Direct Student Loans
Additional Steps Would Increase Borrowers' Awareness of Electronic Debiting and Reduce Federal Administrative Costs Gao ID: GAO-02-350 March 29, 2002Since 1999, the Department of Education (Education) has offered a 0.25 percent interest rate reduction to borrowers who agree to an electronic debit (EDA) program. Borrowers pay a lower interest rate, while the federal government receives fewer late payments. Any revenue loss to the federal government from a reduced interest rate would be more than offset by a gain in revenue because some EDA borrowers who had previously paid by check would stop making periodic payments in excess of their scheduled amount due. By ceasing to make these prepayments, these borrowers would not pay off their loans as soon as they would have without signing up for EDA and, therefore, incur additional interest costs over the life of their loans. Although actual EDA enrollments have exceeded original estimates, Education lacks data on prepayment patterns after borrowers enroll in the program. Education has not informed borrowers of the cost implications of EDA participation, nor has it systematically informed borrowers of their prepayment options. GAO estimates that Education saved $1.5 million in administrative costs in fiscal year 2001 because it did not have to mail bills to EDA borrowers.
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Director: Team: Phone:GAO-02-350, Direct Student Loans: Additional Steps Would Increase Borrowers' Awareness of Electronic Debiting and Reduce Federal Administrative Costs
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United States General Accounting Office:
GAO:
Report to the Honorable James M. Jeffords, U.S. Senate.
March 2002:
Direct Student Loans:
Additional Steps Would Increase Borrowers' Awareness of Electronic
Debiting and Reduce Federal Administrative Costs:
GAO-02-350:
United States General Accounting Office:
Washington, DC 20548:
March 29, 2002:
The Honorable James M. Jeffords:
United States Senate:
Dear Senator Jeffords:
In November 1999, the Department of Education (Education) began
offering a 0.25 percent interest rate reduction under the William D.
Ford Federal Direct Loan Program (FDLP) to borrowers who agree to have
their monthly loan payments automatically withdrawn from a bank account
via its electronic debit account (EDA) program. While borrowers would
benefit by paying a reduced interest rate on their loans, the federal
government would benefit from receiving fewer late payments. The Higher
Education Act of 1965, as amended, requires that such interest rate
reductions be ’cost neutral and in the best financial interest of the
Federal Government“ and that Education offset any higher subsidy costs
[Footnote 1] resulting from the interest rate reduction through
reductions in funding for administrative costs.
In a cost justification it submitted to the Congress in August 1999,
Education stated that the loss of revenue to the federal government
from offering the reduced interest rate would be more than offset by a
gain in revenue because some EDA borrowers who had previously paid by
check would stop making periodic payments in excess of their scheduled
amount due. By ceasing to make these prepayments, these borrowers would
not pay off their loans as soon as they would have without signing up
for EDA and, therefore, incur additional interest costs over the life
of their loans. Education assumed about half of the borrowers making
prepayments prior to enrolling in EDA would discontinue making
prepayments after enrolling in EDA. Education found that eliminating
these prepayments could potentially extend the time some borrowers were
repaying their loans by 1-½ years. In effect, EDA borrowers who stopped
prepaying would lose some portion of their interest savings from the
rate reduction. Thus, Education‘s analysis appeared to justify savings
to the government at additional cost to some borrowers enrolling in the
EDA program, rather than by reducing administrative costs associated
with processing payments by check. Because of your concern about the
possibility that some borrowers would pay additional interest under
EDA, you asked us to determine the following:
* To what extent have assumptions concerning borrower behavior used in
Education‘s cost justification materialized?
* To what extent has Education informed borrowers of the possible cost
implications of EDA participation and the options that are available to
them for prepaying their loans?
* To what extent has Education achieved administrative cost savings as
a result of the program?
