Report No.: GAO/HR-93-2 Date: December 1992
____________________________________________________________________________
___
Author: United States General Accounting Office
Addressee: High-Risk Series
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Overview
- The Problem
- The Causes
- GAO's Suggestions for Improvement
Federal Family Education Loan Program Operation: A Complicated, Cumbersome
Process
- The Student
- The School
- The Lender
- The Guaranty Agency
- The Department of Education
Program Structure Is Flawed
- Original Focus Has Changed Dramatically
- Expansion to Proprietary Schools Escalated the Risk
- Incentives to Promote Access Have Been Costly
- Lack of Adequate Controls Has Increased Costs
Flaws Have Been Costly
- Students Punished the Most
- Some Schools Have Had Little Concern for Defaults
- Lenders and Guaranty Agencies Should Focus More on Preventing Defaul
ts
Department Mismanagement Contributed to Problems
- Better Gatekeeping Needed
- Accurate Financial and Management Information Systems Are Vital
- More Effective Oversight Needed
- Better Qualified Staff Required
- Improved Management Structure Needed
- Existing Problems Could Hamper Implementing Direct Loan Demonstratio
n
Conclusions and Action Needed
Related GAO Products
High-Risk Series
- Lending and Insuring Issues
- Contracting Issues
- Accountability Issues
Figure
======
Figure 1: Federal Family Education Loan Program: A Complicated and
Cumbersome Process
Office of the Comptroller General
Washington, DC 20548
December 1992
The President of the Senate
The Speaker of the House of Representatives
In January 1990, in the aftermath of scandals at the Departments of Defense
and Housing and Urban Development, the General Accounting Office began a
special effort to review and report on federal government program areas that
we considered "high risk."
After consulting with congressional leaders, GAO sought, first, to identify
areas that are especially vulnerable to waste, fraud, abuse, and
mismanagement. We then began work to see whether we could find the fundament
al
causes of problems in these high-risk areas and recommend solutions to the
Congress and executive branch administrators.
We identified 17 federal program areas as the focus of our project. These
program areas were selected because they had weaknesses in internal controls
(procedures necessary to guard against fraud and abuse) or in financial
management systems (which are essential to promoting good management,
preventing waste, and ensuring accountability). Correcting these problems is
essential to safeguarding scarce resources and ensuring their efficient and
effective use on behalf of the American taxpayer.
This report is one of the high-risk series reports, which summarize our
findings and recommendations. It describes our concerns over the Department
of
Education's management of the Guaranteed Student Loan Program, especially
regarding defaulted student loans. It focuses on the program's structural
flaws and the lack of adequate incentives that some participants have to
prevent defaults. We have made numerous recommendations in the past, many of
which have been implemented. We believe that other opportunities for
improvement exist, specifically those aimed at improving program management
and reducing risk, that should be considered and acted on.
Copies of this report are being sent to the President-elect, the Democratic
and Republican leadership of the Congress, congressional committee and
subcommittee chairs and ranking minority members, the Director-designate of
the Office of Management and Budget, and the Secretary-designate of Educatio
n.
The Federal Family Education Loan Program (formerly known as the Guaranteed
Student Loan Program), administered by the Department of Education, is
designed to provide access to postsecondary education for those who cannot
otherwise afford it, on the premise that, once educated, the borrowers will
earn incomes sufficient to pay back the loan. In 1991, the program generated
about 4.8 million new loans totaling over $13 billion for students attending
over 7,500 schools.
These loans are currently made by 7,800 lenders and administered by 46
state-designated guaranty agencies. The government generally pays interest o
n
the loans while students are in school. Also, the government, through the
guaranty agencies, guarantees the loans and repays lenders if borrowers fail
to do so.
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THE PROBLEM
While the program has generally succeeded in providing access to money for
education, it has been less successful in protecting the taxpayers' financia
l
interest. In 1991, the federal government paid out $3.6 billion to make good
its guarantee on defaulted student loans, continuing a trend of escalating
losses.
