Direct Student Loans:

Additional Steps Would Increase Borrowers' Awareness of Electronic Debiting and Reduce Federal Administrative Costs

GAO-02-350: Published: Mar 29, 2002. Publicly Released: Mar 29, 2002.

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Since 1999, the Department of Education (Education) has offered a 0.25 percent interest rate reduction to borrowers who agree to an electronic debit (EDA) program. Borrowers pay a lower interest rate, while the federal government receives fewer late payments. Any revenue loss to the federal government from a reduced interest rate would be more than offset by a gain in revenue because some EDA borrowers who had previously paid by check would stop making periodic payments in excess of their scheduled amount due. By ceasing to make these prepayments, these borrowers would not pay off their loans as soon as they would have without signing up for EDA and, therefore, incur additional interest costs over the life of their loans. Although actual EDA enrollments have exceeded original estimates, Education lacks data on prepayment patterns after borrowers enroll in the program. Education has not informed borrowers of the cost implications of EDA participation, nor has it systematically informed borrowers of their prepayment options. GAO estimates that Education saved $1.5 million in administrative costs in fiscal year 2001 because it did not have to mail bills to EDA borrowers.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Education fully addressed GAO's recommendation by adding information to the exit counseling guide and the application form borrowers use to establish electronic debiting, as well as by highlighting the reduced interest rate borrowers receive by using electronic debiting on its direct loan servicing web page.

    Recommendation: To better publicize EDA and help Education achieve additional administrative cost savings, the Secretary of Education should update the Exit Counseling Guide for Borrowers to reflect the repayment incentives for direct loan borrowers who repay their loans through EDA as well as borrowers' prepayment options.

    Agency Affected: Department of Education

  2. Status: Closed - Implemented

    Comments: Education completed several actions to better inform borrowers about prepaying their loans including providing information on making additional payments in their brochure for EDA borrowers, providing similar information on the Direct Loan website, and implementing an online payment system that allows borrowers to pay any amount.

    Recommendation: To address concerns that borrowers may unknowingly pay more total interest over the life of their loans by not making prepayments if they make their loan payments through EDA, the Secretary of Education should take steps to inform EDA borrowers about steps they can take to prepay their loans. Such steps could include modifying EDA applications to allow borrowers interested in prepaying their loans to designate withdrawal amounts in excess of their scheduled payments when they initially complete the EDA application.

    Agency Affected: Department of Education

  3. Status: Closed - Implemented

    Comments: Under Education's prior loan servicing contract, the Department of Education paid higher fees to service all delinquent loans than it did for loans with on time monthly repayments. Education paid these fees on accounts that were at least 1 day past due, even though the servicer took no action to collect payments until accounts were at least 7 days past due. Education has implemented a new system--Common Services for Borrowers (CSB)--that integrates several existing data systems, including direct loan servicing. Under CSB, payments to the servicing contractor are based on loan performance rather than transaction processing cost or activity. Under the contract terms, borrowers who are less than 31 days delinquent are grouped with borrowers whose repayment status is current. Therefore, Education pays the same fees for borrowers who are making payments on time and those that are less than 31 days late. Fees paid to the servicer progressively decrease the longer loans are in delinquency.

    Recommendation: To ensure that the fees Education pays for servicing delinquent accounts appropriately reflect current collection activity practices, the Secretary of Education should consider renegotiating the fee provision in its contract with the direct loan servicer to eliminate the servicing fee for accounts with payments less than seven days late.

    Agency Affected: Department of Education

 

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