In conducting this work, we interviewed Education officials and
collected and analyzed cost and other pertinent information. To examine
the extent to which Education‘s cost justification assumptions about
borrower behavior”the percentage of EDA borrowers that would enroll in
EDA and the percentage that would change their prepayment patterns
after enrolling”materialized, we reviewed Education‘s cost
justification, discussed its preparation and methodology with the
Education officials who developed it, and obtained and analyzed
available information about the repayment behavior of borrowers who
have enrolled in the EDA program. To identify the information Education
had provided borrowers about possible cost implications of EDA
participation and prepayment options associated with EDA, we obtained
and reviewed all Education direct loan repayment information available
to borrowers. To estimate administrative cost savings, we reviewed
Education and Department of the Treasury (Treasury) cost data
associated with billing EDA and non-EDA borrowers and processing their
payments. We discussed our analysis with officials at both agencies to
ensure that we included all appropriate cost items. We conducted our
work between March 2001 and February 2002 in accordance with generally
accepted government auditing standards.
Results in Brief:
While actual EDA enrollments have exceeded its original assumptions,
Education lacks readily accessible data showing how borrowers have
changed their prepayment patterns after enrolling in the program. In
its cost justification, Education assumed, on the basis of reported
private sector experiences with electronic debit payments, that 5
percent of direct loan borrowers would enroll in its EDA program. As of
September 2001, the actual percentage of direct loan borrowers who
enrolled in the EDA program was almost 12 percent. On the other hand,
whether Education‘s other assumption about borrower behavior has
materialized is unknown. Because private lenders‘ experiences with EDA-
like programs varied widely, Education assumed a random distribution of
borrowers likely to continue to prepay, with 50 percent of those who
had prepaid continuing to do so and 50 percent discontinuing
prepayment. However, Education lacks readily accessible data needed to
determine whether and how EDA borrowers changed their prepayment
patterns. As a result, the extent to which EDA borrowers have been less
likely to prepay is unknown.
Education has not informed borrowers of the possible cost implications
of EDA participation nor has it systematically informed borrowers of
their prepayment options. Specifically, Education has not informed EDA
borrowers that they may pay more interest over the life of the loan
than they would have paid without EDA because only the scheduled
payment amount is withdrawn when EDA is initially established. In May
2001, Education posted information on the direct loan servicing Web
site indicating that EDA borrowers could mail supplemental payments to
the direct loan servicer. However, Education has not systematically
disseminated information about this and other prepayment options
available to all borrowers. Moreover, when we reviewed Education
publications to identify the EDA disclosures made to borrowers, we
found that Education has not updated information to reflect the reduced
interest rate borrowers receive if they repay their loans through EDA,
even though Education began offering the discount in November 1999.
We estimate Education achieved administrative cost savings of about
$1.5 million in fiscal year 2001, primarily because it did not have to
mail and generate bills to EDA borrowers. While reviewing Education‘s
cost data to estimate its administrative cost savings from EDA, we
identified an unrelated potential opportunity for additional
administrative cost savings. The direct loan servicer charges Education
a separate fee for servicing delinquent accounts. Even though the
servicer does not take any action to collect on past due accounts until
they are 7 days late, it still assesses this fee for the first six days
any payment is overdue. In addition to savings to Education, we also
identified savings associated with EDA to the Department of the
Treasury, which processes direct loan payments for Education and incurs
most of the associated costs. In fiscal year 2001, we estimate Treasury
saved about $1.2 million because processing payments electronically,
according to Treasury, costs approximately 99 percent less than
processing payments by check.
In this report, we make recommendations that Education take steps to
better inform borrowers of the options available to them to prepay
their loans, to better publicize EDA in order to maximize
administrative savings, and to consider renegotiating certain fees its
pays its loan servicer.
In written comments on a draft of this report, the Department of
Education generally agreed with the information presented as well as
our conclusions and recommendations. Education‘s comments are reprinted
in Appendix I. Education also provided technical comments, which we
incorporated where appropriate.
Background:
The FDLP legislation was enacted in August 1993 as part of a broader
reform of the federal student loan programs. The first direct loans
were made in fiscal year 1994. FDLP makes it possible for students and
their families to borrow directly from the federal government through
the colleges or other postsecondary institutions the students attend.
