Guaranteed Student Loans

Guidelines for Reducing Guaranty Agency Reserves Gao ID: HRD-86-129BR August 7, 1986

Pursuant to a congressional request, GAO: (1) provided guidelines for determining the maximum amount of cash reserves necessary to guarantee loans under the Guaranteed Student Loan Program; and (2) estimated the effects the guidelines would have if they were implemented in fiscal year (FY) 1986.

GAO noted that agencies should establish their own maximum reserves based upon their potential to experience negative cash flow. GAO developed a methodology to set maximum reserve levels as an amount equal to the largest of three factors: (1) a percentage of claims paid during the prior year; (2) a percentage of the amount of outstanding loans guaranteed by the agency at the end of the prior year; and (3) a minimum of $500,000 to provide for the smaller loan portfolios and claims activity of small agencies. If the guidelines had been implemented in FY 1986: (1) there would have been adequate reserves to offset the largest negative cash flows experienced by any of the guaranty agencies in FY 1984 and FY 1985; (2) guaranty agencies would have returned between $52 million and $81 million in federal advances; and (3) excess reserves would have decreased between $95 million and $222 million. GAO concluded that: (1) agencies' reserve limits should be large enough to accommodate the cash flow problems experienced by any of the agencies in recent years, but not so large that they would allow the accumulation of unnecessarily large reserves; and (2) savings from the implementation of these guidelines in FY 1987 and beyond would depend on the financial condition of each agency during the previous year and the reduction or elimination of barriers such as existing state laws and contractual agreements.


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