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THE CAUSES
The increase in losses reflects fundamental problems in the student loan
program's structure and management. In part, this stems from the tension
between the goals of providing steadily increasing loan funds, often through
expanded or new loan programs, to enable students to meet rising higher
education costs and the need to maintain accountability to taxpayers. Over t
he
years, the federal government has tended to emphasize access to loans at the
expense of accountability.
The structure of the loan program is inordinately complex, and many
participants have little or no incentive to prevent defaults. Lenders and
guaranty agencies benefit from making loans, but generally do not bear any
financial risk. Schools also bear little risk, and some use the program as a
source of easy income, with little regard for students' educational prospect
s
or the likelihood of their repaying the loans. Nearly all the risk falls to
the federal government, whose only recourse is to pursue defaulters. Yet as
loan volume and federal financial exposure grew, the government failed to
establish adequate controls to minimize its losses.
Management weaknesses have plagued the Department's administration of the lo
an
program. The Department has failed to weed out schools that collect tuition
payments for marginal instruction. Its records have been inaccurate and
incomplete, leading to erroneous payments and loans to ineligible borrowers.
It had conducted little oversight of lenders and guaranty agencies, paying
default claims without reliable documentation and failing to collect fees du
e
the government. And it had inadequately trained and organized program staff.
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GAO'S SUGGESTIONS FOR IMPROVEMENT
The Congress, the Department, and the Office of Management and Budget (OMB)
have recognized these problems and attempted to correct many of them. The
Congress enacted more than 100 legislative provisions in 1992 to improve the
program's operations. The Department has worked to correct staffing
inadequacies, controls over schools, and oversight of lenders and guaranty
agencies.
Among other steps, we have suggested that the Department further toughen its
screening of schools seeking initial and continued participation in the
program and expedite its plan for ensuring that program data are more useful
,
timely, and accurate.
While such improvements are essential, they would be unlikely in themselves
to
fix all the program's problems. Addressing the program's underlying flaws an
d
reducing taxpayers' risks may require structural reform. In particular, we
believe that the Congress should consider simplifying the loan
program--perhaps by increasing the risk among participants. A pilot program
to
test a direct lending arrangement, which would eliminate lenders and guarant
y
agencies, is a possible step.
FEDERAL FAMILY EDUCATION LOAN PROGRAM OPERATION: A COMPLICATED, CUMBERSOME
PROCESS
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The Federal Family Education Loan Program functions through a complicated an
d
cumbersome system of rules and requirements involving millions of students a
nd
thousands of schools, lenders, and other entities. As shown in figure 1,
following the maze of responsibilities is difficult. The program basically
involves five parties: students, schools, lenders, guaranty agencies, and th
e
Department of Education. In the sections below, we highlight some of the key
responsibilities each group performs.
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===
THE STUDENT
The student, as borrower, initiates the loan process. The student applies to
a
lender for the loan, arranges for repayment with the lender, and repays the
loan. Most students receive a federal subsidy throughout the period of their
loans, including a low interest rate, and make no interest payments while th
ey
attend school. Generally, when the student completes or otherwise leaves
school, he or she starts repayment. Between fiscal years 1966 and 1991, the
number of student loans guaranteed each year increased from 89,000 to 4.8
million.
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Figure 1: Federal Family Education Loan Program: A Complicated and
Cumbersome Process
The illustration for this figure cannot be displayed in this electronic
version, but the information from the illustration is described below.
The actual figure appears in the printed report.
A flowchart appears in the printed version showing the flow of paper or
data and the flow of funds. The following describes the processes within
the flow chart.
1 - Student provides school with financial information and school determines
loan eligibility and counsels student.
2 - Student generally obtains loan application from lender, fills out his
or her portion and forwards it to school; school completes application
forwards it to lender.
3 - Lender provides information to guaranty agency; agency verifies
student eligibility and agrees to guarantee loan; lender sends
promissory note to student; student returns signed note to lender.
4 - Lender issues check to be endorsed by both school and student.
5 - School periodically confirms borrower's continued student status.
6 - Lender bills the Department of Education for interest subsidy, reports l
oan
origination fees collected, and provides summary information on its
guaranteed loan portfolio.
