Federal Student Aid
Timely Performance Plans and Reports Would Help Guide and Assess Achievement of Default Management Goals Gao ID: GAO-03-348 February 14, 2003During fiscal year 2002, an estimated 5.8 million people borrowed about $38 billion in federal student loans. Despite a dramatic reduction in annual default rates on those loans since fiscal year 1990 (from 22.4 to 5.9 percent), the total volume of dollars in default doubled to nearly $22 billion by fiscal year 2001 from about $11 billion in fiscal year 1990. During that same period, the total student loans outstanding grew from $54.1 billion to $233.2 billion. The Department of Education's Office of Federal Student Aid (FSA) manages the nation's student financial assistance programs authorized under title IV of the Higher Education Act (HEA). In 1998, Congress amended the HEA and established FSA as a performance-based organization. Among other requirements, the HEA called for FSA to annually develop 5-year plans, issue annual reports, and consult with stakeholders regarding their delivery system. GAO initiated a review to assess FSA's default management efforts and results.
FSA's default management goals were mostly to prevent defaults, increase collections, and verify student eligibility, but the agency lacked a plan to guide its efforts. FSA had 39 default management goals for fiscal years 2000 through 2002. However, the goals changed significantly during this period and FSA did not annually prepare 5-year performance plans as required by the HEA. FSA met or exceeded most goals, but did not prepare timely performance reports. According to our analysis, FSA met or exceeded performance targets for 36 of its 39 default management goals during fiscal years 2000 through 2002. However, FSA did not issue performance reports for fiscal years 2000 and 2001, as required by the HEA. Instead, in December 2002, FSA issued one report for both fiscal years that lists accomplishments, but does not clearly indicate the extent to which goals were or were not met. Suggestions from survey respondents did not indicate the need for additional goals. While about one-third of the 23 school officials who responded to our survey made suggestions about ways that FSA could better assist them, none of the suggestions indicated the need for additional default management goals. FSA assisted all schools by sharing default management information through symposiums and other media, and provided individual assistance to some schools through visits and telephone calls. Most of the responding officials were generally pleased with FSA's assistance. The suggestions that officials made did not indicate a need for additional goals because they either related to existing goals or addressed operational issues.
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Director: Team: Phone:GAO-03-348, Federal Student Aid: Timely Performance Plans and Reports Would Help Guide and Assess Achievement of Default Management Goals
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Report to the Secretary of Education:
United States General Accounting Office:
GAO:
February 2003:
Federal Student Aid:
Timely Performance Plans and Reports Would Help Guide and Assess
Achievement of Default Management Goals:
GAO-03-348:
GAO Highlights:
Highlights of GAO-03-348, a report to the Secretary of Education
Why GAO Did This Study:
During fiscal year 2002, an estimated 5.8 million people
borrowed about $38 billion in federal student loans. Despite a
dramatic reduction in annual default rates on those loans since
fiscal year 1990 (from 22.4 to 5.9 percent), the total volume of
dollars in default doubled to nearly $22 billion by fiscal year 2001
from about $11 billion in fiscal year 1990. During that same period,
the total student loans outstanding grew from $54.1 billion to $233.2
billion.
The Department of Education‘s Office of Federal Student Aid
(FSA) manages the nation‘s student financial assistance programs
authorized under title IV of the Higher Education Act (HEA). In
1998, Congress amended the HEA and established FSA as a
performance-based organization. Among other requirements, the
HEA called for FSA to annually develop 5-year plans, issue annual
reports, and consult with stakeholders regarding their
delivery system. GAO initiated a review to assess FSA‘s default
management efforts and results.
What GAO Found:
FSA‘s default management goals were mostly to prevent defaults,
increase collections, and verify student eligibility, but the agency
lacked a plan to guide its efforts. FSA had 39 default management
goals for fiscal years 2000 through 2002. However, the goals changed
significantly during this period and FSA did not annually prepare 5-
year performance plans as required by the HEA.
