Federal Family Education Loan Program
More Oversight Is Needed for Schools That Are Lenders Gao ID: GAO-05-184 January 24, 2005In fiscal year 2004, lenders made about $65 billion in loans through the Federal Family Education Loan Program (FFELP) to assist students in paying for postsecondary education. The Higher Education Act (HEA), which authorizes FFELP, broadly defined eligible lenders--including schools. The Department of Education's (Education) Office of Federal Student Aid (FSA) is responsible for ensuring that lenders comply with FFELP laws and regulations. Recently, schools have become increasingly interested in becoming lenders, and this has raised concerns about whether it is appropriate for schools to become lenders given that they both determine students' eligibility for loans and in some cases set the price of attendance. In light of these concerns we determined (1) the extent to which schools have participated as FFELP lenders and their characteristics, (2) how schools have structured lending operations and benefits for borrowers and schools, and (3) statutory and regulatory safeguards designed to protect taxpayers' and borrowers' interests.
Between school years 1993-1994 and 2003-2004, lending by schools has increased significantly from 22 school lenders disbursing about $155 million to 64 schools disbursing $1.5 billion in FFELP loans. Several schools we interviewed reported that a primary reason to become a FFELP lender was to generate more revenue for the school. About 80 percent of school lenders in school year 2003-2004 were private nonprofit schools, and almost all of them had graduate and professional programs in medicine, law, or business. Most school lenders have contracted with other FFELP organizations to administer their loan programs and subsequently have sold their loans to earn revenue, but school lenders differed in terms of how they financed the loans made and when they sold their loans. About a third of the school lenders we interviewed used their own money to finance the loans they made, while the others obtained lines of credit from a bank or secondary market lender, in some cases from the same organization that eventually purchased the loans disbursed by the school lender. Most schools we interviewed reported using or planning to use revenues earned from the sale of loans to lower student borrowing costs or provide need-based aid. A number of statutory and regulatory provisions applicable to all lenders and schools, and some applicable only to school lenders, exist to safeguard the interests of taxpayers and borrowers. FSA, however, has little information about how school lenders' have complied with FFELP regulations. Under the HEA, FFELP lenders that originate or hold more than $5 million in FFELP loans must submit annually audited financial statements and compliance audits. In October 2004, FSA discovered that 10 of 29 school lenders required to submit an audit for fiscal year 2002 had not done so. Moreover, FSA has not conducted program reviews of school lenders. However, during the course of our review, three regional offices asked 31 school lenders about their compliance with the regulation pertaining to the use of interest income and special allowance payments for need-based grants.
RecommendationsOur 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.
Director: Team: Phone:GAO-05-184, Federal Family Education Loan Program: More Oversight Is Needed for Schools That Are Lenders
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
January 2005:
FEDERAL FAMILY EDUCATION LOAN PROGRAM:
More Oversight Is Needed for Schools That Are Lenders:
GAO-05-184:
GAO Highlights:
Highlights of GAO-05-184, a report to congressional requesters:
Why GAO Did This Study:
In fiscal year 2004, lenders made about $65 billion in loans through
the Federal Family Education Loan Program (FFELP) to assist students in
paying for postsecondary education. The Higher Education Act (HEA),
which authorizes FFELP, broadly defined eligible lenders”including
schools. The Department of Education‘s (Education) Office of Federal
Student Aid (FSA) is responsible for ensuring that lenders comply with
FFELP laws and regulations. Recently, schools have become increasingly
interested in becoming lenders, and this has raised concerns about
whether it is appropriate for schools to become lenders given that they
both determine students‘ eligibility for loans and in some cases set
the price of attendance. In light of these concerns we determined (1)
the extent to which schools have participated as FFELP lenders and
their characteristics, (2) how schools have structured lending
operations and benefits for borrowers and schools, and (3) statutory
and regulatory safeguards designed to protect taxpayers‘ and borrowers‘
interests.
What GAO Found:
Between school years 1993–1994 and 2003–2004, lending by schools has
increased significantly from 22 school lenders disbursing about $155
million to 64 schools disbursing $1.5 billion in FFELP loans, as shown
below.
[See PDF for image]
[End of figure]
Several schools we interviewed reported that a primary reason to become
a FFELP lender was to generate more revenue for the school. About 80
percent of school lenders in school year 2003–2004 were private
nonprofit schools, and almost all of them had graduate and professional
programs in medicine, law, or business.
Most school lenders have contracted with other FFELP organizations to
administer their loan programs and subsequently have sold their loans
to earn revenue, but school lenders differed in terms of how they
financed the loans made and when they sold their loans. About a third
of the school lenders we interviewed used their own money to finance
the loans they made, while the others obtained lines of credit from a
bank or secondary market lender, in some cases from the same
organization that eventually purchased the loans disbursed by the
school lender. Most schools we interviewed reported using or planning
to use revenues earned from the sale of loans to lower student
borrowing costs or provide need-based aid.
A number of statutory and regulatory provisions applicable to all
lenders and schools, and some applicable only to school lenders, exist
to safeguard the interests of taxpayers and borrowers. FSA, however,
has little information about how school lenders‘ have complied with
FFELP regulations. Under the HEA, FFELP lenders that originate or hold
more than $5 million in FFELP loans must submit annually audited
financial statements and compliance audits. In October 2004, FSA
discovered that 10 of 29 school lenders required to submit an audit for
fiscal year 2002 had not done so. Moreover, FSA has not conducted
program reviews of school lenders. However, during the course of our
review, three regional offices asked 31 school lenders about their
compliance with the regulation pertaining to the use of interest income
and special allowance payments for need-based grants.
What GAO Recommends:
GAO recommends that FSA take steps to ensure that all school lenders
are consistently complying with applicable statutory and regulatory
requirements. Education agreed with our recommendation.
www.gao.gov/cgi-bin/getrpt?GAO-05-184.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Cornelia Ashby at (202)
512-8403 or ashbyc@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
FFELP Lending by Schools--Mostly Private Nonprofit Schools--Has
Increased Significantly in the Last Five Years:
School Lenders Contract with Other FFELP Participants to Provide
Student Loans and Later Sell Them to Receive Money, Which May Be Used
to Lower Students' Borrowing Costs:
A Number of Statutory and Regulatory Provisions Exist to Safeguard the
Interests of Taxpayers and Borrowers, but FSA Has Not Regularly
Monitored School Lenders' Compliance with the Provisions:
Conclusions:
Recommendation for Executive Action:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: Top 100 FFELP Originating Lenders in Fiscal Year 2003:
Appendix III: School Lender Loan Volume in School Year 2003-2004:
Appendix IV: Comments from the Department of Education:
Appendix V: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Tables:
Table 1: School Lenders Compared with Nonlending Schools in School Year
2003-2004:
Table 2: Length of Time School Lenders Owned Loans before Selling to
Another Lender to Receive a Premium:
Table 3: Comparison of Benefits for Stafford Borrowers among Selected
School Lenders Interviewed:
Figures:
Figure 1: Amount of FFELP Loans Originated by School Lenders, by School
Year:
Figure 2: Number of School Lenders Providing FFELP Loans, by School
Year:
Figure 3. Percentage of School Lenders That Sold Loans to Either a
Private For-Profit Company, State Agency, or Private Nonprofit Company:
Figure 4: Structure of Lending Operation for One School Lender That
Contracts with One Organization to Finance, Originate, Service, and
Purchase Loans:
Figure 5: Structure of Lending Operation for One School Lender That
Contracted with Three Organizations to Finance, Originate, Service, and
Purchase Loans:
Figure 6: Structure of Lending Operation for One School Lender That
Used an Affiliated Foundation and State Agency to Finance, Originate,
Service, and Purchase Loans:
Figure 7: Statutory and Regulatory Provisions Specific to School
Lenders:
Abbreviations:
ASEDS: Application, School Eligibility, and Delivery Services:
FAFSA: Free Application for Federal Student Aid:
FDLP: William D. Ford Direct Student:
FFELP: Federal Family Education Loan Program:
FPS: Financial Partners Services:
FSA: Federal Student Aid:
GDP: Gross Domestic Product:
HEA: Higher Education Act:
IPEDS: Integrated Postsecondary Education Data System:
NSLDS: National Student Loan Data System:
OIG: Office of Inspector General:
PLUS: Parent Loans for Undergraduate Students:
United States Government Accountability Office:
Washington, DC 20548:
January 24, 2005:
The Honorable Dale E. Kildee:
Ranking Member,
Subcommittee on 21st Century Competitiveness:
Committee on Education and the Workforce:
House of Representatives:
The Honorable Chris Van Hollen:
House of Representatives:
The Higher Education Act (HEA) of 1965, as amended, established the
Federal Family Education Loan Program (FFELP), which provided about $65
billion in student loans in fiscal year 2004 and is the largest source
of federal financial aid for students and their families. A number of
for-profit commercial, nonprofit, and public agencies are involved in
the program, including originating lenders, secondary markets,
postsecondary institutions (schools), and the Department of Education
(Education). Commercial and nonprofit lenders--such as banks and state-
designated agencies--provide loan capital, and the federal government
guarantees these loans against substantially all loss through borrower
default. Originating lenders often sell their loans to secondary
markets, thereby obtaining additional capital to make new loans and
receiving premium revenues--payments from loan buyers that are
calculated as a percentage of the face value of the loans
sold.[Footnote 1] Lenders that hold loans receive interest income paid
by borrowers and in some cases special allowance payments from the
federal government for the loans they hold.[Footnote 2] Schools assess
students' levels of financial need, certify borrower eligibility for
loans, and disburse loan proceeds to students. Education's Office of
Federal Student Aid (FSA) is responsible for overall program
administration and ensuring compliance with laws and regulations.
