Federal Family Education Loan Program:

Increased Department of Education Oversight of Lender and School Activities Needed to Help Ensure Program Compliance

GAO-07-750: Published: Jul 31, 2007. Publicly Released: Jul 31, 2007.

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Concerns have been raised about the Department of Education's (Education) role in overseeing the lenders and schools that participate in the largest of the federal government's student loan programs, the Federal Family Education Loan Program (FFELP). GAO was asked to analyze Education's use of its oversight, guidance, and enforcement authorities under FFELP. To do this, GAO reviewed departmental documents and federal laws, regulations, and cases and interviewed officials from Education and the student loan industry.

While Education has some processes to oversee general compliance in FFELP, it has no oversight tools in place designed to proactively detect potential instances of lenders providing improper inducements--such as gifts to schools in exchange for preferred status on a school's suggested lender list--or schools limiting borrower choice of lender, two activities that are prohibited by law. Instead, the department primarily depends on external complaints to identify potential instances of non-compliance with these prohibitions. Historically, Education did not process these complaints in a systematic manner because complaint processing was not overseen by any one group. However, Education does have plans to conduct lender and school reviews to gather information on inducements, and it is considering updating its audit guides to begin detecting potential instances of improper inducements. Education has not implemented formal comprehensive guidance on inducements since 1989, although it has repeated some of the information contained in that guidance in subsequent financial aid handbooks and other department publications. Instead, the department has responded informally to individual queries from the student loan community regarding allowable inducement practices. Education's Office of Inspector General recommended in 2003--and members of the student loan community have previously requested--that Education issue more guidance on these issues. In June 2007, Education issued proposed regulations that address improper inducements and limitations on borrower choice, and these regulations could become effective in July 2008 at the earliest. Education has only attempted to use its sanctioning authority twice in the past 20 years to enforce prohibitions on improper inducements or limitations on borrower choice. In particular, Education disqualified one lender from FFELP for using misleading advertising and providing improper inducements to borrowers, and it initiated proceedings to limit the participation of another lender in light of what it had determined to be an improper inducement. When Education responds to non-compliance, the department instead has commonly sent letters to offending parties noting the prohibited activity and requesting they cease the activity. In addition, Education has not established a protocol for how to best respond to non-compliance--whether to write a letter requesting the activity to cease or to sanction a lender or school--nor has it routinely assessed the effectiveness of these actions in stopping prohibited activities.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The Department of Education published a Dear Colleague Letter on August 9, 2007, requesting that institutional and student lender colleagues pledge to follow the principles outlined in the Department's proposed regulations of June 12, 2007 (expected to go into effect July 1, 2008), regarding FFELP lending.

    Recommendation: In order to protect students and parents from paying unnecessarily high interest rates and fees because of improper lending activities among FFELP participants, the Secretary of Education should issue new guidance--for example, through a Dear Colleague Letter (DCL)--regarding inducements to guide the industry until the relevant proposed regulations become effective in 2008 at the earliest.

    Agency Affected: Department of Education

  2. Status: Closed - Implemented

    Comments: The Department of Education agreed with this recommendation. In 2007, the agency sent letters to schools with a high loan volume reminding them of borrower's choice rules, and posted a letter on its web site reminding all schools of the requirements. ED stated it would also contact lenders to ensure their compliance with applicable rules and regulations. In subsequent years, the agency took a broader approach to examining and resolving these issues by advocating for the expansion of the government's Direct Loan program, which would eliminate the possibility of improper inducements from banks and preferred lender lists at schools for federal loans. Legislation enacted in 2010 expanded this program, which will address problems with high interest rates and fees, and improper inducements.

    Recommendation: In order to protect students and parents from paying unnecessarily high interest rates and fees because of improper lending activities among FFELP participants, the Secretary of Education should be more proactive in examining situations involving possible improper inducements and limitations on borrower choice, such as exploring how schools generate preferred lender lists to determine if improper inducements have occurred.

    Agency Affected: Department of Education

  3. Status: Closed - Implemented

    Comments: On March 31, 2008, the Department of Education updated its lender review procedures to address improper inducements and limitations on borrower choice.

    Recommendation: In order to protect students and parents from paying unnecessarily high interest rates and fees because of improper lending activities among FFELP participants, the Secretary of Education should update its oversight tools--such as financial audit and program review guidance--to identify possible instances of improper inducements and limitations on borrower choice.

    Agency Affected: Department of Education

  4. Status: Closed - Implemented

    Comments: The Department of Education agreed with this recommendation. In 2007 and 2008, the agency updated its procedures for lender and guaranty agency oversight and provided GAO with a a copy of "Inducement Review Procedures," which lays out guidance on conducting inducement reviews. The procedures explain that reviewers must notify the review lead reviewer if serious noncompliance, ethical concerns or contentious situations arise and document compliance problems. However, it does not include a protocol for determining the level of response appropriate for different cases of non-compliance. In subsequent years, the Secretary of Education took a broader approach to address concerns regarding banks and schools violating federal lending rules. The agency advocated for expansion of the government's Direct Lending program, which would eliminate the possibility that banks could offer improper inducements or schools could illegally insist that students borrow money from a particular private bank. Legislation was enacted in March 2010 to expand the program, thereby resolving concerns over improper inducements and limitations on borrower choice and better protecting students and parents from paying unnecessarily high interest rates and student loan fees.

    Recommendation: In order to protect students and parents from paying unnecessarily high interest rates and fees because of improper lending activities among FFELP participants, the Secretary of Education should establish a protocol for determining the level of response appropriate for different cases of non-compliance involving improper inducements or limitations on borrower choice--from writing letters to imposing fines to terminating participation--and assess the effectiveness of these actions to inform and improve this protocol.

    Agency Affected: Department of Education

 

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