As of September 30, 2001, about 3.6 million borrowers were repaying
more than $45 billion in direct loans. Education services FDLP loans
through a contract with Affiliated Computer Services, Inc. (ACS), an
information technology systems and services company. As prime
contractor, ACS has overall responsibility for FDLP loan servicing. ACS
has a subcontract with Academic Financial Services Association Data
Corporation (AFSA), under which AFSA has the main responsibility for
FDLP loan-servicing operations.[Footnote 2] Education has an
interagency agreement with Treasury for processing direct loan
payments. Treasury, in turn, has agreements with and compensates
certain commercial banks for processing both paper and electronic
payments made by the public to federal agencies. Treasury bills federal
agencies only for those services that it considers outside the basic
level of service negotiated with the designated commercial banks. In
fiscal year 2000, Treasury charged Education $26,353 for these
ancillary services. Specifically, this amount was charged for the cost
of shipping reports and other material by overnight mail to Education.
In February 1998, Education implemented EDA to allow FDLP borrowers to
have their loan payments automatically withdrawn from a bank account
each month. Then, in November 1999, Education began offering a 0.25-
percentage point reduction in the interest rate to borrowers who agreed
to repay their loans this way. The number of borrowers who made their
loan payment through EDA went from 40,023 in October 1999, before the
discount went into effect, to 364,704 in September 2001.
The cost justification model Education developed used eight key
assumptions. These assumptions included such things as the interest
rate charged to borrowers, the number of outstanding loans, and two
assumptions concerning borrower behavior”estimates of how many
borrowers would likely enroll in the program once it was established
and the likelihood that borrowers would continue to prepay their loans
after enrollment. As the basis for developing these assumptions,
Education relied on a variety of factors, including prevailing Treasury
interest rates, private sector experiences with electronic debit
repayments, conventions economists generally use in the absence of
data, and analysis of its student loan portfolio. Table 1 shows the
eight key assumptions used in Education‘s cost justification model and
the basis of each assumption.
Table 1: Key Assumptions Used in Education‘s Cost Justification Model
and Their Basis:
Assumption: Borrower interest rate”Average loan interest rate across
all borrower cohorts in the FDLP.
Basis of assumption: Analysis of loan portfolio data maintained in the
National Student Loan Data System (NSLDS), and the Direct Loan
Servicing System (DLSS), and interest rates published by Treasury.
Assumption: Discount rate”Interest rate used to calculate the net
present value[A] of FDLP student loans over time.
Basis of assumption: Average rate for credit accounts as published by
Treasury.
Assumption: EDA program enrollment rate”Rate at which FDLP borrowers
would enroll in the EDA program.
Basis of assumption: Behavioral assumption made by Education based upon
reported private sector experience.
Assumption: Continued borrower prepayment”Percent of FDLP borrowers
likely to continue to prepay their loans.
Basis of assumption: Behavioral assumption made by Education under
conditions of uncertainty. Education assumed a random distribution in
light of mixed results reported by private sector lenders. Borrowers
whose student loan payment histories showed they were ahead of schedule
in their loan payments were identified as borrowers who were prepaying.
Assumption: Average total time to maturity”Average time in years to
loan maturity for borrowers both assumed to continue and assumed to
discontinue prepaying under EDA.
Basis of assumption: Analysis of loan portfolio data maintained in the
NSLDS and the DLSS.
Assumption: Time since entering repayment”Average time in years since a
borrower entered loan repayment.
Basis of assumption: Analysis of loan portfolio data maintained in
NSLDS and DLSS.
Average balance for loans”Average outstanding FDLP borrower loan
balances.
Basis of assumption: Analysis of loan portfolio data maintained in
NSLDS and DLSS.
Assumption: Number of loans outstanding”Actual total number of
outstanding FDLP loans.
Basis of assumption: Analysis of loan portfolio data maintained in
NSLDS and DLSS.
[A] Net present value is the worth of the future stream of returns or
costs in terms of money paid immediately. In calculating net present
value, the discount rate provides the basis for converting future
amounts into their ’money now“ equivalents.