When FFELP was created, in 1965, Congress broadly defined eligible
lenders--including schools--to ensure that students would be able to
locate a lender. Schools that are FFELP lenders primarily make loans to
graduate students because of statutory limitations on lending to
undergraduates.[Footnote 3] As we and various news media have reported,
schools, including those that have participated in the federal
government's other major student loan program--the William D. Ford
Direct Student Loan Program (FDLP), created in 1993--are becoming
increasingly interested in entering the student loan business as
lenders.[Footnote 4] The possibility of an increasing number of schools
becoming FFELP lenders and receiving revenues from the loans they make
has raised concerns. Specifically, questions have been raised about
whether it is appropriate for schools to become lenders, given that
they both determine students' eligibility for loans and in some cases
set the price of attendance. Additional concerns have been raised about
the propriety of the schools' contractual relationships with other
FFELP participants and whether these relationships create an incentive
for schools to encourage student borrowing. In light of these issues
and the pending reauthorization of the HEA, we are providing
information and analysis on three issues:
1. To what extent have schools participated in FFELP as lenders and
what are their characteristics?
2. How have schools structured their lending operations and what are
the benefits for schools and borrowers?
3. What statutory and regulatory safeguards exist to protect the
interests of taxpayers and borrowers?
To assess the extent to which schools have participated in FFELP as
lenders, we analyzed data from Education's information systems on
school lenders' loan volume in each school year from 1993-1994 to 2003-
2004, which we converted to real 2003 dollars; the amount of loans made
by other FFELP lenders for students attending these schools; and
characteristics of school lenders, such as whether they are private or
public schools. On the basis of our review of the documentation for
these data and our discussions with Education officials about the steps
they take to ensure the reliability and validity of these data, we
determined that the data from these systems were sufficiently reliable
for the purpose of our study. To assess school lending operations and
benefits to schools and borrowers, we conducted site visits and
interviews with 13 school lenders and reviewed their contracts with
other lenders and servicers. We also interviewed 12 other lenders,
including secondary markets; 2 state-designated guaranty agencies,
which perform a variety of administrative functions on behalf of the
federal government in the FFELP; and related higher education and
financial aid associations. We also interviewed officials of all
schools that were lenders in school year 2003-2004 or planning to lend
in 2004-2005, to gather information on what type of lender purchased
their loans. To assess existing safeguards for borrowers and taxpayers,
we reviewed the HEA, related regulations, guidance issued by Education,
and court decisions. We also interviewed officials in Education's FSA,
Office of General Counsel, Office of Inspector General, and Office of
Postsecondary Education. See appendix I for a more detailed discussion
of our scope and methodology. We conducted our work from December 2003
to December 2004 in accordance with generally accepted government
auditing standards.
Results in Brief:
In school year 2003-2004, 64 schools, chiefly private nonprofit
institutions, made over $1.5 billion in FFELP loans, primarily to
graduate and professional students. This represents a dramatic increase
from school year 1993-1994, when only 22 schools participated in FFELP
as lenders, making loans totaling about $155 million.[Footnote 5]
Several schools we interviewed reported that a primary reason to become
a FFELP lender was to generate more revenue for the school. The amount
of loans originated by school lenders will likely continue to increase
because 17 schools are in the process of establishing an FFELP lending
program. Despite the large increase in loans made by school lenders,
such loans remain a small proportion (3 percent) of overall FFELP loan
volume. Loans made by a school lender can, however, constitute a
significant portion of all FFELP loans borrowed by graduate students at
such schools. For example, at almost a third of the schools in 2003-
2004, graduate students borrowed almost exclusively from the school
lender rather than from other FFELP lenders. School lenders that
originated loans in school year 2003-2004 had higher average tuition
and larger enrollments and were more likely to be private nonprofit
than schools that were not FFELP lenders. About 80 percent of school
lenders in school year 2003-2004 were private nonprofit schools, and
almost all of them had graduate and professional programs in law,
business, medicine, or other health specialties.
By and large, school lenders contracted with other FFELP organizations
to administer their loan programs and subsequently sold their loans to
receive revenue, which some reported using to lower students' borrowing
costs and provide need-based aid. The 13 school lenders we interviewed
typically entered into contracts for loan origination, servicing, and
sale by selecting one organization or multiple organizations to perform
all three components. About a third of the school lenders we
interviewed used their own money to finance the loans they made, while
the others obtained a line of credit from a bank or secondary market,
in some cases from the same organization that eventually purchased the
loans originated by the school lender. Several school lenders
emphasized that revenue received by selling loans was a significant
factor in their decision to become a lender and outweighed the
administrative burden and costs of becoming a lender. The premiums
received by the school lenders we visited ranged from about 2 percent
to 6 percent of the total face value of the loans. While some schools
receive revenue only from selling loans, others hold on to the loans
and also receive borrower interest payments and special allowance
payments from Education as compensation for holding FFELP loans, which
are required by the HEA to be used for need-based grant or reasonable
direct administrative expenses. School lenders, however, have
discretion in how they use revenues received from the premiums paid on
loans sold. Officials from most of the schools we interviewed reported
that they used or were planning to use their premium revenue for need-
based aid. In addition, officials from some school lenders also
reported that by becoming FFELP lenders, they were able to offer
students reduced loan origination fees and better repayment terms upon
graduation.
A number of statutory and regulatory provisions applicable to all
lenders and schools, and some applicable only to school lenders, exist
to safeguard the interests of taxpayers and borrowers. FSA, however,
has little information about how school lenders have complied with
these requirements. Under the HEA, FFELP lenders that originate or hold
more than $5 million in FFELP loans must submit annually audited
financial statements and independent compliance audits to assist
Education in detecting fraud, waste, abuse, and mismanagement
potentially contributing to borrower defaults. Another provision in the
HEA, commonly called the "anti-inducement provision" is designed to
protect borrowers' interests by prohibiting any lender from offering
gifts or other incentives to schools or individuals to secure FFELP
applicants. To address problems among school lenders in the 1970s,
Congress added several provisions that apply only to them. For example,
under the HEA, schools with high rates of borrower default are
prohibited from participating in FFELP as lenders. FSA, which is
responsible for ensuring compliance with laws and regulations, has not
provided timely and adequate oversight of school lenders. For example,
in October 2004, FSA discovered that 10 of 29 school lenders required
to submit a compliance audit for fiscal year 2002 had not done so.
Furthermore, until 2004 FSA had not used its authority to conduct
program reviews of school lenders, which supplement the information
contained in audits and are intended to improve the integrity of the
program. During the course of our review, FSA asked 31 school lenders
about their compliance with the regulation pertaining to the use of
interest income and special allowance payments.
In this report, we are recommending that FSA's Chief Operating Officer
take the steps necessary to ensure that all school lenders are
consistently complying with FFELP statutory and regulatory provisions
intended to protect the interests of taxpayers and borrowers.
We provided Education with a copy of our draft report for review and
comment. In written comments on our draft report, Education generally
agreed with our reported findings and recommendation. Education's
written comments appear in appendix IV.
Background:
In fiscal year 2004, students received over $84 billion in federal
loans to finance postsecondary education. The major federal loans
include:
* Stafford subsidized and unsubsidized loans, which are available to
both undergraduate and graduate students--the federal government pays
the interest on behalf of subsidized loan borrowers while students are
in school[Footnote 6] and:
* Parent Loans for Undergraduate Students (PLUS), which are made to
parents on behalf of undergraduate students.
Students can also receive consolidation loans, which allow them to
combine multiple federal student loans into a single loan and to make
one monthly payment.[Footnote 7] In fiscal year 2004, about $65 billion
was disbursed through FFELP and about $19 billion was disbursed through
FDLP.
Since FFELP (originally called the guaranteed student loan program) was
created in the HEA of 1965, the student loan market has changed
significantly. First, there has been a dramatic growth in student loan
volume, with more students relying on private loans, which are not part
of FFELP, than at any point in the past. Combined with the recent
increases in tuition rates and thus in the revenues generated by school
tuition, this makes the student loan market an important economic
concern. Second, a few very large lenders provide the capital for most
of the loan volume. Specifically, in fiscal year 2003, 10 lenders
originated 54 percent of all FFELP loans. Third, the creation of FDLP
in 1993 and the significant growth of private alternative nonfederal
loans have increased competition across loan programs. The primary
result of this competition has been an improvement in benefits for
borrowers and of loan management in both FFELP and FDLP, with most
loans today being originated, disbursed, and serviced electronically,
according to financial aid officials.
Disbursing Loans through FFELP:
In order to receive a Stafford loan through FFELP, students must fill
out and submit a Free Application for Federal Student Aid (FAFSA).
Additionally, parents must have their credit checked to receive a PLUS
loan. A school's financial aid office assesses a student's financial
need and creates a package of financial aid of grants, loans--which may
include Stafford loans--and work-study, a federal program in which
students are provided on-or off-campus jobs. Lenders provide the
capital for loans to both undergraduate and graduate students. Under
the HEA, eligible FFELP lenders include banks, postsecondary schools,
credit unions, and state nonprofit agencies. For a lender to originate
a loan, the school must certify that a student is enrolled and
therefore eligible to receive a loan, and the borrower must complete a
promissory note.
After a loan is disbursed to a borrower, lenders may either service or
sell their loans. Servicing includes sending bills to borrowers and
collecting loan payments after the loan has entered repayment. Lenders
may contract with an outside organization for loan servicing. Lenders
also have the option of selling loans to a secondary market, thereby
freeing up capital to make additional student loans. To encourage
lenders' participation in FFELP, the federal government guarantees
FFELP lenders a minimum rate of return, called the lender yield. When
the interest rate paid by borrowers is below the lender yield, the
federal government makes special allowance payments. Lenders receive
these special allowance payments for loans that they hold.