FSA met or exceeded most goals, but did not prepare timely performance
reports. According to our analysis, FSA met or exceeded performance
targets for 36 of its 39 default management goals during fiscal years
2000 through 2002. However, FSA did not issue performance reports for
fiscal years 2000 and 2001, as required by the HEA. Instead, in
December 2002, FSA issued one report for both fiscal years that lists
accomplishments, but does not clearly indicate the extent to which
goals were or were not met.
Suggestions from survey respondents did not indicate the need for
additional goals. While about one-third of the 23 school officials who
responded to our survey made suggestions about ways that FSA could
better assist them, none of the suggestions indicated the need for
additional default management goals. FSA assisted all schools by
sharing default management information through symposiums and other
media, and provided individual assistance to some schools through
visits and telephone calls. Most of the responding officials were
generally pleased with FSA‘s assistance. The suggestions that officials
made did not indicate a need for additional goals because they
either related to existing goals or addressed operational issues.
Highlights Figure:
[See PDF for image]
[End of figure]
What GAO Recommends:
The Secretary of Education and FSA‘s Chief Operating Officer
should (1) produce a 5-year performance plan annually as
required by the HEA and (2) prepare and issue reports to the
Congress on FSA‘s performance that are timely and clearly identify
whether performance goals were met.
www.gao.gov/cgi-bin/getrpt?GAO-03-348.
To view the full report, including the scope
and methodology, click on the link above.
For more information, contact Cornelia M.
Ashby at (202) 512-8403 or
ashbyc@gao.gov.
Contents:
Letter:
Results in Brief:
Background:
FSA‘s Default Management Goals Were Mostly to Prevent Defaults,
Increase Collections, and Verify Student Eligibility, but the Agency
Lacked a Plan to Guide its Efforts:
FSA Met or Exceeded Most Goals, but Did Not Prepare Timely Performance
Reports:
Surveyed School Officials‘ Suggestions Did Not Indicate the Need for
Additional Goals:
Conclusions:
Recommendations to the Secretary of Education:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: FSA‘s Default Management Goals for Fiscal Years
2000-2002:
Appendix III: FSA‘s Default Management Goals and Outcomes for Fiscal
Years 2000-2002:
Appendix IV: Comments from the Office of Federal Student Aid:
Appendix V: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Tables:
Table 1: Total Student Loan Portfolio and Amounts in Default by Type of
Loan for Fiscal Years 1990--2001 (nominal dollars in billions):
Table 2: Summary of Postsecondary Schools That Participated in Our
Survey:
Figures:
Figure 1: Fiscal Years 1990-2000 National Cohort Default Rates:
Abbreviations:
COO: Chief Operating Officer:
CDRcohort default rate:
FFEL: Federal Family Education Loan Program:
FSA: Office of Federal Student Aid:
HEA: Higher Education Act:
HHS: Department of Health and Human Services:
IFAP: Information for Financial Aid Professionals:
IRS: Internal Revenue Service:
NSLDS: National Student Loan Data System:
PBO: performance-based organization:
VFA: Voluntary Flexible Agreement:
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February 14, 2003:
The Honorable Roderick Paige
Secretary of Education:
Dear Mr. Secretary:
During fiscal year 2002, an estimated 5.8 million people borrowed about
$38 billion in federal student loans to help meet their educational
needs. This is more than triple the $11.7 billion borrowed in fiscal
year 1990. Despite a dramatic reduction in annual default rates on
those loans since fiscal year 1990 (from 22.4 to 5.9 percent), the
total volume of dollars in default had grown to nearly $22 billion by
fiscal year 2001 from about $11 billion in fiscal year 1990. During the
same period, the total student loans outstanding grew from $54.1
billion to $233.2 billion.