[End of table]
Borrowers have the right to prepay their loans.[Footnote 3] If a
borrower repays any amount in excess of the amount due, the excess
amount is a prepayment. Loan repayments, including prepayments, are
credited first to any accrued charges or collection costs and then to
outstanding interest and principal. Because prepayments generally
reduce a borrower‘s principal balance outstanding, the amount of
interest that accrues in subsequent months is also reduced, decreasing
the amount of interest the borrower pays over the life of the loan.
Borrowers who pay by check can easily make repayments in excess of the
amount due, for example, by rounding up their repayment, but EDA
borrowers have to take extra steps to prepay because only the scheduled
repayment amounts are withdrawn from EDA borrowers‘ accounts. In
practice, the amount due without regard to the 0.25 percent discount is
withdrawn. Therefore, EDA borrowers do not receive a reduction in the
amount they repay each month, but more of each repayment is applied to
the principal balance and they will repay their loans faster as a
result.
A variety of factors can affect a borrower‘s decision about whether to
prepay a loan. Given that FDLP interest rates for direct loans cannot
exceed 8.25 percent and the interest paid is tax deductible for
borrowers who do not exceed certain income limits, prepaying may not be
the best option for all borrowers. For instance, borrowers who have
recently entered the workforce when they begin repaying their loans may
not have sufficient resources to prepay their loans. Rather than prepay
their direct student loans, some borrowers may also decide to instead
repay any higher-interest debt they have accumulated, for which
interest paid is not tax deductible, such as credit card debt.
While More than Twice as Many Borrowers Enrolled in EDA than Education
Assumed, the Extent to Which They Have Continued to Prepay Their Loans
Is Unknown:
While more than twice as many borrowers have enrolled in the EDA
program than originally assumed, the percentage of EDA borrowers who
have continued to make prepayments remains unknown. In developing its
cost justification of the EDA program, Education assumed that a certain
percentage of borrowers would likely enroll in the program and that a
certain percentage of these borrowers would continue to prepay their
loans. Education based these assumptions on reported private sector
experiences with electronic debit repayments and on conventions
economists use in the absence of data. Education lacks data showing
borrowers‘ prepayment patterns before and after enrolling in the
program, thus it cannot determine the extent to which its assumption
has materialized.
Education‘s assumption that 5 percent of direct loan borrowers would
enroll in the EDA program was an estimate based on the experiences of
large, national private sector guaranteed loan lenders‘ programs
similar to EDA. As of September 2001, the actual percentage of EDA
enrollees is closer to 12 percent, which, according to Education‘s cost
justification, would increase the savings to the government to over $19
million.[Footnote 4] Table 2 shows government savings at the originally
assumed 5 percent enrollment rate and our estimates of the savings that
Education‘s cost justification model would project if higher EDA
enrollment rates were to materialize, keeping the prepayment assumption
constant.
Table 2: Estimated Government Subsidy Cost Savings with Different Rates
of EDA Enrollment:
Enrollment rate: 5 percent;
Government savings: $7.2 million.
Enrollment rate: 12 percent;
Government savings: $19.1 million.
Enrollment rate: 20 percent;
Government savings: $31.5 million.
Source: Education‘s cost justification model and GAO analysis based on
the model.
[End of table]
Education also obtained information from private sector lenders on
their experiences with continued prepayment by borrowers after
enrolling in EDA-like programs. Private lenders reported mixed results.
For example, one lender reported that 20 percent of borrowers who
previously prepaid continued to prepay after enrolling in such a
program while another lender reported that 80 percent continued
prepaying, according to Education officials. Given the wide variance in
reported experience, Education officials concluded that they could not
make an assumption based on these data. Therefore, Education assumed a
random distribution of borrowers likely to continue to prepay, with 50
percent of those who had prepaid continuing to do so and 50 percent
discontinuing prepayment.
