Financial Audit

Under the Guaranteed Student Loan Program, the Department of Education guaranteed about $14.6 billion in student loans in fiscal year 1992 and paid about $5 billion in default claims and interest subsidies. Because of a history of inadequate program oversight and management, GAO has included the program in its list of 17 "high-risk" areas vulnerable to waste, fraud, and abuse. Material weaknesses impede the Department's ability to obtain accurate and reliable data on the Guaranteed Student Loan Program. These weaknesses include inadequate oversight of guaranty agencies and lenders and weaknesses in the Department's controls to ensure the accuracy of its financial and other program data. As a result, the Department cannot be certain that billions of dollars paid annually to guaranty agencies and lenders were proper or that financial information on program operations was accurate. Serious problems also affect the program's structure. Guaranty agencies assume little financial risk and are not compensated in a way that provides enough incentives to prevent defaults. In addition to their guarantor role, they are allowed to be both loan servicers and secondary market operators, which can create conflicts of interest. By assuming servicing and ownership roles, guaranty agencies are, in effect, responsible for regulating their own activities. The Department had some corrective actions under way that should increase program accountability. Some weaknesses, however, cannot be fully resolved until the role of guaranty agencies is addressed. Effective corrective actions will require new systems, revised regulations, or legislation and thus extend over several years.

GAO found that: (1) Education lacked sufficient controls and procedures that ensured that financial information provided by guaranty agencies and lenders was reliable and adequate to effectively manage GSLP; (2) internal control weaknesses that reduced GSLP accountability included late receipt of billing information, unreconciled reports, and untimely resolutions of reported problems; (3) Education's future cost estimates for outstanding guaranteed loans were erroneous and based on untimely and unreliable data, unreasonable assumptions regarding the program and the economy, an inadequately documented methodology, and significant unreconciled differences between its general ledger information, subsidiary systems, and Department of the Treasury reports; (4) weaknesses within GSLP information systems included inadequate testing of GSLP application software changes and inadequate personnel; (5) Education has assisted financially troubled independent guaranty agencies to maintain lender participation and ensure student access to guaranteed loans; (6) Education lacked the authority to improve guaranty agency operations that affect GSLP operations and costs and prevent guaranty agencies from engaging in activities that create conflicts of interest and affect loan stewardship; and (7) Education needs to intensify reviews of guaranty agencies and lenders, increase accountability by improving ledger reconciliation, and address the role of guaranty agencies.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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