7 - Lender bills student when repayment starts, collects payments, and condu
cts
statutory loan collection services if borrower becomes delinquent or
in default.
8 - Guaranty agency reimburses lender for defaulted loans and receives
reinsurance and an adminstrative cost allowance from the Department. The
agency also receives an insurance premium from students. The agency pays
the Department a loan reinsurance fee, shares collections on defaulted
loans, and provides the Department with summary information of loans it
guaranteed.
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THE SCHOOL
The school verifies students' eligibility and determines that the loan amoun
t
does not exceed students' cost of attendance. The major types of schools
participating in the program are: 2-year public, 2-year private, 4-year
public, 4-year private, and proprietary (for-profit trade and vocational)
schools. In 1991, over 7,500 schools participated in the program, and 3,100
were proprietary schools.
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THE LENDER
The lender makes loans and under the program's guaranty provisions, must
exercise proper care in making, servicing, and collecting them and follows t
he
applicable program requirements. The lender also collects from the student a
loan origination fee for the Department and an insurance premium for the
agency guaranteeing the loan. The lender bills the Department each quarter f
or
the federal interest subsidy payment for the loans it holds. These payments
normally include the students' interest while they are in school. Also, duri
ng
the life of the loan, the lender receives an interest supplement that is
intended to provide it with a market rate of return. If the borrower fails t
o
make required payments, the lender files default claims with the guaranty
agency, but cannot be reimbursed for its claims until borrowers have been
delinquent at least 180 days.
In 1991, about 7,800 lenders participated in the program. Approximately $127
billion in student loans have been guaranteed since the program began. Most
loans are held by relatively few lenders. For example, 25 lenders had 57
percent of the $54 billion outstanding as of September 30, 1990, and one
organization--the federally chartered Student Loan Marketing Association--ha
d
29 percent ($15.7 billion) of the total.
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THE GUARANTY AGENCY
The guaranty agency carries out several tasks, including: (1) issuing
guarantees on qualifying loans so that if a borrower fails to repay his or h
er
loan due to death, disability, bankruptcy, or default, the lenders can be
reimbursed for their claims; (2) charging students an insurance premium of u
pto 3 percent of the loan; (3) verifying that lenders properly service and
attempt to collect loans before the agency pays default claims; and (4)
remitting to the Department its portion of monies the agency subsequently
collects from defaulted borrowers.
Guaranty agencies generally receive 100-percent reinsurance from the
Department on the default claims amounts paid to lenders. The Department als
o
pays the agencies a 1-percent administrative cost allowance based on the
principal amount of the loans they guarantee. Guaranty agencies can also
operate as a secondary market and purchase loans from lenders, as well as
service loans for others. There are 46 guaranty agencies--state agencies or
private nonprofit organizations--that administer the program in the 50 state
s,
the District of Columbia, the Pacific Islands, Puerto Rico, and the Virgin
Islands.
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===
THE DEPARTMENT OF EDUCATION
The Department is responsible for administering the program and for overseei
ng
the activities of the various participants. It determines which schools can
participate (commonly referred to as the "gatekeeping" function), establishe
s
loan collection requirements for lenders and guaranty agencies, pays lenders
interest subsidies, and reinsures guaranty agencies for up to 100 percent of
lenders' claims. To partially offset program costs, the Department charges
borrowers an origination fee and receives a reinsurance fee from the guarant
y
agencies.
PROGRAM STRUCTURE IS FLAWED
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The federal government's risk of losses has increased greatly as the program
has evolved. The original plan was for a simple program involving unsubsidiz
ed
loans that had no needs test and relied on states to guarantee the loans. Th
is
approach fell apart almost immediately because many states were reluctant to
establish guaranty agencies. The program was replaced by the present system
of
interest subsidies and full federal guarantees.
Originally targeted to middle-income students, the program shifted to
low-income students. Also, the loan program expanded to include students
attending proprietary schools. The government also substantially increased i
ts
financial exposure when it provided interest subsidies to lenders, as well a
s
full reimbursement to lenders and guaranty agencies for any default claims.
In
addition, when the growth of program participants exploded, the government
failed to establish adequate controls to minimize its risk.