While we were able to determine the extent to which Education‘s
assumption about EDA enrollment materialized, we were unable to
determine the extent to which its assumption for continued borrower
prepayment materialized. Limitations in Education‘s Direct Loan
Servicing System prevented us from obtaining data on borrower history
of repayment activity. Education can identify borrowers who are paying
their loans ahead of schedule and, therefore, likely to be prepaying.
However, it cannot identify EDA participants from this data and it
lacks trend data showing how frequently and by how much borrowers
prepay their loans. Individual borrower payment activity data are
available for only the most recent 2 months. Given that borrowers
change their prepayment patterns at their convenience throughout their
loan repayment period, these data would not have covered a long enough
time period to determine how prepayment patterns have changed.
Consequently, we could not compare the overall patterns of borrowers‘
prepayment behavior before or after enrolling in the EDA program.
Education Has Not Informed Borrowers about the Possible Cost
Implications of EDA Participation or Prepayment Options:
Education has not informed borrowers of the possible cost implications
of EDA participation nor has it systematically informed borrowers of
their prepayment options. Education has not told borrowers that because
repayment through EDA may take longer, they may incur more interest
cost over the life of the loan than if they previously prepaid without
EDA. While Education has made some information available to borrowers
online about where to send supplemental repayments, it has not
systematically informed all borrowers of their prepayment options.
Further, Education has not updated its borrower publications to inform
borrowers of the option and benefits of repaying their loans through
EDA.
Borrowers Are Not Informed about Cost Implications of EDA
Participation:
Education has not taken steps to inform EDA borrowers that”even with a
reduced interest rate”they could pay more interest over the life of the
loan. This could happen if prior to enrolling in EDA, they made
repayments that exceeded the scheduled amount due, but after enrolling
paid only the amount due. When borrowers establish an EDA, there is no
place on the application form to designate an amount in addition to the
scheduled payment to be withdrawn each month. To continue their
prepayments, such borrowers would have to send a check for any
prepayment or make arrangements to continue making prepayments through
EDA.
Borrowers Are Not Systematically Informed of Their Prepayment Options:
The Higher Education Act of 1965, as amended, requires that student
loan borrowers be informed that they may prepay all or part of their
loans at any time without penalty, but it does not require the
disclosure of specific prepayment options. In documents such as the
master promissory note and borrower publications, Education informs
borrowers that they may prepay their loans. In May 2001, after we began
our work, Education added information to the direct loan servicing Web
site indicating where EDA borrowers wishing to prepay their loans could
send supplemental payments. While this information may help borrowers
with Internet access, Education has not disclosed this information in
EDA brochures, the EDA application, or the confirmation notice sent to
borrowers who establish EDAs. Further, Education does not inform EDA
borrowers that they may make routine prepayments, by contacting the
direct loan servicer at any time and increasing the amount withdrawn
from their bank account each month.
In addition to not disclosing prepayment options, Education had not
updated two of its borrower publications to fully reflect the option
borrowers have to repay through EDA. One publication, Exit Counseling
Guide for Borrowers, does not provide details about how EDA works, the
advantages of EDA for making loan payments, or the reduced interest
rate EDA borrowers receive.[Footnote 5] The other publication,
Repayment Book, which is available to help borrowers understand and
select from the available repayment plans, makes no reference to EDA.
Use of EDAs Generated Estimated Administrative Cost Savings of More
than $2.7 Million in Fiscal Year 2001 for Education and Treasury:
Education and Treasury achieved administrative cost savings because
EDAs reduced the costs associated with billing and processing payments.
Education saved an estimated $1.5 million in fiscal year 2001 as a
result of generating and mailing fewer bills to EDA borrowers.
Additional savings are also possible with respect to costs associated
with servicing past due accounts. Treasury, which processes direct loan
payments and incurs most of the associated processing costs, saved an
estimated $1.2 million in fiscal year 2001.
