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United States Government Accountability Office: 
Washington, DC 20548: 

November 17, 2009: 

Congressional Committees: 

Subject: Higher Education: Factors Lenders Consider in Making Lending 
Decisions for Private Education Loans: 

Over the past few decades, the cost of tuition, room, and board for 
undergraduate students has increased, making it more difficult for some 
students and families to afford the cost of college. While students 
have historically relied on federal loans and grants and family 
contributions to pay for college, a growing number have turned to 
private education loans to help them cover the cost. In 2007-08, 
private loan volume, including private sector and state sponsored 
loans, totaled $19 billion, up from $3 billion in 1997-98, according to 
the 2008 College Board report on student aid.[Footnote 1] Unlike 
federal loans, private education loans are not guaranteed by the 
federal government and are typically more costly for students than 
loans offered through federal programs.[Footnote 2] Despite their 
generally higher cost, about 26 percent of students who obtained 
private education loans in 2007-08 did not obtain Federal Stafford 
loans, and more than one-half of these students did not apply for 
Federal financial aid, according to the Institute for College Access 
and Success. In 2007-08, 14 percent of undergraduate students obtained 
private education loans, according to the Institute for College Access 
and Success, and the average private loan amount was $6,533.[Footnote 

This letter summarizes our briefings with your staff during which we 
discussed our work under the mandated study in section 1122 of the 
Higher Education Opportunity Act of 2008 (HEOA).[Footnote 4] The 
mandate directed GAO to assess the impact of private lenders' use of 
nonindividual factors--factors other than the borrower's own credit 
worthiness, such as the cohort default rate or graduation rate of the 
school the student attends--in making loan decisions.[Footnote 5] The 
mandate also directed GAO to assess whether lenders' use of such 
factors may affect students' access to private education loans and may 
have a disparate impact on the pricing of these loans by race, gender, 
income, and institution type. To address the issues raised in the 
mandate, we framed our study around three key questions: 

1. What are the key characteristics of private education loan borrowers 
and the types of schools they attend? 

2. How do lenders use nonindividual factors--including cohort default 
rate, graduation rate, and accreditation--in making lending decisions 
for private education loans? 

3. What is the impact of using these factors on loan products and rates 
students pay and their access to loans, by gender, race, income, and 
institution type? 

While we were able to obtain some information on the characteristics of 
borrowers, the types of schools they attend, and lenders' use of 
nonindividual factors, we were not able to obtain information that 
allowed us to assess the impact of lenders' use of these factors on 
students. To determine the key characteristics of private education 
loan borrowers and the schools they attend, we analyzed selected data 
on undergraduate student borrowers from Education's 2007-08 National 
Postsecondary Student Aid Study (NPSAS) which contains information on 
private borrowing activity, as well as the characteristics of 
borrowers.[Footnote 6] We assessed the reliability of selected NPSAS 
data.[Footnote 7] To determine how lenders use nonindividual factors in 
their lending decisions, we interviewed several major lenders. We also 
reviewed the Securities and Exchange Commission filings of several 
major lenders and interviewed federal banking regulators who oversee 
private education lenders, including the Federal Reserve System, Office 
of Comptroller Currency and the Federal Deposit Insurance Corporation. 
[Footnote 8] We also interviewed representatives from other financial 
institutions, industry researchers, experts and officials at Education 
and reviewed relevant laws and regulations. To determine whether the 
use of nonindividual factors has an impact on student access to loans 
and rates by student demographics and institution type, we interviewed 
officials at higher education associations and officials from a 
nonrepresentative sample of eight institutions of higher education, 
selected to include representation from Historically Black Colleges and 
Universities (HBCU), as well as public and private nonprofit, and for-
profit institutions (also known as proprietary schools). In addition to 
interviewing several major lenders, we also requested their 
underwriting methodology for private education loans, borrower data and 
information on the terms and conditions associated with their loans. 
Citing the proprietary nature of the underwriting practices and the 
terms and conditions of private education loans, none of the major 
lenders we contacted would allow us access to their underwriting 
criteria or loan data. Consequently, we were unable to determine how 
the use of nonindividual factors impacts students' access to private 
loans; the products and rates available to students at certain 
institutions; or the pricing of these loans by race, gender, income, 
and institution type. Finally, we provide information on how the 
private student loan lending landscape has changed since the HEOA, 
which mandated our study, was passed. We conducted our work from April 
2009 to November 2009 in accordance with all sections of GAO's Quality 
Assurance Framework that are relevant to our objectives. The framework 
requires that we plan and perform the engagement to obtain sufficient 
and appropriate evidence to meet our stated objectives and to discuss 
any limitations in our work. We believe that the information and data 
obtained, and the analysis conducted, provide a reasonable basis for 
any findings and conclusions in this product. 