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===
ORIGINAL FOCUS HAS CHANGED DRAMATICALLY
The program was originally intended to serve middle-income students, a
relatively low-risk group, by helping them finance their education. It was
meant to provide help to those experiencing cash flow problems. The loans we
re
not meant to be subsidized and the program was expected to entail few, if an
y,
costs.
As budget constraints reduced the availability of grants for low-income
students, however, students from low-income families turned increasingly to
the loan program to finance a postsecondary education. Establishing needs
tests resulted in fewer middle-income students being eligible for program
loans. A great debt burden was placed on those who often had little or no
means to repay. This shift would normally have a minimal effect on the progr
am
if students, regardless of their income, would have received a quality
education.
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===
EXPANSION TO PROPRIETARY SCHOOLS ESCALATED THE RISK
The program was also originally intended to finance a traditional college
education. The program expanded to include other education and training
institutions, such as proprietary schools, some of which have not always
provided a high-quality education for their students. Many students attendin
g
these schools are eligible not only for loans but also for other kinds of
federal student financial aid, such as Pell Grants. The lure of plentiful
financial aid for proprietary school students, as well as abusive practices
of
some proprietary schools--including fraud--has had a disproportionate impact
on defaults. For example, in 1990, students attending these schools
represented 41 percent of borrowers, but 77 percent of those that defaulted.
The employment outcomes--and the probability of repayment of the loan--for
some of these students are much less certain.
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INCENTIVES TO PROMOTE ACCESS HAVE BEEN COSTLY
A fundamental tension exists within the program between its primary
goal--providing access to a postsecondary education to students who otherwis
e
could not afford it--and minimizing costs to U.S. taxpayers.
The government's assumption of some financial risk was recognized at the
outset, but the program was not initially designed for the federal governmen
t
to bear all the financial risks. States were to establish guaranty
agencies--that initially shared 20 percent of the risk for all defaulted
loans--to operate programs in their states and, among their other
responsibilities, encourage lenders to make loans to eligible student
borrowers and pay for any defaults that occurred. Lenders, with guarantees
provided by the agencies, were expected to make, service, and collect loans.
However, not enough states were establishing guaranty agencies and lenders
were not making enough loans, so the Congress made several amendments to the
Higher Education Act. It increased financial incentives--and reduced the
limited financial risks--in order to get greater lender and guaranty agency
participation. The financial risks, therefore, shifted almost entirely to th
e
federal government, and U.S. taxpayers became the guarantor and assumed the
risks of default. The government has paid a high price for the resulting
increase in access to the program.
In addition, some guaranty agencies are engaged in, or extended their
activities into, areas that have inherent conflicts of interest. Such
conflicts occur when a guaranty agency is a loan servicer or it operates a
secondary market for loans that it guarantees. The agencies in these cases a
re
in the position of being both a lender servicing loans and a guaranty agency
auditing and overseeing lenders' responsibilities. These situations create
environments in which an agency's financial transactions are "less than
arms-length" because there is no clear separation of responsibilities among
the entities.
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===
LACK OF ADEQUATE CONTROLS HAS INCREASED COSTS
Congressional and administration efforts, either by tightening the standards
for participation or by sharing the risk with others, have not done enough t
o
control the program's risks. Tremendous program growth in the availability o
f
guaranteed student loans and the number of program participants followed
congressional actions providing financial incentives to lenders and guaranty
agencies. However, these incentives were not followed by actions necessary t
o
limit the federal government's financial exposure. Rather, the Department's
way of doing business basically remained the same and failed to keep pace wi
th
the growth.
Other changes, such as requiring greater risk sharing by lenders and guarant
y
agencies, were not authorized by the Congress, and this has also hampered th
e
Department's ability to effectively manage the program. The federal
government, therefore, has been in the undesirable position of being
financially liable for the actions of schools, lenders, and guaranty agencie
s
who could do more to control the risk.
FLAWS HAVE BEEN COSTLY
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---
Federal requirements lack adequate incentives to encourage the participants
to
do more to prevent defaults. This lack of incentives also increases the
government's risks. Schools, lenders, and guaranty agencies face few
consequences for defaulted loans and can profit from defaults, yet students
are heavily penalized if they do not repay. The absence of adequate incentiv
es
for default prevention through better loan origination and servicing has
contributed to the default problem.
