does this on a total budget of about $1.7 billion a year, about half of which is spent on outside contractors to service student loans.
FSA’s role in managing the federal student aid programs also differs from that of a typical bank. Congress, not FSA, sets the terms and conditions for the programs the office administers and dictates the agency’s budget through the annual appropriations process. The U.S. Department of the Treasury provides the capital for loans. And the Department of Education handles issues related to cost projections; provides the office’s legal counsel; and is responsible for policy decisions that affect the portfolio.
As student loans become an increasingly common tool that Americans use to finance higher education, there are significant worries about the management and oversight of the federal financial aid programs. Watchdogs within the government have raised concerns about a range of issues in the aid programs, including:
Although the responsibility for some of these issues, such as cost estimation, rests more with the Education Department than with FSA, some observers in the policy community are increasingly using these concerns to question whether these problems might be related to FSA’s unique organizational structure.8 FSA is 1 of only 3 federal offices designated as a performance-based organization (PBO)—a structure intended to make FSA function more like a private enterprise with a focus on strategic goals and outcomes. Offices that hold this status receive exemptions from typical federal rules around hiring and procurement as well as compensation practices, including the option of paying bonuses to senior managers.9 Similarly, the PBO structure establishes the head of FSA as a chief operating officer (COO) on contract rather than a political appointee. In exchange for these flexibilities, the agency must carry out purposes and functions that Congress spells out in statute and follow a set of strategic goals through an internal performance plan developed with the Education Department.
While FSA’s PBO designation establishes these flexibilities and independence, some in the policy community have criticized the PBO structure in recent years. Critics have argued that FSA has not faithfully adhered to the PBO concept or that the PBO framework frustrates transparency, accountability, and policy reforms.
This report finds a more complicated story. The criticisms leveled against PBOs in recent years have a degree of merit. Yet some of these complaints concern issues that lie with the Education Department, and others may be a function of how PBOs are conceptually supposed to operate. The PBO structure was designed to be somewhat independent from political pressures, which its drafters saw as a feature that would allow it to focus on day-to-day business operations and avoid the distractions of the latest policy agenda. But that independence can cut both ways, making the agency seem unresponsive to the directives of officials at the Education Department or even Congress.
Resolving the tensions between independence and political accountability requires that policymakers hold the PBO and its COO to the goals that Congress has set in law—not overhaul or abandon the PBO structure entirely. In theory, those goals are enforced through the contracts and strategic plans that FSA leadership develops with the Education Department. In recent years, policymakers have treated these goals—which are intended to provide accountability and offset the independence and flexibilities they granted the PBO—as an afterthought. Congress has not meaningfully updated the goals of the PBO since the legislation’s 1998 inception; in fact, recent Democratic and Republican proposals to overhaul and reauthorize the Higher Education Act (HEA) include minimal substantive changes to FSA’s structure and goals as a PBO.
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