Education Saved on Administrative Costs by Not Sending Monthly Billing
Statements to EDA Borrowers:
As a result of EDA, Education reduces administrative costs associated
with generating and mailing billing statements to borrowers. According
to our review of Education cost data, in fiscal year 2001, Education
saved about $1.5 million or $0.39 per month for each borrower who used
EDA. This savings includes the cost of things such as the paper billing
statement, the mailing envelope, and postage. Through EDA, Education
avoided sending out more than 3.6 million billing statements over the
course of fiscal year 2001. The other administrative costs Education
incurs for servicing direct loan accounts are the same for all
borrowers, regardless of their payment method. Table 3 shows the
specific costs Education incurs for routine servicing of FDLP accounts.
EDA should result in additional administrative cost savings by reducing
the potential for late payments and accompanying collection efforts,
according to an Education official.
Table 3: FY 2001 Monthly Costs Associated with Routine Servicing of
FDLP Accounts by Payment Method (per borrower):
Service accounts:
EDA account: $0.909;
Non-EDA account: $0.909.
Post payments:
EDA account: $0.475;
Non-EDA account: $0.475.
Generate and mail bills:
EDA account: $0.000;
Non-EDA account: $0.063.
Envelopes used in billing[A]:
EDA account: $0.000;
Non-EDA account: $0.054.
Postage:
EDA account: $0.000;
Non-EDA account: $0.270.
Total:
EDA account: $1.384;
Non-EDA account: $1.771.
[A] Includes two envelopes per statement mailed. Beginning in May 2001,
the cost of envelopes was reduced from $0.094 to $0.074. In July 2001,
the cost of envelopes was further reduced to $0.054.
[End of table]
Some of the administrative savings Education achieves with EDA are
offset with expenses that Education incurs at Treasury. Education pays
Treasury for processing EDA applications. In fiscal year 2000, Treasury
charged Education about $128,900 for processing 253,000 EDA
applications.
In the course of doing our work, we identified a potential opportunity
for additional administrative cost savings unrelated to EDA. Education
adheres to a price structure for servicing delinquent accounts that may
not be appropriate. Currently, the direct loan servicer assesses
Education a separate fee for each day a borrower‘s account is at least
1 day past due. This fee applies to all late direct loan payments, but
because EDA payments are credited on the due date”provided sufficient
funds are available in the borrower‘s bank account”this fee would
generally not apply to EDA borrowers. The late fee Education is
assessed for past due accounts covers additional work the direct loan
servicer performs, such as sending second billing statements to
borrowers, and making reminder phone calls. These collection activities
occur at regularly scheduled intervals as part of Education‘s default
prevention initiatives.
As previously stated, Education is assessed a fee for each day a
borrower‘s account is at least 1 day past due. Education officials
stated that this contract provision has been in place since FDLP
implementation. In the past, the direct loan servicer sent late payment
notices to borrowers as soon as payments were one day late. However,
according to Education officials, borrowers who had already mailed
their payments found these notices confusing. As a result, Education
decided to delay late payment notification to allow additional time to
receive those payments made by borrowers close to or on the due date.
Presently, the direct loan servicer‘s first collection activity”sending
a second billing statement”does not take place until a payment is 7
days late. However, Education is still assessed fees on payments that
arrive 1 to 6 days late. In fiscal year 2001, Education paid $12.2
million or about $0.05 per day for each account that was at least 1 day
past due. Because of limitations of data in the DLSS, Education is
unable to determine the extent to which it is paying this fee each
month for payments received between 1 and 6 days late.
Treasury Achieved Savings by Processing Loan Payments Electronically:
In fiscal year 2001, we estimate Treasury, which has an interagency
agreement with Education to process direct loan payments, saved about
$1.2 million as a result of EDA. These savings are based on the dollar
volume of payments received. Treasury estimates that processing
payments electronically costs less than 1 percent of the cost of
processing paper payments. For example, it costs about $16 to process
$1 million through EDA; processing the same amount in paper payments
costs about $1,897. According to officials from Treasury‘s Financial
Management Service, Treasury processes payments for federal agencies to
ensure efficient and timely processing of payments, and because
Treasury can achieve economies of scale by providing this service
throughout the federal government.