State-designated guaranty agencies, which are nonprofit organizations
designated by the state to administer FFELP loans, perform a variety of
administrative functions under the program. With federal funding,
guaranty agencies generally provide insurance to the lenders for 98
percent of the unpaid principal of defaulted loans.[Footnote 8] The
guaranty agencies also work with lenders and borrowers to prevent loan
defaults and to collect on the loans after default.
Borrower Fees, Benefits, and Payment Plans under FFELP:
Students who borrow through FFELP may pay fees on their loans and have
a variety of repayment options from which to choose. Specifically,
students may pay a 3 percent loan origination fee and a 1 percent
guarantor fee for each loan. Lenders may pay some or all of the
origination fee to the federal government on behalf of the student, and
guaranty agencies may waive the guarantor fee. While in repayment,
borrowers in FFELP can choose from four repayment plans, including:
* standard repayment--borrowers pay a fixed monthly amount of at least
$50 up to 10 years,
* graduated repayment--borrowers pay smaller monthly amounts initially
and larger amounts in later years,
* extended repayment--borrowers pay a fixed monthly amount that can be
repaid over a time period as long as 25 years under FFELP, and:
* income-sensitive repayment--borrowers pay a monthly amount that
varies according to the borrower's income.
In addition, while students are in repayment, lenders or loan servicers
may offer interest rate reductions or cancel all or part of the loan.
FSA's Oversight Responsibilities:
In response to concerns about fraud, waste, and abuse associated with
the student aid programs and other management weaknesses, Congress
established FSA as the government's first performance-based
organization in October 1998. FSA's primary objectives are to improve
the efficacy and efficiency of student aid delivery and to make it less
expensive. FSA administers and provides oversight for all federal
student aid programs, including FFELP. Currently, FSA oversees or
directly manages approximately $320 billion in outstanding loans
representing over 22 million borrowers.
FSA has 10 organizational units, 2 of which provide oversight and
guidance for schools and lenders that participate in FFELP:
Application, School Eligibility, and Delivery Services (ASEDS) and
Financial Partners Services (FPS). The ASEDS office verifies the
eligibility of schools to participate in FFELP and other federal aid
programs. The FPS office provides oversight to all guaranty agencies,
lenders, and servicers to ensure compliance with FFELP requirements.
FFELP Lending by Schools--Mostly Private Nonprofit Schools--Has
Increased Significantly in the Last Five Years:
FFELP lending by schools--chiefly private nonprofit schools providing
Stafford loans to their graduate and professional students--has
increased significantly between school years 1993-1994 and 2003-2004
rising from $155 million to $1.5 billion.[Footnote 9] The amount of
loans originated by school lenders is likely to increase because 17
schools are in the process of establishing their lending programs.
Despite the increases in school lending, it is still a small proportion
of total FFELP loan volume. More than three-quarters of school lenders
in school year 2003-2004 were private nonprofit schools, and all but
one of them had graduate and professional programs in law, business,
medicine, or other health specialties. Moreover, prior to becoming
school lenders, several school lenders provided loans through FDLP.
Some of these school lenders continue to participate in both FFELP and
FDLP.
Between School Years 1993-1994 and 2003-2004, the Amount of Stafford
and PLUS Loans Originated by School Lenders Increased by Over a Billion
Dollars:
The amount of loans originated by school lenders has increased by over
a billion dollars since school year 1993-1994, with the most
significant increases occurring in the past 5 years. Between school
year 1999-2000 and 2003-2004, the amount of loans originated by school
lenders has almost tripled, from $535 million to over $1.5
billion.[Footnote 10]As shown in figure 1, school lender loan volume
has increased in each school year since 1993-1994.
Figure 1: Amount of FFELP Loans Originated by School Lenders, by School
Year:
[See PDF for image]
[End of figure]
The vast majority of loans originated by school lenders are Stafford
subsidized and unsubsidized loans to graduate students--over 99 percent
of FFELP loans originated by school lenders in school year 2003-2004.
Despite limitations on lending to undergraduates, Education officials
reported that school lenders may originate PLUS loans so long as they
do so to no more than 50 percent of their undergraduates. School
lenders reported differing interpretations of the law regarding their
authority to originate PLUS loans. Some reported that they interpreted
the statute to allow school lenders to originate PLUS loans, while
others--such as one large school lender and one large secondary market-
-believed that they could not. Because of this confusion, school
lenders that may wish to originate PLUS loans and could legally do so
have not done so. Moreover, school lenders currently originating PLUS
loans may not be aware of the limitations in originating such loans.
Education has responded to inquiries from school lenders that have
asked for clarification on the issue but has not issued guidance
available to all school lenders. More recently, a bill proposed by some
members of Congress includes a provision that specifies school lenders
may not originate PLUS loans, unless the school has already issued a
loan to the student.[Footnote 11]
Since school year 1996-1997, the increase in loans originated by school
lenders has been due primarily to more schools participating as lenders
rather than a stable number of schools originating more loans. Several
schools we interviewed reported that a primary reason to become a FFELP
lender was to generate more revenue for the school. As shown in figure
2, the number of school lenders increased dramatically from 19 in
school year 1999-2000 to 64 in school year 2003-2004. (See app. II for
the list of all school lenders in school year 2003-2004.) School
lending likely will continue to grow in the coming years because
another 17 schools are in the process of establishing their loan
programs and preparing to originate FFELP loans in school year 2004-
2005.
Figure 2: Number of School Lenders Providing FFELP Loans, by School
Year:
[See PDF for image]
[End of figure]
Some school lenders are among the largest loan originators in FFELP.
For example, in fiscal year 2003, 14 school lenders were among the top
100 FFELP loan originators. (See app. III for the top 100 FFELP
originating lenders.) Despite the large increase in loans made by
school lenders, the proportion of total FFELP loan volume from school
lenders has remained small, rising from 2 percent in fiscal year 2000
to 3 percent in fiscal year 2003. Loans made by a school lender can,
however, constitute a significant portion of all FFELP loans to
graduate students at such schools. At several school lenders, graduate
students borrowed almost exclusively from the school. At other school
lenders, the proportion of graduate students that borrowed from the
school was low--less than 10 percent.
School lenders have also made loans to not only students who attend
their school but also students who do not attend their school.
Specifically, four school lenders originated loans to students that did
not attend their school in school year 2003-2004. Officials at an
osteopathic medicine school that serves as a school lender reported
that they lend to students at other osteopathic medicine schools as a
way to meet the school's mission to promote osteopathic medicine
nationally.
Most School Lenders Are Private Nonprofit Schools That Offer Graduate
or Professional Programs, And a Few Once Provided Loans Through The
FDLP:
More than three-quarters of school lenders are private nonprofit
schools representing a range of schools that offer graduate and
professional programs in law, business, medicine, or other health
specialties. Of the 64 school lenders in school year 2003-2004, 53 were
private nonprofit schools, 1 was a private for-profit school, and 10
were public schools. Private nonprofit school lenders ranged from a
university with a large student body (over 10,000 students) and
graduate degree programs in law, business, medicine, and other academic
disciplines to a small specialized school (just over 300 students)
providing only a graduate degree in chiropractic medicine. Compared
with schools that were not lenders in school year 2003-2004, school
lenders were more likely to be private nonprofits; have higher tuition
costs; larger student enrollments; and offer a law, business, or
medical degree. (See table 1.)
Table 1: School Lenders Compared with Nonlending Schools in School Year
2003-2004:
Number of schools in 2003-2004;
School lenders: 64;
Nonlending schools[A]: 5,414.
Percent private;
School lenders: 84;
Nonlending schools[A]: 65.
Percent public;
School lenders: 16;
Nonlending schools[A]: 35.
Average graduate in-state tuition;
School lenders: $ 13,534;
Nonlending schools[A]: $ 7,899.
Average enrollment;
School lenders: 7,669;
Nonlending schools[A]: 2,070.
Percent offering a law, business, medical, or other health degree;
School lenders: 98;
Nonlending schools[A]: 68.
Percent offering a law degree;
School lenders: 47;
Nonlending schools[A]: 11.
Percent offering a business degree;
School lenders: 64;
Nonlending schools[A]: 54.
Percent offering a medical degree;
School lenders: 39;
Nonlending schools[A]: 7.
Percent offering another health degree;
School lenders: 89;
Nonlending schools[A]: 45.
Source: GAO analysis of National Student Loan Data System and
Integrated Postsecondary Education Data System.
[A] Nonlending schools are schools eligible to participate in the
federal financial aid programs but do not serve as FFELP lenders to
their students.
[End of table]
Ten school lenders had once provided all student loans through FDLP. In
school year 2003-2004, 7 of those school lenders only offered loans
through FFELP. Another 3 school lenders have continued providing loans
through both FFELP and FDLP--the schools lend to their graduate
students, and undergraduates borrow through FDLP.
School Lenders Contract with Other FFELP Participants to Provide
Student Loans and Later Sell Them to Receive Money, Which May Be Used
to Lower Students' Borrowing Costs:
Generally school lenders contracted with other FFELP organizations to
administer their loan programs and subsequently sold their loans to
receive revenue. School lenders typically entered into contracts with
other organizations that participate in FFELP to perform key components
of the FFELP program: financing, originating (i.e., ensure that
borrowers complete promissory notes), servicing, and purchasing loans.
Differences existed in how school lenders financed and when they chose
to sell their loans. School lenders emphasized that the potential
revenue received by selling loans, which ranged from 2 to 6 percent of
the total value of the loans sold by these schools, was a significant
factor in their decision to become a lender and outweighed the costs of
the program. In addition to receiving revenue from selling loans,
school lenders may also receive borrower interest payments and special
allowance payments from Education as compensation for holding FFELP
loans. Several school lenders reported using or planning to use premium
revenue to provide borrower benefits such as reduced loan origination
fees, better repayment terms upon graduation, and need-based aid.