Students who attended certain types of schools were more likely to take 
out private loans; and in addition, there were small differences that 
were statistically significant for private loan borrowers with respect 
to dependent and independent students, family income, gender, and 
greater differences between some race and ethnicity groups. 
Specifically, according to NPSAS, nearly one-third of the students at 
the highest cost institutions ($25,000 or more per year) took out 
private loans. In addition, while students attending proprietary 
schools accounted for approximately 10 percent of the undergraduate 
population, over 40 percent of them borrowed private loans (see figure 
1), according to NPSAS data. The proportion of undergraduate students 
attending HBCUs who borrowed private education loans did not differ 
significantly from borrowers at all other institutions. 

Figure 1: Percentage of Undergraduate Students Who Borrowed Private 
Education Loans and Enrollment by Institution Type, 2007-08: 

[Refer to PDF for image: vertical bar graph and pie-chart] 

Received Private Loans: 
Institution Type: Public: 8.7%; 
Institution Type: Private NonProfit: 24.3%; 
Institution Type: Proprietary: 42.5%. 

Institution Type: Public: 73.2%; 
Institution Type: Private NonProfit: 19.4%; 
Institution Type: Proprietary: 7.4%. 

Source: GAO analysis of NPSAS (version June 09, 2008). 

[End of figure] 

Moreover, a slightly higher percentage of dependent undergraduate 
students borrowed private education loans (15 percent) compared to 
independent students (13 percent), and a higher percentage of dependent 
students from middle and high income families (17 percent and 15 
percent, respectively) borrowed private loans compared to dependent 
students from low income families (about 12 percent).[Footnote 9] In 
addition, a slightly higher proportion of female students borrowed 
private education loans (about 15 percent for females and 13 percent 
for males). While there were varying differences in the percentages of 
undergraduate students borrowing private education loans by race/ 
ethnicity, Black or African American students were the highest 
percentage of borrowers (see figure 2). 

Figure 2: Percentage of Undergraduates Who Borrowed Private Education 
Loans by Race/Ethnicity, 2007-08: 

[Refer to PDF for image: vertical bar graph] 
Received Private Education Loans: 
Race/Ethnicity: Black or African American: 17.2%; 
Race/Ethnicity: White: 14.3%; 
Race/Ethnicity: Hispanic or Latino: 13.2%; 
Race/Ethnicity: Asian: 8.3%; 
Race/Ethnicity: Other: 12.7%. 

Source: GAO analysis of NPSAS database. 

Notes: "Other" includes the following NPSAS categories: American Indian 
or Alaska Native, Native Hawaiian or other Pacific Islander, Other, and 
More than one race. 

There was no difference detected between "Hispanic or Latino" and 
"Other." All other comparisons were significant at the 95 percent 

[End of figure] 

Private lenders may use nonindividual factors to select the 
institutions at which they will lend to students and to establish loan 
terms and conditions, including interest rates, according to lenders 
and industry experts. Similarly, guarantors, agencies that insure 
student loans against default, of private education loans may use 
nonindividual factors to determine the institutions at which they will 
guarantee student loans. Some of the key nonindividual factors that 
lenders use include program length (e.g., two-year versus four-year 
program), type of school, school graduation rates, and schools' cohort 
default rates, according to lenders and industry experts. Although the 
inclusion of nonindividual factors as well as the thresholds and 
relative importance vary by lender, many of the lenders who we 
interviewed said that the cohort default rate is the most commonly used 
nonindividual factor. Lenders generally view longer programs of study, 
high graduation rate, and low cohort default rate as more favorable 
conditions when making lending decisions, according to experts and 
lenders we interviewed. Lenders, researchers, and industry experts 
confirmed that lenders have historically used nonindividual factors to 
help them make lending decisions, especially because students often 
lack sufficient credit history upon which to base decisions. Education 
also uses a school's cohort default rate to determine school 
eligibility for participation in selected federal student aid programs, 
and lenders who participate in federally guaranteed student loan 
programs also use the cohort default rate and other nonindividual 
factors to select schools where they will lend to students, according 
to Education officials. 

Finally, the student loan lending landscape has changed significantly 
since the HEOA, which mandated our study, was passed. Many of the 
lenders offering private loans have exited the market in response to 
limited access to capital resulting from the credit crisis, according 
to researchers, lenders, and experts we interviewed. In 2008-09, the 
private loan volume totaled about $12 billion, according to the 2009 
College Board report on student aid. Lenders who have continued their 
private student loans programs reportedly tightened their lending 
practices, which have limited some students' access to these loans, 
according to some researchers we interviewed.[Footnote 10] In response 
to the tightening of credit, some school officials we interviewed 
reported that their schools are offering students more institutional 
funds--grants, scholarships, and loans--to help them finance college 
costs. Also, according to officials from credit unions and experts, 
credit unions are increasingly offering private education loans. 