The Department of Education‘s Office of Federal Student Aid (FSA) is
responsible for managing and administering the nation‘s student
financial assistance programs authorized under title IV of the Higher
Education Act (HEA) of 1965, as amended. In 1998, the Congress amended
HEA to establish FSA as a performance-based organization (PBO) in order
to address longstanding management weaknesses.[Footnote 1] Among other
requirements, HEA called for FSA to annually develop 5-year plans that
establish measurable goals and to issue annual reports on the extent to
which the goals were met. The intent of this law was to provide among
other things, a greater level of accountability for FSA‘s
administration of programs. Additionally, HEA requires FSA to seek the
opinions and suggestions of postsecondary institutions and other
stakeholders, such as lenders and borrowers, regarding their delivery
system. Because of the large volume of dollars at-risk, we undertook
this study to determine (1) what FSA‘s default management goals were
for fiscal years 2000 through 2002, (2) whether FSA had achieved its
stated performance goals, and (3) whether school officials from
schools with large potential losses from defaults--schools with high
default rates or a high volume of dollars in default--had suggestions
that indicated the need for additional default management goals.
To achieve our objectives, we reviewed HEA to identify FSA‘s roles and
responsibilities, interviewed FSA officials responsible for overseeing
and administering student aid programs, and obtained and analyzed
available data and reports on FSA‘s performance goals and
accomplishments for fiscal years 2000--2002. In addition, we
interviewed FSA officials regarding assistance provided to schools,
particularly, schools with high default rates and those with a high
volume of dollars in default. We attempted to contact officials at 31
schools with high default rates or a high volume of dollars in default
to ask them their views of the assistance provided by FSA and to obtain
their suggestions on ways that FSA could better assist them. Officials
from 23 of the 31 schools agreed to participate in our survey. We
conducted our work between September 2002 and January 2003 in
accordance with generally accepted government auditing standards. See
appendix I for additional information about our scope and methodology.
Results in Brief:
For fiscal years 2000 through 2002, FSA identified 39 default
management goals designed primarily to prevent defaults, increase
collections, or verify student eligibility. The default management
goals included increasing students‘ awareness of their repayment
obligations, verifying family income by matching student records with
Internal Revenue Service (IRS) tax records, and locating defaulted
borrowers through a national new hires database. However, the goals
changed significantly between fiscal years 2000 and 2002 and were not
tied to an overall plan. Specifically, although 5 of the 39 goals were
continued for each of the 3 fiscal years and 6 others were continued
for 2 years, 28 were single-year goals. Moreover, a majority of these
single-year goals, 15 of the 28, were implemented in fiscal year 2002.
FSA‘s documents did not explain the basis for establishing, continuing,
or ending goals from year to year nor did FSA prepare 5-year
performance plans as required by HEA.
On the basis of our analysis of FSA‘s internal documents, we determined
that 36 of its 39 default management goals were met or exceeded during
the 3-year period. FSA met its goal to recover more previously
defaulted dollars than it lost through new defaults; it recovered $4.87
billion compared to $2.7 billion lost through new defaults. Also, FSA
met its target to support the administration‘s efforts to improve its
data matching capabilities with the IRS by proposing changes to
legislation that would authorize expanded use of tax data. The 3 unmet
goals were to (1) provide the Congress with a report by the end of
fiscal year 2002 explaining the impact of voluntary flexible agreements
(VFAs);[Footnote 2] (2) implement a multiyear program during the 3-year
period to reduce default rates over the life of the loan; and (3)
prepare an analysis in fiscal year 2002 to identify improvements that
could be made to the National Student Loan Data System (NSLDS)--a
national database containing information on federal student loans and
grants. Although FSA achieved nearly all of its default management
goals, it did not provide to the Congress timely reports on its
performance as required by HEA for fiscal years 2000 and 2001. In
December 2002, FSA issued a single performance report for both fiscal
years 2000 and 2001. The information in the report was not timely nor
did it indicate whether or not the agency met established performance
goals. As a result, the Congress does not know whether FSA achieved its
goals for those years.