Typically School Lenders Contracted with Other FFELP Organizations to
Administer Their Loan Program, but Differences Existed in How They
Financed Loans, When They Sold Loans, and the Costs Incurred in Selling
Loans:
In order to provide FFELP loans, school lenders we interviewed
generally entered into contracts with other organizations that
participate in FFELP to perform key components of the FFELP program:
financing, originating, servicing, and purchasing loans. To select the
organizations that a school lender would use to finance, originate,
service, and purchase its FFELP loans, some school lenders asked for
organizations to submit contract proposals. For example, one school
lender we interviewed specifically asked organizations to submit
proposals that included:
1. a line of credit to finance its loans with a below-market interest
rate;
2. a fixed premium for loans sold rather than one that varied;
3. better financial benefits to borrowers, such as a 1.5 percent
origination fee reduction; and:
4. specifications for electronic loan processing.
These school lenders then would review the proposals and select the one
that best met the school lenders' needs. While assessing submitted
proposals, officials from two school lenders told us that they worked
with a private company that assists schools in structuring loan
programs and negotiating the prices paid for loans. For one public
school lender, the process to review proposals was subject to the same
requirements that state agencies must follow when selecting
contractors, including having the proposals reviewed by a board that
included the governor of the state:
School lenders that originated loans in school year 2003-2004, or are
in the process of establishing their FFELP lending programs, contracted
with one of three types of organizations--private for-profit company,
state agency, or private nonprofit company--to purchase their loans. As
shown in figure 3, most school lenders sold their loans to private for-
profit companies.
Figure 3: Percentage of School Lenders That Sold Loans to Either a
Private For-Profit Company, State Agency, or Private Nonprofit Company:
[See PDF for image]
Note: The figure shows the purchasers for all school lenders that
originated loans in school year 2003-2004 or school lenders that are
planning to provide loans for school year 2004-2005. The percentages
add to more than 100 because of rounding.
[End of figure]
While All School Lenders We Interviewed Contracted for the Sale of
Loans, They Varied in the Extent to Which They Contracted for the
Financing, Originating, and Servicing of Loans:
The 13 school lenders we interviewed typically entered into contracts
for loan origination, servicing, and sale by selecting one organization
or multiple organizations to perform all three components. About a
third of the school lenders we interviewed used their own money to
finance the loans they made, while the others obtained a line of
credit, in some cases from the same organization that eventually
purchased the loans originated by the school lender. Some school
lenders used the same organization to finance, originate, service, and
purchase their loans. Officials with one school lender reported that
contracting with one organization simplified the loan process and was
operationally efficient. Figure 4 illustrates how one school lender we
interviewed structured its program by contracting with one organization
to finance, originate, service, and purchase its loans.
Figure 4: Structure of Lending Operation for One School Lender That
Contracts with One Organization to Finance, Originate, Service, and
Purchase Loans:
[See PDF for image]
[End of figure]
In contrast, five school lenders we interviewed contracted with two or
more organizations to finance, originate, service, and purchase loans.
Figure 5 depicts how one school lender has structured its lending
program by contracting with multiple organizations. In this example,
the school received financing from a bank and loan servicing from a
private nonprofit company and eventually sold the loans to a state
secondary market.
Figure 5: Structure of Lending Operation for One School Lender That
Contracted with Three Organizations to Finance, Originate, Service, and
Purchase Loans:
[See PDF for image]
[End of figure]
Further, one school lender we interviewed had a unique approach in how
it structured its lending program. The actual lender was a foundation
affiliated with the school because state law prohibits public schools
from incurring debt in that state. According to a school official, the
foundation finances the loans, provides them to borrowers, collects
interest payments from borrowers and special allowance payments from
Education, and is responsible for having the loans serviced until they
are later sold to the secondary market. After the foundation covers its
administrative expenses, the official stated it gives the school any
remaining money. As shown in figure 6, the foundation contracted with a
secondary market, in this example a state agency, to originate,
service, guarantee, and purchase the loans.
Figure 6: Structure of Lending Operation for One School Lender That
Used an Affiliated Foundation and State Agency to Finance, Originate,
Service, and Purchase Loans:
[See PDF for image]
[End of figure]
By and large, school lenders contracted with others to operate their
lending program, but some school lenders reported that it was
beneficial to assume financing, origination, or servicing
responsibilities themselves rather than contract with others. For
example, four school lenders used endowment or other institutional
funds to finance their loans, and one school lender's affiliated
foundation issued a taxable bond to raise the funds needed to finance
the loans. One school lender that used its own funds also performed its
own loan origination. Moreover, this school lender performed its own
servicing of the loans--monitoring student enrollment, billing
borrowers, providing periodic reports to Education, and collecting
payments for students no longer enrolled--before it sold the loans.
School Lenders Differed in Terms of When They Sold Loans and the Costs
Incurred:
School lenders we interviewed differed in terms of when they sold their
loans, with most selling them 60 to 90 days after full disbursement, as
shown in table 2.[Footnote 12]
Table 2: Length of Time School Lenders Owned Loans before Selling to
Another Lender to Receive a Premium:
Number of school lenders: 1;
Number of days school lender owns the loans before selling them: 7.
Number of school lenders: 9;
Number of days school lender owns the loans before selling them:
60-90[A].
Number of school lenders: 1;
Number of days school lender owns the loans before selling them:
Up to 120.
Number of school lenders: 2;
Number of days school lender owns the loans before selling them: Until
student graduates or leaves school[B].
Source: GAO analysis.
[A] One school lender receives a portion of the premium when it sells a
legal interest in the loans the same day they are originated. Legal
interest entitles the secondary market to all principal payments,
accrued interest, government subsidies, and special allowance payments.
The school lender transfers legal title within 60 days following full
disbursement.
[B] Two school lenders sold PLUS loans 30 and 60 days after full
disbursement but retain Stafford loans until time of graduation.
[End of table]
The decision to sell a loan can be motivated by a variety of factors.
Typically, officials from school lenders that sold the loans before 90
days after they were fully disbursed reported doing so in part to
minimize risk associated with potential default on loans and associated
servicing costs. Moreover, some school lenders reported that they
preferred to make and sell loans within the same fiscal year so that
they could repay lines of credit to avoid having to record outstanding
debt on the school's annual financial statements. For one school lender
it was important not to record additional debt because of concerns
about the impact of such debt on the school's bond rating. The school
lender that sold the loans a week after first disbursement received the
premium much sooner than those schools that sold the loans after full
disbursement. Two school lenders that sold loans after the student had
graduated or left the school were private schools with sufficient
resources to finance the loans and were not as concerned about
financial liability or receiving revenue quickly.
Several of the school lenders we interviewed reported that operating as
a lender was only marginally more labor intensive and costly than the
traditional processes for schools that are not FFELP lenders, and that
the premium received when loans are sold makes being a lender
worthwhile. Generally, school lenders incur initial start-up and
ongoing costs when serving as a FFELP lender. Start-up costs can
include staff time to research and sign contracts with other FFELP
participants and training staff on new software to process loans.
Ongoing costs include payment of a 0.5 percent fee to the federal
government for each loan and staff to manage the loan process and
originate and service loans. The extent of these costs borne by a
school lender depended on how school lenders negotiated their
contracts, with some negotiating contracts in which they did not have
to pay for costs normally paid by FFELP lenders. For example, school
lenders we interviewed that obtained a line of credit to finance their
FFELP loans typically were charged market interest rates on the money
borrowed. However, according to one contract, the secondary market that
provided the line of credit for the school lender to finance its loans
did not charge the school lender interest. In exchange, this school
lender sold a legal interest in the loans on the day they are first
disbursed, entitling this secondary market to all principal payments,
accrued interest, government subsidies, and special allowance payments.
Additionally, several of the school lenders did not pay for loan
servicing, while most school lenders interviewed paid about $2 a month
per loan for servicing. Moreover, one school lender also told us that
it receives a special rate on private loans offered to students to
supplement FFELP loans from the purchaser because of the volume of
graduate loans it sells.
Many School Lenders Reported Using or Planning to Use the Money from
Selling Loans to Lower Borrowing Costs or Provide Need-Based Aid, but
They Are Not Required to Do So:
Many school lenders interviewed reported using the premium received on
the sale of the loans to lower borrowing costs and provide need-based
aid to students, although current law does not specify how premiums
should be used. The premiums that school lenders receive are based on
several factors, such as the default rate of the students attending the
school, the average amount borrowed by students, and the number of
loans per borrower. Some school lenders received a fixed premium for
their loan portfolio, while other schools were paid a variable premium
that corresponded to the average amount borrowed. For example, one
school lender's premium increased by 0.25 percentage points for nearly
all increases of $1,000 in the average amount borrowed by students. The
premiums received by school lenders we interviewed ranged from 1.85
percent to 6 percent of the total value of the loans sold, with an
average premium of 4.4 percent.[Footnote 13]
Unlike special allowance payments and interest income that under HEA
must be used for need-based grants, school lenders may choose how they
use premiums received when selling loans. Premiums are the primary
source of revenue for many school lenders since most choose to quickly
sell loans, thereby giving up the right to receive special allowance
payments and interest income. Officials from several school lenders
emphasized that as their financial budgets have been constrained, the
revenue received from being a lender is a primary motivation for
becoming a school lender. For example, one large public school lender
estimated that it will receive about $7.5 million over a 3-year period.
A smaller private school lender estimated it will receive less than $1
million over the next 3 years. Most of the school lenders interviewed
reported that they used or plan to use premium money for student
financial aid. However, they differed in how they allocated the money.
For example, two school lenders reported using premium revenues to pay
part of the origination fee for borrowers and generate revenue for
need-based aid, while another school lender reported using premium
revenue for only need-based aid. School lenders either used money to
lower borrowing costs and/or provide need-based grants to its students.
