Stronger Actions Needed To Recover $730 Million in Defaulted National Direct Student Loans

HRD-81-124: Published: Sep 30, 1981. Publicly Released: Sep 30, 1981.

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The loans of the National Direct Student Loan Program are made from revolving funds maintained by participating schools which are responsible for making loans and collecting repayments. The Federal Government provides 90 percent of the moneys for the revolving funds, while the schools provide 10 percent. The program has been plagued by a high default rate. GAO reviewed the program to determine how well schools are carrying out their responsibilities for administering and collecting student loans and to identify Department of Education actions for collecting defaulted loans forwarded to it by participating schools.

GAO believes that stronger collection efforts are needed by participating schools. The Department's collection activities also have been inadequate; however, its performance has recently improved. The seven schools which GAO visited did not fully comply with the Department's loan collection procedures. Though they generally did an adequate billing job, improvements were needed in: counseling borrowers and maintaining contact with them, locating borrowers, referring accounts quickly to collection agencies, monitoring the status of accounts referred, determining collection agency success, and suing borrowers to collect defaulted loans. Schools have been permitted by law to submit defaulted loans to the Department since 1972. However, the Department took almost 6 years to develop procedures to enable schools to forward National Direct Student Loans to the Department for collection. This allowed schools with high default rates to continue receiving Federal funding under the loan program. The Department's efforts to collect loans have been hampered because schools failed to provide complete information, loan collection was not of high priority, and the computer system for the program will not be completed until the latter half of 1981. As a result of these problems, the Department plans to reduce the number of its collectors and to contract out collections on defaulted loans, raising agency concerns regarding the performance records of outside contractors.

Recommendations for Executive Action

  1. Status:

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

    Recommendation: The Secretary of Education should determine whether submissions of National Direct Student Loans to the Department of Education for collection earlier than the statutory 2-year time limit would be beneficial to collection efforts.

    Agency Affected: Department of Education

  2. Status:

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

    Recommendation: The Secretary of Education should monitor the Department of Education's use of private collection agencies to insure that their use is the most cost-effective means of collecting defaulted student loans.

    Agency Affected: Department of Education

  3. Status:

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

    Recommendation: If earlier submissions of National Direct Student Loans to the Department of Education for collection would be beneficial, the Secretary of Education should propose legislation to allow schools to submit defaulted loans as soon as possible after completion of required collection activities.

    Agency Affected: Department of Education

  4. Status:

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

    Recommendation: The Secretary of Education should make sure that any reassessment should consider the collection program that was in place in one Department of Education region that was returning approximately $6 for every $1 spent.

    Agency Affected: Department of Education

  5. Status:

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

    Recommendation: The Department of Education should reassess the economic feasibility of its plan to use private collection agencies to insure that their use is the most cost-effective means of collecting defaulted student loans.

    Agency Affected: Department of Education

  6. Status:

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

    Recommendation: The Department of Education should monitor the performance of its collection contractors to insure that the collection of defaulted loans is being carried out in a manner that will return the most Federal dollars at the least cost to the Government.

    Agency Affected: Department of Education

 

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