Better Cash Management Can Reduce the Cost of the National Direct Student Loan Program

FGMSD-80-5: Published: Nov 27, 1979. Publicly Released: Nov 27, 1979.

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The Department of Health, Education, and Welfare (HEW), through its Office of Education (OE), sponsors three student financial aid programs, one of which is the National Direct Student Loan program. This program provides funds to postsecondary schools for making long-term, low-interest loans to students. Before 1970, OE monitored all aspects of the program including the disbursement of funds to schools and the reasonableness of school balances. Since 1970, when HEW transferred disbursing responsibilities to its federal assistance financing system, OE has not actively monitored the schools' cash balances.

Schools participating in the loan program have been allowed to hold an annual average of over $63 million in federal funds in excess of their 30-day needs. GAO estimated that if the Treasury had this money, it could save the government interest costs as much as $4 million annually. Although OE encourages schools to invest the excess funds in short-term securities, many schools have not done this. Such investments would help offset the government's cost of borrowing, and their earnings would reduce the government's expenditures for the program. Because organizational responsibility for cash management has not been clarified, neither OE nor the departmental federal assistance financing system has an adequate system to effectively monitor school balances. Furthermore, the system does not have controls to prevent schools from obtaining more federal funds than are needed for current program operations. OE believes that returning excess funds would jeopardize many school loan programs because additional funds might not be available until the next fiscal year if the school underestimates its needs. GAO believes that the program must be flexible enough to provide for such a shortage, but that this can be done while still saving the government interest costs.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: Until the cash management system starts to work properly, the Secretary, HEW, should determine which organization can best manage school cash balances and withdrawals and direct the head of that organization to develop and implement effective cash management procedures, including procedures for controlling school cash balances and withdrawals to prevent future excess cash situations at participating schools. The Secretary should also propose legislation providing the Commissioner of Education with 1-year authority to reuse returned excess federal funds to continue financing the National Direct Student Loan program. In addition, the Secretary should direct the Commissioner of Education to: (1) determine the amount of Federal National Direct Student Loan funds that are in excess of the schools' immediate needs; (2) have schools deposit the excess funds in interest-bearing accounts until the schools are requested to return them to the Treasury; and (3) develop procedures to return funds not immediately needed for loans.

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