Guaranteed Student Loans:

Guidelines for Reducing Guaranty Agency Reserves

HRD-86-129BR: Published: Aug 7, 1986. Publicly Released: Aug 7, 1986.

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Pursuant to a congressional request, GAO: (1) provided guidelines for determining the maximum amount of cash reserves necessary to guarantee loans under the Guaranteed Student Loan Program; and (2) estimated the effects the guidelines would have if they were implemented in fiscal year (FY) 1986.

GAO noted that agencies should establish their own maximum reserves based upon their potential to experience negative cash flow. GAO developed a methodology to set maximum reserve levels as an amount equal to the largest of three factors: (1) a percentage of claims paid during the prior year; (2) a percentage of the amount of outstanding loans guaranteed by the agency at the end of the prior year; and (3) a minimum of $500,000 to provide for the smaller loan portfolios and claims activity of small agencies. If the guidelines had been implemented in FY 1986: (1) there would have been adequate reserves to offset the largest negative cash flows experienced by any of the guaranty agencies in FY 1984 and FY 1985; (2) guaranty agencies would have returned between $52 million and $81 million in federal advances; and (3) excess reserves would have decreased between $95 million and $222 million. GAO concluded that: (1) agencies' reserve limits should be large enough to accommodate the cash flow problems experienced by any of the agencies in recent years, but not so large that they would allow the accumulation of unnecessarily large reserves; and (2) savings from the implementation of these guidelines in FY 1987 and beyond would depend on the financial condition of each agency during the previous year and the reduction or elimination of barriers such as existing state laws and contractual agreements.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The 1987 Omnibus Budget Reconciliation Act establishes maximum reserve levels for each guaranty agency using the guidelines developed by GAO.

    Matter: Congress should consider amending the Higher Education Act of 1965 to require that guaranty agency reserves be limited during each FY to the largest of: (1) a percentage in the range of 40 to 50 percent of claims paid during the preceding year; (2) a percentage in the range of 0.3 to 1 percent of the original amount of outstanding loans guaranteed by the agency at the end of the preceding year; or (3) a minimum dollar amount of $500,000 to protect smaller agencies.

  2. Status: Closed - Implemented

    Comments: The 1985 Reconciliation Act and the 1986 Higher Education Amendments require agencies to return $110 million of excess reserves representing advances using GAO guidelines. The 1987 Omnibus Reconciliation Act requires agencies to reduce excess reserves by an additional $250 million using GAO guidelines through offset of federal payments to the agencies.

    Matter: Congress should consider amending the Higher Education Act of 1965 to require the Secretary of Education to: (1) annually determine, at the end of the first quarter of each FY, the cash reserve applicable to each agency during the current year; and (2) require, where actual cash reserves at the end of the prior year exceed the limits, that such excess reserves be used first to return federal advances and then to pay default claims without reimbursement.

  3. Status: Closed - Implemented

    Comments: The 1987 Omnibus Budget Reconciliation Act included these appeal provisions for agencies.

    Matter: Congress should consider amending the Higher Education Act of 1965 to provide for appeal by the guaranty agencies to the Secretary of Education of the maximum reserve levels permitted at the end of each FY on the basis that: (1) an agency's financial position had deteriorated significantly after the end of the year; (2) an agency has agreements that require the agency to maintain reserves that exceed the maximum limits; or (3) significant changes in the economic environment or the program render the guidelines inadequate for individual agencies.

 

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