While 7 of the 23 officials from schools with high default rates or a
high volume of dollars in default who participated in our survey made
suggestions about ways that FSA could better assist them, none of these
suggestions indicated the need for additional default management goals.
FSA provided similar assistance to all schools, irrespective of their
default rates or dollars in default, primarily by sharing default
management best practices at its National Default Prevention Day
symposiums and hosting conferences to disseminate default management
information. FSA also provided individual assistance to some schools
through on-site visits and telephone calls to address specific default
management concerns such as preparing default management plans.
Although 16 of the 23 officials said that they were generally pleased
with one or more services provided by FSA, nearly a third suggested
ways that FSA could better assist schools. Their suggestions included
improving the usefulness and access to loan information in NSLDS,
holding default management training sessions in locations near them,
and making it easier to identify and contact the right FSA program
officials to address concerns. These suggestions did not indicate the
need for additional default management goals because they either
related to existing goals or addressed operational issues.
To assure the public that FSA has developed long-term goals that set
the direction for its default management program, we are recommending
that the Secretary of Education and FSA‘s Chief Operating Officer (COO)
prepare and make available a 5-year performance plan annually, as
required by HEA. In addition, to provide essential information to the
Congress about FSA‘s progress toward achieving its goals, we are
recommending that the Secretary of Education and FSA‘s COO prepare and
issue performance reports to the Congress that are timely and clearly
indicate whether established goals and performance targets were met.
FSA provided written comments on a draft of this report. In commenting
on the draft, FSA generally agreed with our findings and said it would
take actions to address our recommendations. FSA‘s written comments
appear in appendix IV.
Background:
Title IV of HEA authorized several student aid programs including the
Federal Family Education Loan (FFEL) and the William D. Ford Direct
Loan (Direct Loan) programs, the Federal Pell Grant program, and
campus-based aid programs.[Footnote 3] The FFEL and Direct Loan
programs are the largest source of aid for students. The FFEL
program[Footnote 4] provides loans to eligible students and parents
through participating private lenders that receive a federal guarantee
of repayment if the borrower defaults. Under the Direct Loan program,
eligible students and parents borrow funds directly from the federal
government through participating schools. As of October 2002, about
6,400 schools participated in one or more of the title IV student aid
programs. To be eligible to participate in the FFEL and Direct Loan
programs, schools must manage their loan portfolios to keep the default
rate for their loans below established limits.
The national student loan default rate, also known as the national
cohort default rate (CDR), is defined as the percentage of borrowers
who enter repayment status in a certain fiscal year and default before
the end of the next fiscal year on Federal Stafford Loans and, under
certain circumstances, Federal SLS loans, and Direct Stafford Loans.
For example, the fiscal year 2000 CDR of 5.9 percent represents the
percentage of borrowers whose first loan repayments came due between
October 1, 1999, and September 30, 2000, and who, as of September 30,
2001, had defaulted. The national CDR is an aggregate of all
postsecondary institutional default rates. The CDR for schools with 30
or more borrowers in repayment is calculated based on the percentage of
borrowers entering repayment on loans in a fiscal year and defaulting
during that fiscal year or the following fiscal year.[Footnote 5] FSA
issues draft CDRs and supporting data to schools in January or February
of each year for review. A school may challenge the draft default rate
information if it identifies inaccuracies in data. In addition, a
school with CDRs of 25 percent or more for 3 consecutive years can
appeal the draft rate if it can show that the number of students who
obtained loans did not exceed approximately 3.8 percent of the total
number of students at the school, while schools with CDRs over 40
percent in 1 year can appeal the draft rate if it can show that the
number of students who obtained loans did not exceed approximately 6
percent of the total number of students at the school. FSA makes
revisions as needed, and releases the final CDR to the schools and the
public no later than September 30 of each year.
