Student Loan Defaults

Some schools, particularly proprietary for-profit trade schools whose profits come from student tuition, have enrolled students whose education is heavily financed by federally guaranteed student loans. Some of these schools are not overly concerned about their students' completing educational programs or the frequency of their students' defaulting on student loans. In 1994, the federal government paid $2.4 billion to make good its guarantee on these defaulted loans. In 1991, the Education Department began to bar postsecondary schools from federally guaranteed student loan programs if their students had exceptionally high loan default rates. Many schools, however, complained that the Department was using inaccurate information in setting default rates. Several schools filed administrative appeals or sued to block the Department's denial of their participation in federal loan programs. This report answers the following questions: How many schools have contested the Department's decisions, and what are the main points of their contention? To what extent have the schools' concerns been addressed by recent legislation and by the Department? What additional steps need to be taken to resolve problems with the default reduction initiative?

GAO found that: (1) as of September 30, 1994, 601 schools were barred from the Federal Family Education Loan Program and 250 schools had pending administrative appeals challenging Education's default rate determinations; (2) 111 schools had filed 22 lawsuits over default rate issues, of which 10 have been dismissed or terminated by agreement; (3) the schools alleged that Education used erroneous data in its default rate calculations and failed to exclude improperly serviced loans in its calculations; (4) the inaccuracies in Education's databases concerning loan defaults were well documented; (5) the schools and Education did not agree on what constituted an improperly serviced loan; and (6) the schools complained that they had insufficient access to loan information which limited their ability to detect servicing problems. GAO also found that: (1) the 1993 amendments should reduce, but not eliminate, challenges to Education's default rate determinations; (2) schools' increased access to loan information should resolve misunderstandings on matters of fact and implementing regulations should make adjudications more straightforward and less time-consuming; (3) these regulatory changes will not fully protect the government's interest in these disputes, since unscrupulous schools continue to accumulate additional loan default costs during the appeal process; and (4) to protect the government from these additional costs, schools should be held liable for additional loan default costs that occur during the appeals process or required to post performance bonds as a condition of filing an appeal.

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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