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===
STUDENTS PUNISHED THE MOST
Many people believe that students who typically default on their loans got a
good education for their money, became doctors or lawyers, and simply chose
not to repay. While this happens sometimes, the more common situation is far
different. Many defaulters are poor, attended a proprietary school, dropped
out of their course of instruction, and have little or no means to repay. So
me
were "pressured" by unscrupulous recruiters to enroll in proprietary schools
that provided a poor-quality education and dismal employment prospects. As a
result, many such students failed to get value for their money and are
reluctant or unable to repay their loans.
Students who fail to repay their loans, however, may suffer greatly for that
default. They may (1) be denied other federal student aid, (2) receive a
negative credit rating, (3) have their income tax refunds seized, and (4) ha
ve
their wages garnished.
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===
SOME SCHOOLS HAVE HAD LITTLE CONCERN FOR DEFAULTS
Some schools, particularly proprietary schools whose profits come from stude
nt
tuition payments, have had a strong incentive to sign up students whose
tuition is heavily financed by federally guaranteed loans. Partly because th
ey
were not accountable for their students' performance, these schools often di
d
not use outcome measures, such as completion and job placement rates, to
evaluate whether their students received the education and skills they were
promised.
Some schools were also not overly concerned about the frequency of defaults
by
their students. That changed somewhat in 1990 and again in 1992, when the
Congress mandated default rate thresholds for schools that, if exceeded, can
result in future ineligibility for guaranteed student loans. However, the
schools still lack incentives to further reduce their default rates below th
e
legislative thresholds.
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===
LENDERS AND GUARANTY AGENCIES SHOULD FOCUS MORE ON PREVENTING DEFAULTS
Alternatives are needed to encourage more default prevention efforts by
lenders and guaranty agencies. The lack of an effective risk-sharing mechani
sm
for these participants has contributed to the loan default problem. Current
loan collection requirements are detailed and prescriptive, emphasizing form
over substance. Increased risk-sharing would persuade lenders and guaranty
agencies to pay more attention to the kinds of schools their students attend
and students' repayment practices.
Guaranty agencies are not guarantors in the truest sense. The name implies a
financial protection that in reality does not exist. In general, neither the
guaranty agencies themselves nor the states that designated the agencies hav
e
any capital at risk. If a guaranty agency experiences financial difficulties
and is unable to perform its functions, especially in paying lenders' defaul
t
claims, taxpayers, through the federal government--not the state--become the
true guarantor. As a result, the "guaranty" agencies function primarily as
loan processors. In addition, they have lacked incentives to manage their
activities on behalf of the government in a cost-effective manner.
DEPARTMENT MISMANAGEMENT CONTRIBUTED TO PROBLEMS
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The Department of Education has had a history of mismanagement and poor
oversight of the program's activities. It generally (1) has used ineffective
procedures for determining which schools can participate, (2) has had
inadequate financial and management information systems that contain
inaccurate and incomplete data, (3) has conducted little oversight of the
lenders and guaranty agencies, (4) has experienced high turnover in key
management positions and has not hired staff with adequate skills, and (5) h
as
had a management structure that inhibited program improvements. Not adequate
ly
addressing these problems could jeopardize the Department's implementation o
f
the direct loan demonstration program.
The Department's management and program deficiencies have been the subject o
f
congressional hearings, reports by GAO and the Department's Office of
Inspector General (OIG), and other studies and evaluations. Both GAO and OMB
have identified this program as one of the government's high-risk areas. In
addition, OMB and the Department conducted a review that concluded that the
Department's management practices contributed to high loan default rates, as
well as fraud and abuse in the federal student aid programs.
The Department's gatekeeping procedures for determining which schools can
participate--and whether they should continue participating--in federal
student aid programs have been weak. The Department must rely on others with
limited accountability to U.S. taxpayers--such as state licensing
organizations and school accrediting bodies--for assuring the quality of the
education being offered. Little federal oversight has been directed at
determining whether schools--especially proprietary schools--have the fiscal
and administrative capability to provide a quality education. As a result,
procedures for determining which schools participate in the program have bee
n
generally ineffective in weeding out abusive practices, such as collecting
tuition payments for marginal instruction.