Conclusions:
Regardless of the conclusions Education reached in its cost
justification, borrowers who enroll in EDA will benefit from paying a
reduced interest rate on their loans and the federal government will
achieve administrative cost savings. Data limitations make it difficult
to assess whether borrowers have changed their prepayment behavior as
Education assumed in its cost justification, and thus, the extent of
the benefit for both borrowers and the federal government is unknown.
Even if data were available and showed borrowers‘ had changed their
behavior, it would not tell us that this behavior changed as a result
of entering EDA. Rather, borrowers could be making sound economic
decisions such as choosing to prepay a higher rate loan rather then
their federal student loan. By fully informing borrowers of the
consequences of paying through EDA as well as their prepayment options,
Education could ensure that borrowers have all the information they
need to make sound economic choices. However, the limited disclosures
Education currently makes to borrowers concerning their prepayment
options under EDA are not sufficient to ensure that borrowers have all
essential information to make informed decisions. Education does not
make clear that, in spite of the 0.25 percentage-point interest rate
reduction, borrowers might incur more interest cost over the life of
their loans under EDA than they would if they continued to sometimes
make payments in excess of the scheduled amount due.
Although Education did not include estimated administrative cost
savings associated with EDA in conducting its cost justification,
clearly, these savings would help offset the expense of offering
borrowers a reduced interest rate. EDA can further reduce
administrative costs associated with loan processing if more borrowers
use it. Education has not promoted the benefits of EDA to borrowers as
much as possible to maximize administrative cost savings to the federal
government. Promoting the benefits of EDA to borrowers when they are
considering their repayment options could achieve even greater
administrative cost savings if more borrowers were to participate in
EDA as a result. Moreover, EDAs should reduce the amount of higher fees
that Education incurs for servicing past due accounts, because EDA
payments are generally credited on time.
Although not related to EDA, Education may be able to achieve
additional administrative cost savings. At present, Education is paying
a fee for servicing EDA and non-EDA accounts that are at least 1 day
past due. We believe that those fees may be unjustified because no
action is taken to collect late payments until they are 7 days past
due.
Recommendations:
To help make the EDA program more useful and understandable to
borrowers and take greater advantage of its potential savings to the
taxpayer, we are making several recommendations to the secretary of
education.
* To better publicize EDA and help Education achieve additional
administrative cost savings, we recommend updating the Exit Counseling
Guide for Borrowers to reflect the repayment incentives for direct loan
borrowers who repay their loans through EDA as well as borrowers‘
prepayment options.
* To address concerns that borrowers may unknowingly pay more total
interest over the life of their loans by not making prepayments if they
make their loan payments through EDA, we recommend Education take steps
to inform EDA borrowers about steps they can take to prepay their
loans. Such steps could include modifying EDA applications to allow
borrowers interested in prepaying their loans to designate withdrawal
amounts in excess of their scheduled payments when they initially
complete the EDA application.
* To ensure that the fees Education pays for servicing delinquent
accounts appropriately reflect current collection activity practices,
we recommend Education consider renegotiating the fee provision in its
contract with the direct loan servicer to eliminate the servicing fee
for accounts with payments less than 7 days late.
Agency Comments:
In comments we obtained, Education generally agreed with the
information presented in the report. In response to our recommendation,
Education said that it would explore updating the Exit Counseling Guide
for Borrowers and explore taking other steps to better inform borrowers
of their prepayment options. In addition, Education said it would
consider renegotiating the direct loan servicing contract to move in
the direction of paying for results rather than processes. Education
also provided technical comments, which we incorporated where
appropriate.
We are sending copies to the secretary of education, the secretary of
the treasury, and the director of the Office of Management and Budget
and will also make copies available to others on request. This report
is also available on GAO‘s home page at [hyperlink,
http://www.gao.gov].
If you or your staff have any questions or wish to discuss this
material further, please call me at (202) 512-8403 or Jeff Appel at
(202) 512-9915. Other staff who made key contributions to this report
include Barbara Alsip, Joel Marus, Scott McNabb, and Debra Prescott.