For some school lenders, the financial benefits offered to students who
borrow through them are better than those offered prior to the school
becoming a lender.
Although most of the school lenders reported using the premium revenues
to provide financial benefits for students, under current law they
could use the money to meet other institutional needs, such as student
recruitment or facility improvement. One school lender told us that it
does not plan to use premium revenue for need-based aid but instead
will use it for initiatives that would improve students' educational
environment, such as enhancing technological equipment. Legislation
proposed in the House of Representatives in May 2004 would require
school lenders to use the premium for need-based aid.[Footnote 14]
Generally, school officials told us that the requirement seems
reasonable because most of the school lenders already use the revenue
for that purpose. According to officials from two school lenders, they
plan to use the premium for need-based aid but are still determining
specifically how the money will be allocated. One school lender noted
that the premium is applied to the school's general operating budget
and that it is used in part for need-based aid.
The school lenders we interviewed differed in the loan origination and
guarantor fees charged to borrowers as well as repayment terms offered,
and certain school lenders offered more financial benefits to borrowers
than others. Four of the 13 school lenders we interviewed waived
origination fees for their students. Additionally, several school
lenders used guaranty agencies that did not charge or reduced the
guarantor fee. Moreover, some school lenders sold their loans to
secondary markets that offered better repayment terms than others, such
as interest-rate reductions and principal rebates for timely payments.
Table 3 shows the range of financial benefits offered to borrowers
among selected school lenders.
Table 3: Comparison of Benefits for Stafford Borrowers among Selected
School Lenders Interviewed:
School lender: School lender A;
Origination fee: 0%;
Guarantor fee: 0%;
Repayment incentives: 0% interest rate charged if first 36 consecutive
payments made on time; 0.25 percentage point interest rate reduction
for repaying electronically.
School lender: School lender B;
Origination fee: 3%;
Guarantor fee: 0%;
Repayment incentives: 1.25 percentage point interest rate reduction at
first payment; 0.25 percentage point interest rate reduction for
repaying electronically.
School lender: School lender C;
Origination fee: 0%;
Guarantor fee: 0%;
Repayment incentives: 2 percentage point interest rate reduction after
48 on-time payments; 0.25 percentage point interest rate reduction for
repaying electronically.
School lender: School lender D;
Origination fee: 1.5%;
Guarantor fee: .5%;
Repayment incentives:
For loans disbursed 1/1/93-6/30/02: 2 percentage point reduction on
interest rate for 48 consecutive on-time payments;
For loans disbursed 7/1/02-6/30/04: 3.3% of the original loan amount as
either a credit or a check to the borrower; 0.25 percentage point
interest rate reduction for repaying electronically.
School lender: School lender E;
Origination fee: 3%;
Guarantor fee: 1%;
Repayment incentives: 2 percentage point interest rate reduction after
first 30 on-time payments; 0.25 percentage point interest rate
reduction for repaying electronically.
Source: GAO analysis.
[End of table]
Officials from two school lenders stated that they contracted to sell
their loans to the agencies in their states because of the benefit
programs offered to borrowers. For example, one school lender
contracted with a state agency for the sale of its loans because the
state agency agreed to pay the origination fees for borrowers, reduce
borrowers' interest rate to 0 percent if they made the first 36
payments on time, and reduce interest rates 0.25 percent for making
payments electronically. Officials from two state agencies that
purchase loans from school lenders said they were able to fund borrower
benefits to residents of their state or students attending schools in
the state in part with earnings from loans financed with tax-exempt
bonds issued by their states prior to October 1, 1993. The federal
government guarantees holders of loans financed with such bonds a
minimum 9.5 percent yield, providing these agencies a source of
relatively higher revenues in light of low current market interest
rates.[Footnote 15]
A Number of Statutory and Regulatory Provisions Exist to Safeguard the
Interests of Taxpayers and Borrowers, but FSA Has Not Regularly
Monitored School Lenders' Compliance with the Provisions:
A number of statutory and regulatory provisions applicable to all
lenders and schools, and some applicable only to school lenders, exist
to safeguard the interests of taxpayers and borrowers. FSA however, has
little information on school lenders' compliance because it has not
provided timely and adequate oversight of school lenders. Under the
HEA, lenders and schools must submit annual audits to demonstrate
compliance with laws and financial stability. Another provision in the
HEA, commonly called the anti-inducement provision, is designed to
protect borrowers' interests by prohibiting any lender from offering
gifts or other incentives to schools or individuals to secure
applicants that may result in increased student borrowing. Not only
must school lenders comply with audits and provisions of the HEA
applicable to all lenders, but they must also comply with provisions
specific to them. FSA has little information about how school lenders
are complying with laws and regulations, and until this year, FSA had
not used its authority to conduct program reviews of school lenders,
which supplement the information contained in audits.
Several Statutory and Regulatory Provisions Applicable to All Lenders
and Schools, and Some Applicable Only to School Lenders, Exist to
Protect the Interests of Taxpayers and Borrowers:
To protect the interests of taxpayers and borrowers, a number of
statutory and regulatory provisions exist regarding, among other
things, application processes and audit requirements for schools and
lenders; these also provide FSA and guaranty agencies the authority to
review lenders and schools. For example, in determining whether a
lender will be granted a lender identification number and permitted to
provide FFELP loans, according to HEA regulations, Education considers
several factors. These include:
* whether the applicant is capable of implementing adequate procedures
for making, servicing, and collecting loans;
* the financial resources of the applicant; and:
* in the case of a school that is seeking approval as a lender, its
accreditation status.[Footnote 16]
Additionally, under the HEA, all FFELP lenders that originate or hold
more than $5 million in FFELP loans must have an independent annual
compliance audit, which examines the lender's compliance with the HEA
and relevant regulations as well as its financial management of FFELP
activities. Lenders must then submit this audit to FSA. About 17
percent of the school lenders in school year 2003-2004 did not
originate more than $5 million and therefore were not required to have
a compliance audit. Schools that participate in federal financial aid
programs must submit audited financial statements and compliance audits
that attest to their compliance with laws and regulations governing
federal financial aid programs, including FFELP.
FSA and guaranty agencies have the authority to conduct program reviews
of lenders or schools, which are intended to assess, promote, and
improve compliance with laws and regulations and to help ensure program
integrity. Program reviews can supplement the information provided
through the required annual compliance audits. According to FSA,
program reviews of lenders tend to focus on lenders' billing of
Education for interest and special allowance payments. FSA reviews
schools that participate in federal financial aid programs and will
target schools that have a cohort default rate in excess of 25 percent
or have significant fluctuation in Stafford loan volume from year to
year. Guaranty agencies also conduct program reviews of lenders and
schools. Every 2 years guaranty agencies must review any lender that
meets one of the following criteria:
* lender's loan volume represented 2 percent or more of the guarantor's
volume of FFELP loans guaranteed during the preceding year,
* lender was one of the guarantor's top 10 lenders as measured by its
loan volume for the preceding year, or:
* lender's loan volume during the most recent fiscal year equaled or
exceeded $10 million.
Guaranty agencies also have the authority to review any lender that has
more than $100,000 in defaulted loans and a cohort default rate above
20 percent. Guaranty agencies review schools to assess, among other
things, how schools certify loan applications and maintain loan
records.
Congress Adopted the Anti-Inducement Provision to Protect Borrowers'
Interests:
Another provision in the HEA, anti-inducement provision is designed to
protect borrowers' interests by prohibiting any lender from offering
gifts or other incentives to schools or individuals to secure
applicants that may result in increased student borrowing. Education
once attempted to enforce the anti-inducement provision with respect to
school lenders. Specifically, Education proposed to limit the
participation of a secondary market based on its financing and
purchasing contracts with a school lender. Education contended that
these contracts provided the school with an improper financial
inducement to solicit more loan applications from students than it
would have otherwise. The secondary market challenged Education's
actions in federal district court, which found that the school lender's
financing, servicing, and loan purchase contracts were not uncommon
among traditional FFELP lenders. Moreover, the premium paid and other
economic benefits received by the school lender were unremarkable and
did not rise to the level of an improper inducement. The court found
also that there was no evidence that borrowers were counseled
improperly or encouraged to borrow more than they needed. Finally,
while the court pointed out that under the anti-inducement provision,
lenders are prohibited from offering "inducements" to educational
institutions, including school lenders, it found that Congress' intent
was unclear. Nevertheless, the court stated that Congress did not
intend that all incentives be treated as inducements.[Footnote 17]
Since the court's decision in this case, Education has not clarified
its definition of inducements, and according to an Education official,
the court's decision makes it much harder for Education to show that
school lending arrangements violate the inducement provision. The lack
of clarity surrounding the issue of inducements is not solely a problem
for school lenders. In an August 2003 memo, Education's Office of
Inspector General (OIG) noted that it had concerns about bargaining
practices between schools and lenders for private loans that students
may obtain to supplement FFELP loans and preferred lender status that
may violate the anti-inducement provision. OIG recommended that
Education reevaluate the anti-inducement provision and determine if
statutory revisions should be proposed during HEA reauthorization, but
Education has not taken any action in response to OIG's memo. A work
group representing FFELP lenders, guaranty agencies, and financial aid
officers has developed guidelines for what constitutes an inducement,
but these guidelines do not specifically address school lenders'
contracts.
