Higher Education

In fiscal year 1999, lenders participating in the Federal Family Education Loan Program (FFELP) loaned $20 billion to college students. Because some lenders do not qualify as eligible lenders under the Higher Education Act of 1965, they can only be an eligible lender under a trustee arrangement. The act was amended in 1998, and eligible lenders can now serve as a trustee, but they must meet statutory requirements. GAO studied the number and cost of trustee arrangements, the benefits and protections afforded the federal government through use of trustee arrangements, and the effect of trustee arrangements on market participation and the availability of student loans. The Department of Education reports that about 125 trustee arrangements exist between 16 eligible lender trustees and 31 ineligible lenders, amounting to $25.3 billion in outstanding loans. Trustee arrangements come with some protections to ensure the federal government's investment in FFELP is secure while allowing ineligible lenders to participate. Both eligible and ineligible lenders believe that market participation and availability are positively affected by trustee arrangements. GAO recommends that Education clarify its interpretation of the act's trustee provision.

GAO noted that: (1) the Department of Education reports that approximately 125 trustee arrangements exist between 16 eligible lender trustees and 31 ineligible lenders for the purpose of originating or purchasing student loans; (2) these arrangements account for $25.3 billion in outstanding loans--approximately 19 percent of the outstanding balance of all Federal Family Education Loan Program (FFELP) loans as of December 1999; (3) costs of trustee arrangements fall into two categories--costs to initiate the arrangement and annual costs to maintain it; (4) ineligible lenders GAO interviewed said that the costs did not prohibit them from conducting business in the student loan market; (5) the amount charged by an eligible lender for its trustee services varied and was based on the volume of loans the ineligible lender was anticipated to originate and on the number and kind of other services the trustee provided; (6) both eligible and ineligible lenders reported little, if any, change in the availability of lenders to serve as trustees or the costs of these arrangements since 1998; (7) several characteristics were common among the trustee arrangements GAO reviewed, including the criteria used by trustees to evaluate ineligible lenders before they entered into trustee arrangements, the various elements of the trustee arrangement contracts, and the day-to-day interaction between the trustee and the ineligible lender; (8) trustee arrangements come with some protections to ensure the federal government's investment in FFELP is secure while allowing ineligible lenders to participate in the program; (9) most financial institutions that serve as eligible lender trustees are subject to federal oversight; (10) because most eligible lender trustees also hold student loans in their own name and receive regular FFELP-related payments from the government for those loans, the federal government has recourse for recovering any repayments due the government on ineligible lenders' loans that lose the federal guarantee; (11) Education officials stated that because ineligible lenders are generally not subject to financial safety and soundness reviews by government agencies, Education lacks assurance that these lenders would be able to meet their financial obligations in the program; and (12) both eligible and ineligible lenders said they believe that market participation and loan availability are positively affected by trustee arrangements which allow lenders to make and hold loans.

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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