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===
ACCURATE FINANCIAL AND MANAGEMENT INFORMATION SYSTEMS ARE VITAL
Many of the Department's financial problems have been repeatedly cited in GA
O
and OIG reports, as well as in the Department's own reports required by the
Federal Managers' Financial Integrity Act. The act requires federal agencies
to evaluate and report on their internal accounting and administrative
controls annually. These problems stemmed from the Department's emphasis on
program execution--quickly getting funds out to students--rather than fiscal
accountability. For example, records supporting the Department's payments to
lenders and guaranty agencies have been, at times, missing, incomplete, or
inaccurate. Also, the Department has relied heavily on an honor system in it
s
financial management activities. It pays over $5 billion annually to lenders
and guaranty agencies based on unaudited summary billings. This extends the
risk the federal government--and ultimately the taxpayer--assumes.
Department, independent, and state auditors do not conduct in-depth
examinations of the accuracy and validity of lenders' and guaranty agencies'
claims for interest subsidies, defaulted loans, and administrative cost
allowances. Generally, audits also fail to provide a positive attestation to
the claims submitted or to the adequacy of the lenders' and guaranty agencie
s'
internal controls structure. As a result, the federal government has little
assurance that the "bills" it pays are proper.
The Department's management information systems contain data that are not
always timely and accurate, which limits these systems' use for compliance a
nd
evaluation purposes. The limitations have hampered the Department's ability
to
effectively manage and monitor the guaranteed student loan programs,
especially those activities concerning loan defaults and collections. As a
result, millions of dollars in new loans have been made to borrowers for
amounts exceeding statutory limits, or to borrowers who are already in defau
lt
and, therefore, ineligible for additional loans.
However, the Department has made slow progress in improving its information
systems, and the National Student Loan Data System, authorized by the Higher
Education Amendments of 1986, will not be implemented until, at best, Decemb
er
1993. This system could meet many of the Department's student loan informati
on
management needs and be an important tool in determining students' loan
eligibility.
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===
MORE EFFECTIVE OVERSIGHT NEEDED
Lenders and guaranty agencies have received little oversight and view their
primary mission as getting loan monies to students. Until recently, as loan
volume increased, the number of Department reviews of participants generally
decreased. In part, because of the large number of lenders and guaranty
agencies, the Department's review efforts generally were not focused on thos
e
with the largest default volumes. In addition, when violations were found, t
he
Department was slow at times to resolve them.
Also, better oversight could be obtained with fewer lenders and guaranty
agencies. The advent of electronic fund transfers and automation improvement
s
has reduced the need for the number of lenders and guaranty agencies that we
re
once necessary to help ensure student access to the program.
More effective oversight could provide an increased focus on the Department'
s
failure to collect origination fees due the government, accurately pay
interest subsidies, require sufficient default prevention efforts in paying
default claims for lenders, and ensure that borrowers obtain loans within
statutory limits.
A shortage of qualified Department personnel has also plagued program
management. The Department has not had adequately trained staff, and some
lacked appropriate skills. For example, it has had few people with financial
or accounting backgrounds to administer over $13 billion in new loans made
annually. Its staff have lacked experience, training, and proficient skills
in
finance, information systems, data analysis, planning, and policy making.
The Department's organizational structure has not adequately emphasized
fiduciary responsibilities, but has focused instead on promoting services to
participants. Responsibility for federal student aid has been divided among
various offices. This fragmented management had contributed, at times, to
inadequate communication and decision-making that, in turn, resulted in (1)
delays in issuing guidance and regulations, (2) duplicate program compliance
responsibilities, (3) reduced opportunities to develop comprehensive program
and system changes, and (4) the failure to use Department resources and
processes in a coherent and effective manner.
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===
EXISTING PROBLEMS COULD HAMPER IMPLEMENTING DIRECT LOAN DEMONSTRATION
The Higher Education Amendments of 1992 created a direct lending demonstrati
on
program. Under direct lending, the federal government becomes the lender, an
d
private lenders and guaranty agencies--in their present form--would no longe
r
be needed. Schools, acting as agents for the federal government, would use
federal funds to make loans to qualifying students. The Department of
Education would service and collect the loans, presumably by contracting wit
h
private firms.
The 1992 amendments also require that we evaluate the costs and experiences
of
the schools, students, parents, and the Department of Education participatin
g
in the direct loan demonstration program. The evaluation will also include a
comparison with a control group of schools that are not participating in the
demonstration program. We are to issue an interim report in January 1997 on
our evaluation, with a final report due in May 1998.
We estimate that direct loans could save the federal government $4.8 billion
over the first 5 years of implementation. But the inventory of known problem
s
in the Department's administration of guaranteed student loans raises
questions about its ability to adequately manage a direct lending program. T
he
Department needs accurate financial and information management systems for i
t
to not only manage the guaranteed loan program, but to properly implement th
e
demonstration program.
CONCLUSIONS AND ACTION NEEDED
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The problem of billions of dollars in student loan defaults has not been
ignored. The Congress and the Department have attempted to improve the
integrity of the Federal Family Education Loan Program through many
incremental legislative and regulatory reforms. For example, the Congress
enacted over 100 legislative provisions in 1992 to improve default preventio
n,
loan collections, and overall program integrity. Also, the Congress expanded
loan eligibility to more middle-income families, while authorizing additiona
l
grant funds. Although some of these changes are dependent on available
funding, they could help reduce the government's loan default risk.
The Department also has been taking many steps to improve its management and
reduce the government's financial exposure. For example, the Department's
staffing inadequacies have lessened since it has begun hiring staff with
financial skills, while targeting its resources to areas with major problems
It has been strengthening its gatekeeping function and establishing stricter
controls over which schools can participate in federal student aid programs.
In addition, it has been improving its monitoring of lenders and guaranty
agencies, specifically in determining the guaranty agencies' financial
stability. These actions should help improve program and fiscal integrity, a
s
well as aid in the Department's implementation of the direct lending
demonstration. We recognize that these improvements are in various stages of
implementation and that other actions are planned or underway. We encourage
the Department to continue implementing these efforts.
Better management alone, however, may not fix the program's problems.
Structural reform may be necessary to simplify this complex program. Part of
this reform may need to involve reducing the number of lenders and guaranty
agencies through some form of consolidation or reorganization. In the interi
m,
steps to strengthen the program through simplification, reorganization, and
risk-sharing and better oversight of schools, lenders, and guaranty agencies
should be considered.
Actions the Congress should consider in enhancing the existing program
include:
-- Reorganizing the roles of lenders and guaranty agencies, including having
them assume a greater share of the risk.
-- Strengthening the incentives for effective loan servicing and default
prevention by lenders and guaranty agencies, and establishing
results-oriented default prevention incentives.
Actions the Secretary of Education should consider in enhancing the existing
program include:
-- Further strengthening the Department's gatekeeping procedures to more
effectively determine the fiscal and administrative capabilities of schoo
ls
seeking initial and continuing approval for participation in federal
student aid programs. Part of this effort should include the use of outco
me
measures, such as completion and job placement rates, in recording the
performance of such schools (especially those providing
proprietary/vocational training).
-- Ensuring that the Department expeditiously implements the recommendations
contained in the joint OMB/Department study of the program.
-- Requiring that independent public accountant audits of lenders and guaran
ty
agencies include: (1) a positive attestation to the claims for payment th
at
these parties submit to the federal government and (2) an opinion on the
overall adequacy of the program's internal controls.
-- Expediting efforts to develop a comprehensive plan to identify and correc
t
longstanding problems in the Department's financial management of the
program.
-- Expediting efforts to implement an information resources management
strategy and plan that will have as its primary focus improving program
data so that these data are more useful, timely, and accurate.
-- Proceeding cautiously with the implementation of the direct lending
demonstration program to ensure its proper implementation and subsequent
evaluation.