School Lenders Are Subject to a Number of Regulations:
Not only must school lenders comply with audits and provisions
applicable to all lenders, but Congress has added provisions that apply
only to school lenders--in part to address past problems among school
lenders. In the early to mid-1970s, certain school lenders--
particularly vocational schools--did little to ensure that students
paid back loans, such as informing and counseling borrowers about
repayment obligations and options, which contributed to high default
rates. Congress was also concerned that schools were determining the
cost of attendance and also awarding students financial aid while
investing few resources in preventing loan default. While there was
pressure from some groups for Congress to eliminate the school lender
provision in the 1976 reauthorization of the HEA, there were still
concerns about students' access to loans and school lenders' roles in
helping meet students' need. Rather than eliminating school lenders,
Congress enacted and revised several provisions designed to reduce the
number of school lenders with abusive practices that contributed to
high default rates. In 1992, Congress added another requirement
specific to school lenders that they use interest income and special
allowance payments for need-based grants. Since 1992, Congress has not
added any statutory provisions regarding school lenders. Figure 7 shows
the primary statutory provisions applicable to school lenders today
that were, for the most part, enacted in the mid-1970s.
Figure 7: Statutory and Regulatory Provisions Specific to School
Lenders:
[See PDF for image] --graphic text:
School lenders:
* shall employ full-time at least one person whose responsibilities are
limited to the administration of financial aid programs for students
attending the school;
* may not be a correspondence school;
* may not make or originate loans that would be outstanding to or on
behalf of more than 50 percent of the undergraduates in attendance at
that school on at least a half-time basis unless the secretary waives
this rule because of extreme hardship to the school;
* shall inform any undergraduate student who has not previously
obtained a loan that was made or originated by the school and who seeks
to obtain such a loan that he or she must first make a good faith
effort to obtain a loan from a commercial lender;
* may not make or originate a loan for an academic period to an
undergraduate student unless the student provides the school with
evidence of denial of a loan by a commercial lender for the same
academic period;
* may not have a default rate exceeding 15 percent; and
* except for reasonable administrative expenses directly related to
FFELP, school must use interest and special allowance payments for
need-based grant programs for its students.
[End of figure]
FSA Has Little Information about How School Lenders Are Complying with
Laws and Regulations because It Has Not Provided Timely and Adequate
Oversight of School Lenders:
FSA has minimal information about how school lenders are complying with
laws and regulations, and until this year, FSA had not used its
authority to conduct program reviews of school lenders to assess
compliance with regulations specific to them. For example, FSA does not
check a school's accreditation status when the school applies to be a
lender, as specified in HEA regulations. FSA was unaware that in fiscal
year 2004, one school lender who received a lender identification
number, which is needed to originate loans, had been placed on
probation by its accrediting agency. According to the accrediting
agency, the school lender was on probation because of concerns about
the school's financial stability. In general, the lack of financial
stability at a school can have a serious impact on the funding of
instructional programs, the quality of learning resources available to
students, and the number of faculty and staff employed.
FSA is also responsible for ensuring that lenders submit required
annual compliance audits that attest to the lender's financial
stability and compliance with laws and regulations. Compliance audits
are but one source of information about a lender's compliance with laws
and regulations and are a mechanism to assess an organization's
internal controls. Without these audits, Education's ability to monitor
and detect significant fraud or other illegal acts is compromised.
Compliance audits are generally due 6 to 9 months after the end of the
lender's fiscal year.[Footnote 18] If a lender does not submit the
compliance audit, then Education may suspend the lender's participation
in the FFELP program. For fiscal year 2002, FSA did not verify, on a
timely basis, that all school lenders required to submit compliance
audits, which were due between June and August 2003, had done so. As a
result, FSA did not realize, until September 2004, that 10 of 29 school
lenders had failed to submit required compliance audits for fiscal year
2002. Moreover, while FSA had previously notified 6 of these 10 school
lenders that FSA had not received the required compliance audits, it
had not yet notified the remaining 4 schools of their failure to submit
such audits. FSA subsequently reminded the 4 school lenders to submit
their required compliance audits and suspended the remaining 6 school
lenders from receiving interest and special allowance payments for
their failure to submit compliance audits. After FSA contacted or
suspended the school lenders in September 2004, 3 school lenders
subsequently submitted their fiscal year 2002 compliance audits. FSA
officials told us that school lenders required to submit compliance
audits for fiscal year 2003 had done so.
According to FSA officials, the Financial Partners office is
responsible for monitoring school lenders and may conduct program
reviews to determine compliance with regulations. FSA has not conducted
such reviews of school lenders. However, during the course of our
review, three regional offices asked 31 school lenders about their
compliance with the regulation pertaining to the use of interest income
and special allowance payments for need-based grants. The school
lenders told FSA that they were in compliance with this regulation and
provided information on their servicing costs and interest rates paid
for lines of credit. FSA is planning to conduct a more thorough review
of 10 school lenders to gain a further understanding of how school
lenders are structuring their lending programs. FSA officials reported
that school lenders will be selected based on several risk factors,
such as a large increase in loan volume or an increase in default
rates. As part of these reviews, FSA will follow the review guide used
for traditional lenders, and it will also review contracts to ensure
there are no violations of the anti-inducement provision and that fee
arrangements are appropriate. However, FSA officials told us that they
had not determined the criteria for what would constitute an improper
inducement.
Conclusions:
When FFELP was created, in 1965, Congress was concerned about lenders'
capacity and willingness to make loans to students who had little
credit history and when the economic returns on such loans were
uncertain. Postsecondary schools were included in the definition of
eligible FFELP lenders as one way to help ensure that all students
would have access to student loans. In recent years, an increasing
number of schools are becoming FFELP lenders as a way to generate more
revenue for the school, rather than ensure students' access to loans.
As the number of schools becoming lenders continues to increase, it is
critical for FSA to ensure school lenders' compliance with laws and
regulations designed to ensure program integrity, thereby protecting
taxpayer dollars and student interests. For one such requirement--
annual submission of compliance audits--FSA has not ensured that school
lenders have submitted them in a timely manner. Without this
information, FSA is unaware of, among other things, whether school
lenders disburse loans only to eligible students in accordance with the
law and are financially stable. A school's financial stability is
important because if a school is unable to meet its financial
obligations, it may place into jeopardy students' completion of their
educational programs and, in turn, their ability to repay their student
loans. Future FSA plans to review selected school lenders should
provide useful information about how school lenders operate, but
without consistent oversight, FSA may be unaware of practices that
could place taxpayer dollars at risk.
Recommendation for Executive Action:
To ensure program integrity, we recommend that FSA's Chief Operating
Officer take the steps necessary to ensure that school lenders are
consistently complying with statutory and regulatory provisions. As a
first step, FSA should ensure that school lenders consistently submit
audited financial statements and compliance audits in a timely manner.
Agency Comments:
We provided Education with a copy of our draft report for review and
comment. In written comments on our draft report, Education generally
agreed with our reported findings and recommendation. Education agreed
that increased oversight is necessary given "the very substantial
growth in the number of school lenders and the loan volume associated
with these lenders." Education stated that it believed the efforts it
undertook to verify that lenders submitted required annual compliance
audits for fiscal year 2002 were instrumental in ensuring compliance
and further noted that all school lenders that were required to submit
such audits for fiscal year 2003 had done so. As a result, Education
noted that it believed our "criticism that FSA has little information
about how school lenders are complying with laws and regulations is
misplaced." As we describe in our report, compliance audits are but one
source of information concerning the extent to which school lenders
comply with laws and regulations. FSA staff could also learn about
school lender compliance issues by collecting information themselves,
such as--as described in our report--determining a school's
accreditation status when the school applies to be a lender and by
conducting program reviews. Finally, Education noted in its comments
that FSA is planning to conduct a more thorough review of 10 school
lenders. Education's written comments appear in appendix IV.
We are sending copies of this report to the Secretary of Education,
appropriate congressional committees, and other interested parties. In
addition, the report will be available at no charge on GAO's Web site
at http://www.gao.gov.
If you or your staff have any questions about this report, please call
me on (202) 512-8403 or Jeff Appel on (202) 512-9915. Other contacts
and staff acknowledgments are listed in appendix IV.
Signed by:
Cornelia M. Ashby:
Director, Education, Workforce, and Income Security Issues:
[End of section]
Appendix I: Scope and Methodology:
To address our research objectives we analyzed data from the Department
of Education (Education); interviewed officials with school lenders,
Education, lenders, and others; and reviewed relevant laws and
regulations. To assess the extent to which schools have participated in
the Federal Family Education Loan Program (FFELP) as lenders, we
obtained a list from Education of schools approved to be FFELP lenders
and then, using data in the National Student Loan Data System (NSLDS),
we analyzed the dollar amount of FFELP loans made by each school lender
in each school year from 1993-1994 to 2003-2004.[Footnote 19] We
converted loan volume to real 2003 dollars using the Department of
Commerce's Gross Domestic Product (GDP) Deflator and the Congressional
Budget Office's GDP Deflator projections. We also analyzed the amount
of loans made by other FFELP lenders for students attending these
schools. We used the Integrated Postsecondary Education Data System
(IPEDS) to determine the characteristics of schools that were lenders,
including whether they were private or public schools, whether they
provided graduate or professional programs, average tuition, and
average enrollment.[Footnote 20] To identify school lenders that once
provided or still participate in the FDLP, we analyzed data on the
amount of FDLP loans provided at a school between school years 1994-
1995 and 2003-2004.[Footnote 21] On the basis of our review of the
documentation for these data and our discussions with Education
officials about the steps they take to ensure the reliability and
validity of these data, we determined that the data from these systems
were sufficiently reliable for the purpose of our study.
To assess school lending operations and benefits to schools and
borrowers, we conducted site visits and interviews with 13 school
lenders. We selected school lenders that have been FFELP lenders for
several years and some that have just begun lending. Moreover, the
school lenders selected included public and private institutions,
schools that had once participated in the FDLP, and some of the largest
school lenders in terms of loan volume. We also interviewed 12 other
lenders, including secondary markets; two state-designated guaranty
agencies; and related higher education and financial aid associations.
