Guarantee Agency Funding, Operations, and Reserves Under the Guaranteed Student Loan Program

GAO reviewed the guarantee agencies under the Guaranteed Student Loan Program (GSLP) with emphasis on how those agencies are financed and how they accumulate, maintain, and use reserve funds. There are 47 organizations that serve as the guarantee agencies for 58 separate reporting units under GSLP and act as the middleman between the Department of Education and lenders. Federal funds in the form of non-interest-bearing loans and reimbursement of claims paid on Department of Education defaulted loans, called reinsurance, are the largest sources of financing. Regulations allow the agencies to retain up to 30 percent of all collections on defaulted loans to cover collection costs and an additional portion on loans that are not fully reinsured. The final source of funding is income from invested surplus funds. Since most expenditures are fully reimbursed and the agencies have some discretion in charging insurance premiums and earning interest income, they usually have a surplus. The Administration has been concerned over the growing reserves of these surplus funds and has recommended reductions in the agencies' income. GAO believes that the guarantee agencies should have enough funds to carry out their responsibilities and that the rules governing agency financing and reserves be revised to provide that the agencies do not generate unnecessary income at the expense of the students or the federal government.