Guaranteed Student Loans:

Legislative and Regulatory Changes Needed To Reduce Default Costs

HRD-87-76: Published: Sep 30, 1987. Publicly Released: Sep 30, 1987.

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Pursuant to a congressional request, GAO examined needed legislative and regulatory changes for the Department of Education's Guaranteed Student Loan Program, focusing on: (1) guaranty agencies' loan collection practices and procedures; (2) ways to reduce default costs; (3) the amount of time defaulters have to repay loans; and (4) whether guaranty agencies are promptly remitting Education's share of collections.

GAO found that: (1) new regulations require all guaranty agencies to standardize collection practices and follow specific actions to collect defaulted loans; (2) 1986 legislation should help to reduce defaults and increase collections by requiring guaranty agencies to report repayment patterns to credit bureaus and requiring defaulters to pay reasonable collection costs; (3) the establishment of a National Student Loan Data System should help to further reduce costs by providing means to verify eligibility; (4) Education collected about $38 million in income tax refund offsets from loan defaulters in 1985; (5) new regulations require guaranty agencies to share all default payments made on reinsured loans with Education; and (6) guaranty agencies allow longer repayment periods than Education and have 60 days to remit default collections to Education.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: An accomplishment report was approved by OP on November 6, 1989 for $305 million.

    Matter: Congress should continue the income tax refund offset program for tax years 1987 and 1988 for defaulted student loans.

  2. Status: Closed - Implemented

    Comments: The authority to require guaranty agencies to use the System was included in the Omnibus Budget Reconciliation Act of 1989. However, the department will not have the System implemented until 1993. As a result, GAO will delay preparing the accomplishment report until the System is on-line.

    Matter: Congress should amend the Higher Education Act by providing the Department of Education with the authority to require that guaranty agencies use the National Student Loan Data System to verify borrower eligibility after the system is established.

  3. Status: Closed - Not Implemented

    Comments: This recommendation was not adopted in the Higher Education Amendments of 1992, Public Law 102-325, and it is unlikely that the recommendation will be adopted in the forseeable future.

    Matter: Congress should amend the Higher Education Act by requiring that a borrower's promissory note specify that, upon default, the loan interest rate will change to a variable rate with a ceiling of 12 percent, unless existing state law allows for a higher rate to be charged.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: Regulations issued on December 18, 1992, did not contain the provision regarding posting loan payments. It is unlikely that such action will be taken on this recommendation.

    Recommendation: The Secretary of Education should amend the Guaranteed Student Loan Program regulations by requiring that guaranty agencies post borrower payments in the same manner that federal agencies are required to in accordance with the Federal Claims Collections Standards.

    Agency Affected: Department of Education

  2. Status: Closed - Implemented

    Comments: Section 404(g)(3) of title 34 CFR was revised on December 18, 1992, to require that guaranty agencies share all borrower payments--including collection costs--with the government.

    Recommendation: The Secretary of Education should amend the Guaranteed Student Loan Program regulations by requiring that guaranty agencies share all borrower payments to offset collection costs on reinsured loans with Education.

    Agency Affected: Department of Education

  3. Status: Closed - Implemented

    Comments: Section 404(g)(2) of title 34 CFR was revised on December 18, 1992, to require guaranty agencies to pay the government its share of default collections within 45 days. However, no penalty provisions were included, and it is unlikely that action will be taken.

    Recommendation: The Secretary of Education should: (1) amend the Guaranteed Student Loan Program regulations to require that guaranty agencies submit Education's share of collections on reinsured loans within 30 days; and (2) explore a mechanism to assess penalties, similar to those included in the Prompt Payment Act, against agencies that submit their payments late.

    Agency Affected: Department of Education

  4. Status: Closed - Implemented

    Comments: GAO asked Education for an estimate of how much will be saved by implementing this recommendation. After receiving this estimate, GAO will prepare the accomplishment report.

    Recommendation: The Secretary of Education should amend the regulations for the Guaranteed Student Loan Program to require that guaranty agencies adhere to criteria comparable to the Joint Standards, which require that, if possible, defaulted debts paid in installments be paid off in 3 years or less.

    Agency Affected: Department of Education

  5. Status: Closed - Implemented

    Comments: Section 682.512(a)(ii) of title 34 CFR, when revised on December 18, 1992, retained capitalizing interest on defaulters claims an option, not a requirement. It is unlikely that further action will be taken on this recommendation.

    Recommendation: The Secretary of Education should amend the Guaranteed Student Loan Program regulations by requiring that guaranty agencies capitalize interest on defaulters' unpaid costs when they fail to follow their repayment agreements.

    Agency Affected: Department of Education

 

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