We reviewed contracts between schools and secondary markets and
servicers. To determine the types of lenders purchasing loans from all
64 school lenders in school year 2003-2004 and the 17 in the process of
establishing their loan programs, we interviewed officials with the
school lender or with the secondary market.
To assess existing safeguards for borrowers and taxpayers, we reviewed
the Higher Education Act (HEA), related regulations, guidance issued by
Education, and court decisions. We also interviewed officials in
Education's Office of Federal Student Aid, Office of General Counsel,
Office of Inspector General, and Office of Postsecondary Education.
[End of section]
Appendix II: Top 100 FFELP Originating Lenders in Fiscal Year 2003:
(Volume in millions of dollars).
Lender: Bank One Ed Fin Group;
Loan Volume: $3,318.
Lender: Sallie Mae;
Loan Volume: $3,161.
Lender: Citibank, Student Loan Corp;
Loan Volume: $2,995.
Lender: JP Morgan Chase Bank;
Loan Volume: $2,466.
Lender: Bank of America;
Loan Volume: $2,158.
Lender: Wells Fargo Education Financial Services;
Loan Volume: $2,042.
Lender: Wachovia Bank/Classnotes (Educaid);
Loan Volume: $1,781.
Lender: National City Bank;
Loan Volume: $1,378.
Lender: U.S. Bank;
Loan Volume: $1,031.
Lender: Pittsburgh National Corp;
Loan Volume: $671.
Lender: Suntrust Bank;
Loan Volume: $661.
Lender: EdAmerica;
Loan Volume: $652.
Lender: Northstar Guarantee;
Loan Volume: $635.
Lender: Penna Higher Education Assistance Agency;
Loan Volume: $633.
Lender: Fleet Bank;
Loan Volume: $593.
Lender: Academic Management Services;
Loan Volume: $480.
Lender: College Foundation Inc.;
Loan Volume: $477.
Lender: Citizens Bank, Education Finance;
Loan Volume: $441.
Lender: College Loan Corp;
Loan Volume: $427.
Lender: Union Bank & Trust Company;
Loan Volume: $417.
Lender: Nova Southeastern University*;
Loan Volume: $376.
Lender: S C Student Loan Corp;
Loan Volume: $370.
Lender: Key Corp;
Loan Volume: $366.
Lender: Education Lending Group;
Loan Volume: $318.
Lender: Teachers Insurance & Annuity Assn of America;
Loan Volume: $307.
Lender: Brazos Group;
Loan Volume: $289.
Lender: Illinois Student Assistance Comm/IDAAP;
Loan Volume: $280.
Lender: Commerce Bank;
Loan Volume: $257.
Lender: Amsouth Bancorp Ed Fin Group;
Loan Volume: $253.
Lender: Washington Mutual Savings Bank;
Loan Volume: $235.
Lender: AELMAC/Southwest Student Services Corp;
Loan Volume: $229.
Lender: Kentucky Higher Ed Student Loan Corp;
Loan Volume: $224.
Lender: Vermont Ed Loan Finance Program;
Loan Volume: $223.
Lender: HSBC Bank USA;
Loan Volume: $196.
Lender: Comerica Bank;
Loan Volume: $192.
Lender: Rhode Island Student Loan Authority;
Loan Volume: $187.
Lender: New Hampshire Higher Ed Loan Corp;
Loan Volume: $176.
Lender: Regions Bank;
Loan Volume: $172.
Lender: Provincial Bank Academic Funding Group;
Loan Volume: $164.
Lender: Twin City Federal Savings Bank (TCF);
Loan Volume: $162.
Lender: All Student Loan Corp;
Loan Volume: $154.
Lender: First National Bank;
Loan Volume: $153.
Lender: Stillwater National Bank;
Loan Volume: $148.
Lender: Manufacturers & Traders Bank;
Loan Volume: $141.
Lender: Fifth Third Bank;
Loan Volume: $130.
Lender: Connecticut Student Loan Foundation;
Loan Volume: $124.
Lender: Bancorpsouth Bank;
Loan Volume: $117.
Lender: Zions First National Bank;
Loan Volume: $112.
Lender: EFS Finance Co;
Loan Volume: $106.
Lender: First Midwest Bank;
Loan Volume: $104.
Lender: National Ed Loan Network (Nelnet);
Loan Volume: $98.
Lender: University of Pennsylvania*;
Loan Volume: $96.
Lender: Louisiana Public Facilities Authority;
Loan Volume: $96.
Lender: Boone County National Bank;
Loan Volume: $93.
Lender: Union Planters National Bank;
Loan Volume: $90.
Lender: Hibernia National Bank;
Loan Volume: $88.
Lender: University of Southern California FCU;
Loan Volume: $87.
Lender: Bank of Oklahoma;
Loan Volume: $79.
Lender: Bank of North Dakota;
Loan Volume: $79.
Lender: Maine Educational Loan Marketing;
Loan Volume: $76.
Lender: Plains National Bank;
Loan Volume: $75.
Lender: New Mexico Ed Assistance Foundation;
Loan Volume: $75.
Lender: Frost National Bank;
Loan Volume: $71.
Lender: Kansas State Bank;
Loan Volume: $69.
Lender: Colorado Student Obligation Bond Auth;
Loan Volume: $62.
Lender: Kirksville College of Osteopathic Medicine*;
Loan Volume: $62.
Lender: University Federal Credit Union;
Loan Volume: $61.
Lender: Independence Federal Savings Bank;
Loan Volume: $59.
Lender: Arkansas Student Loan Authority;
Loan Volume: $59.
Lender: Midwestern University*;
Loan Volume: $59.
Lender: Georgia Student Finance Authority;
Loan Volume: $58.
Lender: Carnegie Insurance Company;
Loan Volume: $57.
Lender: Michigan State University*;
Loan Volume: $56.
Lender: University of Chicago*;
Loan Volume: $56.
Lender: Trustmark National Bank;
Loan Volume: $54.
Lender: Simmons First National Bank;
Loan Volume: $54.
Lender: University of Missouri*;
Loan Volume: $54.
Lender: First Tennessee Bank;
Loan Volume: $53.
Lender: Palmer College of Chiropractic Medicine*;
Loan Volume: $52.
Lender: Marshall & Ilsley Bank;
Loan Volume: $51.
Lender: Michigan Higher Ed Stud Loan Auth;
Loan Volume: $51.
Lender: University of Miami*;
Loan Volume: $50.
Lender: University of Denver*;
Loan Volume: $50.
Lender: BancFirst;
Loan Volume: $50.
Lender: Indiana Secondary Market;
Loan Volume: $50.
Lender: Southtrust Bank;
Loan Volume: $49.
Lender: Western University of Health Sciences*;
Loan Volume: $47.
Lender: First Federal Savings Bank;
Loan Volume: $45.
Lender: First National Bank;
Loan Volume: $44.
Lender: First National Bank;
Loan Volume: $43.
Lender: Compass Bank;
Loan Volume: $43.
Lender: Navy Federal Credit Union;
Loan Volume: $42.
Lender: Security Service Federal Credit Union;
Loan Volume: $41.
Lender: CA Higher Ed Loan Authority (Chela);
Loan Volume: $41.
Lender: Purdue Employees FCU;
Loan Volume: $39.
Lender: Dr Scholl College of Podiatric Medicine*;
Loan Volume: $39.
Lender: Whitney National Bank;
Loan Volume: $39.
Lender: Wyoming Student Loan Corp;
Loan Volume: $37.
Lender: Widener College*;
Loan Volume: $36.
Lender: Regis University*;
Loan Volume: $33.
[End of table]
Source: Financial Partners, Department of Education, "Top 100
Originators of FFELP."
Notes: Fourteen school lenders are on the top 100 list; they are
indicated with an asterisk. The top 100 FFELP lenders represented 91.7
percent of the overall FFELP volume.
[End of section]
Appendix III: School Lender Loan Volume in School Year 2003-2004:
School lender: NOVA Southeastern University;
Loan Volume: $302,613,491.
School lender: University of Pennsylvania;
Loan Volume: $86,090,323.
School lender: Michigan State University;
Loan Volume: $65,186,038.
School lender: A.T. Still University of Health Sciences;
Loan Volume: $60,757,687.
School lender: Midwestern University;
Loan Volume: $57,428,863.
School lender: University of Chicago;
Loan Volume: $52,951,854.
School lender: University of Missouri - Kansas City;
Loan Volume: $48,119,655.
School lender: Palmer College of Chiropractic;
Loan Volume: $46,215,953.
School lender: University of Denver;
Loan Volume: $41,243,023.
School lender: University of Miami;
Loan Volume: $39,965,978.
School lender: Northwestern University;
Loan Volume: $38,761,198.
School lender: Western University of Health Sciences;
Loan Volume: $37,645,505.
School lender: SCPM at Finch University;
Loan Volume: $36,885,485.
School lender: University of Phoenix;
Loan Volume: $35,772,707.
School lender: Widener College;
Loan Volume: $34,046,555.
School lender: Regis University;
Loan Volume: $29,950,388.
School lender: Case Western Reserve University;
Loan Volume: $28,952,721.
School lender: Tufts University;
Loan Volume: $27,190,067.
School lender: Simmons College;
Loan Volume: $20,744,189.
School lender: Southern Methodist University;
Loan Volume: $19,632,868.
School lender: Wayne State University;
Loan Volume: $19,511,499.
School lender: George Washington University;
Loan Volume: $19,035,444.
School lender: Santa Clara University;
Loan Volume: $18,526,486.
School lender: Washington University;
Loan Volume: $18,219,650.
School lender: Duquesne University;
Loan Volume: $17,959,741.
School lender: University of Maryland, Baltimore;
Loan Volume: $16,871,252.
School lender: Yale University;
Loan Volume: $16,788,402.
School lender: Duke University;
Loan Volume: $16,697,753.