Unless a school has 30 or fewer borrowers who entered repayment for the
3 most recent fiscal years, it could lose its eligibility to
participate in some title IV student aid programs if its final CDR
exceeds established thresholds. For example, under HEA, if schools have
CDRs of 25 percent or more for 3 consecutive years, they face loss of
eligibility to participate in the FFEL and Direct Loan
programs.[Footnote 6] A regulation imposes the same restriction on
eligibility if schools have CDRs exceeding 40 percent in a given year.
Additionally, schools that are ineligible to receive FFEL and Direct
Loans due to CDRs of 25 percent or more for 3 consecutive years are
also generally prohibited by statute from receiving Pell Grants. These
schools are subject to suspension from title IV programs for the
remainder of the fiscal year in which FSA notifies them of termination
and the following 2 fiscal years. However, schools have appeal rights
and retain program eligibility while their appeals are pending. Schools
may apply to be reinstated to participate in title IV loan and/or
Federal Pell Grant programs after the later of the expiration of their
suspension or 18 months after the effective date of their termination.
Over the last decade, approximately 1,200 schools have been subject to
suspension due to default rates above the 25 percent threshold for
fiscal years 1998 through 2000.[Footnote 7]
From fiscal year 1990 to fiscal year 1999, the national student loan
default rate declined from 22.4 percent to 5.6 percent. In fiscal year
2000, the rate climbed slightly to 5.9 percent. Figure 1 shows the
trend in national cohort default rates from fiscal years 1990 through
2000.
Figure 1: Fiscal Years 1990-2000 National Cohort Default Rates:
[See PDF for image]
[End of figure]
Despite the overall progress made in reducing the national default
rate, the cumulative student loan funds in default had doubled to
almost $22 billion by fiscal year 2001 from their fiscal year 1990
level of nearly $11 billion. During this same time period, the total
student loan portfolio grew by more than 400 percent from $54.1 billion
to $233.2 billion and the defaults, as a percent of the total loan
portfolio, declined from 20.1 percent to 9.4 percent. Table 1 shows the
outstanding portfolio and defaulted loan balances for FFEL and Direct
Loans as well as the total defaulted loans as a percentage of the total
outstanding loan portfolio for fiscal years 1990 through 2001.
Table 1: Total Student Loan Portfolio and Amounts in Default by Type of
Loan for Fiscal Years 1990--2001
(nominal dollars in billions):
Fiscal Year: 1990; FFEL Outstanding Portfolio: $ 54.1; FFEL Defaults[
A]: $ 10.9; Direct Loan Outstanding Portfolio: --; Direct Loan
Defaults[ A]: --; Total Outstanding Portfolio: $54.1; Total Outstanding
Portfolio: $10.9; Total Defaults: 20.1.
Fiscal Year: 1991; FFEL Outstanding Portfolio: 57.5; FFEL Defaults[ A]:
12.5; Direct Loan Outstanding Portfolio: --; Direct Loan Defaults[ A]:
--; Total Outstanding Portfolio: 57.5; Total Outstanding Portfolio:
12.5; Total Defaults: 21.7.
Fiscal Year: 1992; FFEL Outstanding Portfolio: 62.0; FFEL Defaults[ A]:
13.6; Direct Loan Outstanding Portfolio: --; Direct Loan Defaults[ A]:
--; Total Outstanding Portfolio: 62.0; Total Outstanding Portfolio:
13.6; Total Defaults: 21.9.
Fiscal Year: 1993; FFEL Outstanding Portfolio: 69.0; FFEL Defaults[ A]:
12.1; Direct Loan Outstanding Portfolio: --; Direct Loan Defaults[ A]:
--; Total Outstanding Portfolio: 69.0; Total Outstanding Portfolio:
12.1; Total Defaults: 17.5.
Fiscal Year: 1994; FFEL Outstanding Portfolio: 80.0; FFEL Defaults[ A]:
12.5; Direct Loan Outstanding Portfolio:
