Student Loan Defaults:

Department of Education Limitations in Sanctioning Problem Schools

HEHS-95-99: Published: Jun 19, 1995. Publicly Released: Jun 19, 1995.

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Pursuant to a congressional request, GAO reviewed the Department of Education's efforts to resolve disputes arising from its debarment of schools from federally guaranteed student loan programs, focusing on: (1) how many schools have contested Education decisions and their main points of contention; (2) whether Education has taken sufficient steps to implement the 1993 amendments to the Higher Education Act and address the schools' concerns; and (3) what needs to be done to resolve problems with Education's default reduction initiative.

GAO found that: (1) as of September 30, 1994, 601 schools were barred from the Federal Family Education Loan Program and 250 schools had pending administrative appeals challenging Education's default rate determinations; (2) 111 schools had filed 22 lawsuits over default rate issues, of which 10 have been dismissed or terminated by agreement; (3) the schools alleged that Education used erroneous data in its default rate calculations and failed to exclude improperly serviced loans in its calculations; (4) the inaccuracies in Education's databases concerning loan defaults were well documented; (5) the schools and Education did not agree on what constituted an improperly serviced loan; and (6) the schools complained that they had insufficient access to loan information which limited their ability to detect servicing problems. GAO also found that: (1) the 1993 amendments should reduce, but not eliminate, challenges to Education's default rate determinations; (2) schools' increased access to loan information should resolve misunderstandings on matters of fact and implementing regulations should make adjudications more straightforward and less time-consuming; (3) these regulatory changes will not fully protect the government's interest in these disputes, since unscrupulous schools continue to accumulate additional loan default costs during the appeal process; and (4) to protect the government from these additional costs, schools should be held liable for additional loan default costs that occur during the appeals process or required to post performance bonds as a condition of filing an appeal.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: The bills approved in the House and Senate (in the 105th Congress) to reauthorize the Higher Education Act of 1965, as amended, did not incorporate the necessary implementing provision.

    Matter: In those instances in which schools appeal a Department action to eliminate their Federal Family Education Loan Program eligibility because their default rates exceed a statutory threshold, Congress may wish to consider giving the Secretary of Education authority to require schools to reimburse the government for the cost of loans that are made and that may subsequently default, in the event that the schools' appeals are unsuccessful.

  2. Status: Closed - Not Implemented

    Comments: The bills approved in the House and Senate (in the 105th Congress) to reauthorize the Higher Education Act of 1965, as amended, did not incorporate the necessary implementing provision.

    Matter: As a measure of further protection of the government's interests, Congress also may wish to consider granting the Secretary of Education the authority to require schools to post a performance bond as a condition of filing an appeal as well as the discretion in determining under which circumstances a bond would be required of schools.

 

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