School lender: Illinois College of Optometry;
Loan Volume: $16,508,709.
School lender: Detroit College of Law (Michigan State U.);
Loan Volume: $16,421,996.
School lender: Cleveland Chiropractic College;
Loan Volume: $15,591,030.
School lender: Parker College of Chiropractic Medicine;
Loan Volume: $15,400,240.
School lender: University of Missouri, St. Louis;
Loan Volume: $15,056,767.
School lender: Pennsylvania College of Optometry;
Loan Volume: $14,033,796.
School lender: Life Chiropractic College West;
Loan Volume: $13,819,336.
School lender: University of Dayton;
Loan Volume: $12,864,455.
School lender: University of Oklahoma;
Loan Volume: $11,950,895.
School lender: Claremont Graduate University;
Loan Volume: $11,787,491.
School lender: St. Mary‘s University;
Loan Volume: $10,189,486.
School lender: Northwestern Health Services University;
Loan Volume: $10,084,693.
School lender: National University of Health Sciences;
Loan Volume: $9,833,038.
School lender: The University of Tulsa;
Loan Volume: $9,519,514.
School lender: The University of Health Sciences;
Loan Volume: $9,480,644.
School lender: Illinois Institute of Technology;
Loan Volume: $9,365,766.
School lender: Sherman College of Straight Chiropractic Medicine;
Loan Volume: $7,352,179.
School lender: Stanford University;
Loan Volume: $6,768,517.
School lender: Southwest College of Naturopathic Medicine;
Loan Volume: $6,614,267.
School lender: Naropa University;
Loan Volume: $6,156,301.
School lender: National College of Naturopathic Medicine;
Loan Volume: $6,084,159.
School lender: Western Illinois University;
Loan Volume: $5,572,536.
School lender: Pepperdine University;
Loan Volume: $5,541,699.
School lender: Creighton University;
Loan Volume: $5,421,886.
School lender: Oklahoma City University;
Loan Volume: $5,102,086.
School lender: Indiana Weslyan University;
Loan Volume: $4,798,824.
School lender: Eastern Michigan University;
Loan Volume: $4,317,410.
School lender: Drexel University;
Loan Volume: $3,938,519.
School lender: Philadelphia College of Osteopathic Medicine;
Loan Volume: $3,275,418.
School lender: University of San Francisco;
Loan Volume: $3,107,009.
School lender: University of Northern Colorado;
Loan Volume: $2,335,397.
School lender: University of La Verne;
Loan Volume: $1,049,680.
School lender: Texas Chiropractic College;
Loan Volume: $360,336.
School lender: Florida State University;
Loan Volume: $220,448.
School lender: Texas Christian University;
Loan Volume: $186,235.
School lender: Des Moines University;
Loan Volume: $136,280.
Source: GAO Analysis of Education Data.
Note: Total school lender loan volume in school year 2003-2004 was
$1,534,011,817.
[End of table]
[End of section]
Appendix IV: Comments from the Department of Education:
UNITED STATES DEPARTMENT OF EDUCATION:
OFFICE OF POSTSECONDARY EDUCATION:
THE ASSISTANT SECRETARY:
JAN 10 2005:
Ms. Cornelia M. Ashby:
Director, Education, Workforce, and Income Security Issues:
United States Government Accountability Office:
Washington, DC 20548:
Dear Ms. Ashby:
Thank you for the opportunity to respond to the U.S. Government
Accountability Office's (GAO's) draft report entitled "Federal Family
Education Loan Program: More Oversight Is Needed For Schools That Are
Lenders" (GAO-05-184).
We appreciate GAO's review of this important and growing area in the
Federal Family Education Loan Program and agree with the draft report's
recommendations that increased oversight is necessary given the very
recent, substantial growth in the number of school lenders and the loan
volume associated with these school lenders.
The data presented in the draft report suggest that, in general, school
lenders are those that the Congress intended - relatively large
institutions of higher education that have significant graduate and
first-professional programs. The fact that these programs generate
institutional revenues is not problematic if these revenues are used
appropriately. As you know, section 435(d)(2)(F) of the Higher
Education Act provides that revenue derived from interest and special
allowance payments must be used to support need-based student financial
aid. We believe that there are a number of other appropriate uses of
revenue received by an institution as a result of its status as an FFEL
lender. For example, the institution may use such resources to support
its educational programs, to increase educational access, or to reduce
the rate of increase in tuition and fees charged students.
We appreciate you noting the importance of ensuring that lenders,
including school lenders, submit required annual compliance audits that
attest to the lenders' financial stability and compliance with
applicable statutes and regulations. We believe that the steps we took
to verify that such audits were submitted for fiscal year 2002 were
instrumental in ensuring compliance. As you indicated, Federal Student
Aid (FSA) can report that all school lenders that are required to
submit such audits for fiscal year 2003 have done so. Therefore, your
criticism that "FSA has little information about how school lenders are
complying with laws and regulations" is misplaced.
We also appreciate you noting the importance of monitoring school
lenders through program reviews. As you indicated, FSA has inquired of
31 school lenders regarding compliance with the regulation pertaining
to the use of interest income and special allowance payments for need-
based grants. As you additionally indicated, FSA plans to conduct a
more thorough review of 10 school lenders. Again, we agree that
increased oversight of school lenders is necessary given the very
recent, substantial growth in the number of school lenders and the loan
volume associated with these school lenders. FSA is taking steps to
meet that important responsibility.
I appreciate your examination of this important issue.
Sincerely,
Signed by:
Sally Stroup:
[End of section]
Appendix V: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Jeff Appel, Assistant Director: (202) 512-9915:
Andrea Romich Sykes, Analyst-in-Charge: (202) 512-9660:
Staff Acknowledgments:
In addition to those named above, the following people made significant
contributions to this report: Rebecca Christie, Jeffrey W. Weinstein,
Richard Burkard, Margaret Armen, Mimi Nguyen, and Cynthia Decker.
FOOTNOTES
[1] Secondary markets are lenders that include Sallie Mae, banks, and
nonprofit state agencies.
[2] Lenders are guaranteed a statutorily specified rate of return--
called lender yield--on the loans they hold. When the interest rate
paid by borrowers is less than the lender yield, the government pays
lenders the difference--a subsidy called special allowance payments.
[3] Under the HEA, a school lender may originate loans for
undergraduates so long as it does not lend to more than 50 percent of
its undergraduates and may only originate loans for students who have
previously received a loan from the school or have been rejected by
other lenders.
[4] GAO, Direct Student Loan Program: Management Actions Could Enhance
Customer Service, GAO-04-107 (Washington D.C.: Nov. 20, 2003). Under
FDLP, the federal government provides loans to students and their
families, using federal capital, and owns the loans. Schools may serve
as direct loan originators or the loans may be originated by
contractors working for Education.
[5] Loan volume in 1993-1994 was $184 million in 2003 dollars.
[6] Subsidized Stafford loans are made to students who are enrolled at
least half-time and who have demonstrated financial need, while
unsubsidized Stafford loans are made to any student enrolled at least
half-time. Unsubsidized Stafford and PLUS loan borrowers must pay all
loan interest costs.
[7] Borrowers may consolidate while in school if they are consolidating
at least one direct loan but must wait until their grace period--the
time period after a student graduates or leaves school but before any
payments are due--or until they are in repayment if only consolidating
FFELP loans.
[8] For loans disbursed on or after October 1, 1998, the government
pays 95 percent of the default costs plus certain administrative costs,
and the guaranty agency pays the remaining amount. The percentage of
default costs paid by the federal government decreases if the guaranty
agency's default claims are high compared with the amount of loans in
repayment.
[9] Loan volume in 1993-1994 was $184 million in 2003 dollars.
[10] Loan volume in 1999-2000 was $573 million in 2003 dollars.
[11] College Access and Opportunity Act of 2004, H.R. 4283, 108th Cong.
§ 428.
[12] Under the HEA, loans are disbursed in multiple payments.
[13] This is based on premiums reported by 10 of the school lenders.
[14] College Access and Opportunity Act of 2004, H.R. 4283, 108th Cong.
§ 428.
[15] Under the Internal Revenue Code (IRC), earnings on loans financed
by tax-exempt bonds are limited. Lenders can reduce their earnings on
loans financed with tax-exempt bonds, and avoid exceeding IRC
limitations, by providing benefits to borrowers. For additional
information see GAO, Federal Family Education Loan Program: Statutory
and Regulatory Changes Could Avert Billions in Unnecessary Federal
Subsidy Payments, GAO-04-1070 (Washington D.C.: September 20, 2004).
[16] The purpose of accreditation is to provide public assurance of
educational quality. There are two types of accreditation:
institutional and specialized. Institutional accrediting examines the
school as a whole and includes an assessment of the formal educational
activities of the institution, governance and administration, financial
stability, admissions and student personnel services, institutional
resources, student academic achievement, institutional effectiveness,
and relationships with constituencies inside and outside the
institution. Specialized accreditation examines programs within a
school, such as medicine or teacher education.
[17] Student Loan Marketing Assoc. v. Riley, 112 F. Supp. 2d 38 (D.D.C.
2000).
[18] Lenders or servicers that are nonprofit or governmental
organizations have the option of obtaining an audit in accordance with
Office of Management and Budget Circular A-133, Audits of Institutions
of Higher Education and Other Nonprofit Institutions. Such audits are
due 9 months following the end of the lender's fiscal year. Audits
submitted by other lenders are due 6 months following the end of the
lender's fiscal year.
[19] The NSLDS is a national repository of information about federal
loans and grants awarded to students.
[20] IPEDS is a collection of information obtained from surveys of all
schools whose primary purpose is to provide postsecondary education and
provides school-level data for a variety of characteristics.
[21] FDLP data is from Education's Committed Loan Volume Report, which
includes data reported by schools and contractors.
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