Why it matters

Loan servicer audits on student accounts are a compliance test: regulators and oversight bodies (often the U.S. Department of Education or state agencies) review whether servicing practices match contracts, federal rules, and borrower protections. Good preparation reduces findings, preserves federal eligibility, and shortens audit timelines (U.S. Department of Education: https://www.ed.gov).

Pre-audit checklist (step-by-step)

  • Create an audit team and point person. Assign responsibilities for documents, systems access, and communications. Include legal/compliance and IT representation.
  • Inventory required documents. Typical requests include loan origination files, promissory notes, payment histories, deferment/forbearance records, borrower communications, collection actions, and transcript logs. Keep a clear index for each borrower.
  • Map your processes. Produce simple flow charts showing how loans move from intake to repayment, how exceptions are handled, and which staff or vendors perform each step.
  • Pull and validate data reports. Run batch reports for the audit period and reconcile totals to the general ledger. Save export logs and data dictionaries to show how reports were generated.
  • Preserve communications. Save call logs, scripted messages, and written notices to borrowers. Ensure redaction rules protect personal data.
  • Review vendor and sub-servicer contracts. Be ready to show oversight activities, SLA records, and audit clauses from third parties.
  • Conduct a targeted internal review. Sample a manageable subset of accounts (e.g., 50–200) and confirm file completeness and regulatory actions were timely.
  • Document remediation. If you find discrepancies, create corrective-action logs that show root cause, corrective steps, owners, and completion dates.

Records retention and timelines

Federal and state rules vary. Keep original loan documents and key servicing records for the period required by your program or regulator—commonly 3–7 years after the end of the audit period—but follow your institutional records policy and any federal student aid guidance (U.S. Dept. of Education). When in doubt, retain payroll, reconciliation records, and borrower-facing notices for at least seven years.

Systems, security, and e-discovery

  • Provide secure, read-only access to auditors where possible. Track who accessed what and when.
  • Prepare export-ready datasets and explain report logic. Auditors often test the extraction method.
  • Keep an audit trail for edits and corrections in servicing systems.

Staff training and controls

  • Train frontline and back-office staff on documentation standards and how to pull supporting records. Conduct a quick mock request to test staff readiness.
  • Maintain written policies and version history for procedures and scripts.

How to respond during the audit

  • Acknowledge requests promptly and deliver items per the agreed schedule.
  • Use an issues log to record every request, submission date, clarifying question, and outstanding item.
  • Avoid over-sharing: provide only the requested scope unless the auditor asks for additional documents.

Common pitfalls

  • Incomplete indexes: files are complete but poorly organized, slowing the audit.
  • Report mismatches: summary reports don’t reconcile to underlying transactions because of filters or date ranges.
  • Forgotten vendor obligations: servicer oversight and proof of testing are common findings.

Real-world tip from practice

I’ve helped several institutions where a quarterly internal sampling program eliminated most findings months before an external audit. Small, frequent checks (and documented remediation) reduce scope and improve results.

Relevant resources

Internal guidance and related topics

Quick FAQ

  • How long should I keep files? Follow program rules, but retain essential servicing evidence for at least 3–7 years; many institutions keep seven years for safety.
  • Who typically conducts audits? Federal or state education agencies, independent auditors hired by oversight bodies, or internal compliance teams.
  • What are typical consequences of findings? Ranging from corrective-action plans to monetary penalties or program sanctions, depending on severity.

Professional disclaimer

This article is educational and not legal advice. Institutions facing an audit should consult their legal counsel or compliance advisor for tailored guidance.

Authority and further reading

U.S. Department of Education, Consumer Financial Protection Bureau, and relevant state education agencies provide program rules and audit guidance—consult those sources when preparing for an audit.