Signed by:
Cornelia M. Ashby:
Director, Education, Workforce and Income Security Issues:
[End of section]
Appendix I: Comments from the Department of Education:
United States Department Of Education:
The Deputy Secretary:
400 Maryland Ave., S.W.
Washington, D.C. 20202-0500:
[hyperlink, http://www.ed.gov]:
"Our mission is to ensure equal access to education and to promote
educational excellence throughout the Nation."
March 22, 2002:
Ms. Cornelia M. Ashby:
Director, Education, Workforce and Income Security Issues:
United States General Accounting Office:
Washington, DC 20548:
Dear Ms. Ashby:
Thank you for the opportunity to review and comment on your draft
report, Direct Student Loans: Additional Steps Would Increase
Borrowers' Awareness of Electronic Debiting and Reduce Federal
Administrative Costs. We appreciate your providing members of Congress
valuable information on the Federal Direct Student Loan Program
(FDSLP). In the FDSLP, the Federal government provides loan capital and
uses private contractors to perform loan origination and servicing
functions.
The report acknowledges that FDSLP's electronic debiting initiative
provides customer service and financial management benefits to
borrowers and administrative savings to the American taxpayer. We are
pleased that you recognize the successful aspects of our implementation
of electronic debiting. We also appreciate your input on potential
improvements in FDSLP electronic debiting, including your suggestions
for improving the information we provide to borrowers. The Department
is always looking for ways to improve disclosure to borrowers. To this
end, we will look into updating the Exit Counseling Guide. for
Borrowers and taking other steps to provide borrowers with additional
information on options for prepaying their student loans. As your
report notes, last year we implemented an "On-line Advisor" feature
which "pushes" information, such as prepayment options, to borrowers.
In addition, we have recently learned that OMB has approved
improvements to the Electronic Debit Account Brochure/Application.
These changes inform the potential EDA enrollee of the availability of
prepayment options. We are continuing to consider additional
enhancements to our web-based and printed materials for both borrowers
and institutions to provide increased disclosure about prepayment.
The Congress, the Department and the higher education community have
long believed that the ability to offer student and parent borrowers a
variety of repayment plans has long-term positive effects on student
loan repayment. In addition to loan entrance and exit counseling
provided by the schools, FDSLP conducts additional counseling during
the grace period of the loan during which it educates borrowers about
the various repayment options. This grace counseling helps ensure that
borrowers are in a position to make an informed choice about the
various types of FDSLP repayment plans available.
We are pleased that you have noted the administrative cost savings
generated through the electronic debit initiative. Some savings, such
as those derived from Treasury's processing payments electronically
rather than via paper payments and Education's reductions in paper
bills, envelopes and postage costs, are relatively easy to measure.
Other savings, such as those derived from reductions in delinquency and
defaults, will take much longer to evaluate. We will be happy to share
additional data as it becomes available. Finally, in response to the
suggestion in your report, we will consider renegotiating the loan
servicing contract to move in the direction of paying for results
rather than processes.
We have attached an Appendix with technical comments.
Again, we appreciate the opportunity to comment on the draft report.
Sincerely,
Signed by:
William D. Hansen:
cc: Sally Stroup:
Greg Woods:
[End of section]
Footnotes:
[1] Subsidy costs are the net present value, at the time a direct loan
is disbursed, of the cash flows for loan disbursement, repayments of
principal, and payments of interest and other payments by or to the
government over the life of the loan after adjusting for estimated
defaults, prepayments, fees, penalties, and other recoveries. Present
value is the worth of the future stream of returns or costs in terms of
money paid immediately”prevailing interest rates provide the basis for
converting future amounts into their ’money now“ equivalents.
[2] AFSA also provides student loan servicing for banks and secondary
markets under the Federal Family Education Loan Program”the largest
federal student loan program.
[3] 20 U.S.C. 1077(a)(2)(F).
[4] As of September 2001, 424,209 borrowers were enrolled in EDA.
[5] FDLP schools are responsible for ensuring that borrowers who are
graduating, withdrawing, or otherwise ceasing to attend school at least
half time, receive exit counseling.
[End of section]
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