We provided a draft of this letter to Education for review and comment. 
Education provided technical comments which we incorporated as 

As agreed with your staffs, this letter satisfies the reporting 
requirement specified in the mandate. We are sending copies of this 
letter to the cognizant congressional committees and Education. This 
letter also will be available on the GAO Web site at [hyperlink,]. Should you or your staffs have any questions, 
please contact me at (202) 512-7215 or Contact points 
for our Offices of Congressional Relations and Public Affairs may be 
found on the last page of this report. Key contributors to this report 
include Sherri Doughty, Tranchau (Kris) Nguyen, Charlene M. Johnson, 
Stacy Ann Spence, Erin Preston, Susannah Compton, Cindy Gilbert, Doreen 
Feldman, Debra Johnson, Sheila McCoy, Grant Mallie, James Rebbe, and 
Karen O'Conor. 

Signed by: 

George A. Scott:
Director, Education, Workforce and Income Security Issues: 

List of Congressional Committees: 

The Honorable Christopher J. Dodd:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate: 

The Honorable Tom Harkin:
The Honorable Michael B. Enzi:
Ranking Member:
Committee on Health, Education, Labor, and Pensions:
United States Senate: 

The Honorable Barney Frank:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives: 

[End of section] 


[1] In 2007-08, the federal government provided $66.8 billion in 
federal loans for postsecondary students. In the past several years, 
Congress raised limits on federal student aid, including loans. In 
general, the aggregate loan limits for an entire undergraduate 
education are $31,000 for dependent students and $57,500 for 
independent students. A student is classified as either financially 
dependent on his or her parents or independent when applying for 
financial aid. This classification is important because it affects the 
factors used to determine a student's financial aid eligibility. 

[2] The Department of Education (Education) administers the Federal 
Family Education Loan (FFEL) Program and the William D. Ford Federal 
Direct Loan (Direct Loan) Program, both of which consist of what are 
generally known as Stafford Loans and Parent Loans for Undergraduate 
Students. Under the Direct Loan Program, loan funds come directly from 
the federal government. For the FFEL Program, loans funds come from 
participating private financial institutions and are guaranteed by the 
federal government. 

[3] This estimate, based on the 2007-08 National Postsecondary Student 
Aid Study, has a margin of error of plus or minus $173 at the 95 
percent confidence level. 

[4] Pub.L.No.110-315 (Aug. 14, 2008). 

[5] Cohort default rate refers to the percentage of a school's 
borrowers who enter repayment on certain FFEL Program or Direct Loan 
Program loans during a particular federal fiscal year. 

[6] NPSAS is a comprehensive nationwide study designed to determine how 
students and their families pay for postsecondary education, and to 
describe some demographic and other characteristics of those enrolled. 
The study uses data from nationally representative sample surveys of 
students in postsecondary education institutions, including 
undergraduate, graduate, and first-professional students. Students 
attending all types and levels of institutions are represented, 
including public and private not-for-profit and for-profit 
institutions, and less-than-two-year institutions, community colleges, 
and four-year colleges and universities. 

[7] We assessed the reliability of selected NPSAS data by (1) reviewing 
agency documents, (2) reviewing the response rates for the variables 
used in our analyses, and (3) computing confidence intervals. In 
addition, agency officials reviewed our analyses. The overall response 
rate for NPSAS was 96 percent. Missing variables were imputed and were 
replaced with valid data from donor records. All of the NPSAS 
percentage estimates used for this report have standard errors of 2.5 
percentage points or less, and the standard error for the average total 
private loans was $88 based on the Balanced Repeated Replication 
method. The item response rates for the variables used in this report 
are above 75 percent except for the private loan variable which had a 
response rate of 67 percent. We were unable to perform an item 
nonresponse bias analysis for private loans because the restricted 
NPSAS 2007-08 file was not available during the time we conducted our 

[8] In August 2009, the Federal Reserve Board published a final rule 
amending Regulation Z, which implements the Truth in Lending Act (15 
U.S.C. 1601 et seq.), a consumer protection law that regulates certain 
credit practices and promotes the informed use of consumer credit by 
requiring uniform disclosures. The rule implements provisions of the 
HEOA, by adding disclosure requirements and prohibiting certain 
practices for creditors making private education loans. Under the rule, 
creditors who extend private education loans must provide disclosures 
about loan terms and features on or with the loan application and must 
also disclose information about federal student loan programs that may 
offer less costly alternatives. Additional disclosures must be provided 
when the loan is approved and when the loan is consummated 74 Fed. Reg. 
41194 (Aug. 14, 2009). 

[9] Using income groups of Education's database, GAO defined middle to 
high income families as those with an annual income of $30,000 or more. 

[10] Some examples of how lenders have tightened lending practices for 
private education loans include requiring higher credit scores for 
approval, approving lower loan amounts, charging higher interest rates, 
increasingly requiring interest payments while students are in school, 
and more frequently only approving borrowers who have a credit-worthy 

[End of section] 

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