This is the accessible text file for GAO report number GAO-05-184 
entitled 'Federal Family Education Loan Program: More Oversight Is 
Needed for Schools That Are Lenders' which was released on January 24, 
2005.

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Report to Congressional Requesters:

United States Government Accountability Office:

GAO:

January 2005:

FEDERAL FAMILY EDUCATION LOAN PROGRAM:

More Oversight Is Needed for Schools That Are Lenders:

GAO-05-184:

GAO Highlights:

Highlights of GAO-05-184, a report to congressional requesters: 

Why GAO Did This Study:

In fiscal year 2004, lenders made about $65 billion in loans through 
the Federal Family Education Loan Program (FFELP) to assist students in 
paying for postsecondary education. The Higher Education Act (HEA), 
which authorizes FFELP, broadly defined eligible lenders—including 
schools. The Department of Education’s (Education) Office of Federal 
Student Aid (FSA) is responsible for ensuring that lenders comply with 
FFELP laws and regulations. Recently, schools have become increasingly 
interested in becoming lenders, and this has raised concerns about 
whether it is appropriate for schools to become lenders given that they 
both determine students’ eligibility for loans and in some cases set 
the price of attendance. In light of these concerns we determined (1) 
the extent to which schools have participated as FFELP lenders and 
their characteristics, (2) how schools have structured lending 
operations and benefits for borrowers and schools, and (3) statutory 
and regulatory safeguards designed to protect taxpayers’ and borrowers’ 
interests.

What GAO Found:

Between school years 1993–1994 and 2003–2004, lending by schools has 
increased significantly from 22 school lenders disbursing about $155 
million to 64 schools disbursing $1.5 billion in FFELP loans, as shown 
below. 
 
[See PDF for image]

[End of figure]

Several schools we interviewed reported that a primary reason to become 
a FFELP lender was to generate more revenue for the school. About 80 
percent of school lenders in school year 2003–2004 were private 
nonprofit schools, and almost all of them had graduate and professional 
programs in medicine, law, or business. 

Most school lenders have contracted with other FFELP organizations to 
administer their loan programs and subsequently have sold their loans 
to earn revenue, but school lenders differed in terms of how they 
financed the loans made and when they sold their loans. About a third 
of the school lenders we interviewed used their own money to finance 
the loans they made, while the others obtained lines of credit from a 
bank or secondary market lender, in some cases from the same 
organization that eventually purchased the loans disbursed by the 
school lender. Most schools we interviewed reported using or planning 
to use revenues earned from the sale of loans to lower student 
borrowing costs or provide need-based aid.

A number of statutory and regulatory provisions applicable to all 
lenders and schools, and some applicable only to school lenders, exist 
to safeguard the interests of taxpayers and borrowers. FSA, however, 
has little information about how school lenders’ have complied with 
FFELP regulations. Under the HEA, FFELP lenders that originate or hold 
more than $5 million in FFELP loans must submit annually audited 
financial statements and compliance audits. In October 2004, FSA 
discovered that 10 of 29 school lenders required to submit an audit for 
fiscal year 2002 had not done so. Moreover, FSA has not conducted 
program reviews of school lenders. However, during the course of our 
review, three regional offices asked 31 school lenders about their 
compliance with the regulation pertaining to the use of interest income 
and special allowance payments for need-based grants.

What GAO Recommends:

GAO recommends that FSA take steps to ensure that all school lenders 
are consistently complying with applicable statutory and regulatory 
requirements. Education agreed with our recommendation. 

www.gao.gov/cgi-bin/getrpt?GAO-05-184.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Cornelia Ashby at (202) 
512-8403 or ashbyc@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

FFELP Lending by Schools--Mostly Private Nonprofit Schools--Has 
Increased Significantly in the Last Five Years:

School Lenders Contract with Other FFELP Participants to Provide 
Student Loans and Later Sell Them to Receive Money, Which May Be Used 
to Lower Students' Borrowing Costs:

A Number of Statutory and Regulatory Provisions Exist to Safeguard the 
Interests of Taxpayers and Borrowers, but FSA Has Not Regularly 
Monitored School Lenders' Compliance with the Provisions:

Conclusions:

Recommendation for Executive Action:

Agency Comments:

Appendix I: Scope and Methodology:

Appendix II: Top 100 FFELP Originating Lenders in Fiscal Year 2003:

Appendix III: School Lender Loan Volume in School Year 2003-2004:

Appendix IV: Comments from the Department of Education:

Appendix V: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Staff Acknowledgments:

Tables:

Table 1: School Lenders Compared with Nonlending Schools in School Year 
2003-2004:

Table 2: Length of Time School Lenders Owned Loans before Selling to 
Another Lender to Receive a Premium:

Table 3: Comparison of Benefits for Stafford Borrowers among Selected 
School Lenders Interviewed:

Figures:

Figure 1: Amount of FFELP Loans Originated by School Lenders, by School 
Year:

Figure 2: Number of School Lenders Providing FFELP Loans, by School 
Year:

Figure 3. Percentage of School Lenders That Sold Loans to Either a 
Private For-Profit Company, State Agency, or Private Nonprofit Company:

Figure 4: Structure of Lending Operation for One School Lender That 
Contracts with One Organization to Finance, Originate, Service, and 
Purchase Loans:

Figure 5: Structure of Lending Operation for One School Lender That 
Contracted with Three Organizations to Finance, Originate, Service, and 
Purchase Loans:

Figure 6: Structure of Lending Operation for One School Lender That 
Used an Affiliated Foundation and State Agency to Finance, Originate, 
Service, and Purchase Loans:

Figure 7: Statutory and Regulatory Provisions Specific to School 
Lenders:

Abbreviations:

ASEDS: Application, School Eligibility, and Delivery Services:

FAFSA: Free Application for Federal Student Aid:

FDLP: William D. Ford Direct Student:

FFELP: Federal Family Education Loan Program:

FPS: Financial Partners Services:

FSA: Federal Student Aid:

GDP: Gross Domestic Product:

HEA: Higher Education Act:

IPEDS: Integrated Postsecondary Education Data System:

NSLDS: National Student Loan Data System:

OIG: Office of Inspector General:

PLUS: Parent Loans for Undergraduate Students:

United States Government Accountability Office:

Washington, DC 20548:

January 24, 2005:

The Honorable Dale E. Kildee: 
Ranking Member, 
Subcommittee on 21st Century Competitiveness: 
Committee on Education and the Workforce: 
House of Representatives:

The Honorable Chris Van Hollen: 
House of Representatives:

The Higher Education Act (HEA) of 1965, as amended, established the 
Federal Family Education Loan Program (FFELP), which provided about $65 
billion in student loans in fiscal year 2004 and is the largest source 
of federal financial aid for students and their families. A number of 
for-profit commercial, nonprofit, and public agencies are involved in 
the program, including originating lenders, secondary markets, 
postsecondary institutions (schools), and the Department of Education 
(Education). Commercial and nonprofit lenders--such as banks and state-
designated agencies--provide loan capital, and the federal government 
guarantees these loans against substantially all loss through borrower 
default. Originating lenders often sell their loans to secondary 
markets, thereby obtaining additional capital to make new loans and 
receiving premium revenues--payments from loan buyers that are 
calculated as a percentage of the face value of the loans 
sold.[Footnote 1] Lenders that hold loans receive interest income paid 
by borrowers and in some cases special allowance payments from the 
federal government for the loans they hold.[Footnote 2] Schools assess 
students' levels of financial need, certify borrower eligibility for 
loans, and disburse loan proceeds to students. Education's Office of 
Federal Student Aid (FSA) is responsible for overall program 
administration and ensuring compliance with laws and regulations.

When FFELP was created, in 1965, Congress broadly defined eligible 
lenders--including schools--to ensure that students would be able to 
locate a lender. Schools that are FFELP lenders primarily make loans to 
graduate students because of statutory limitations on lending to 
undergraduates.[Footnote 3] As we and various news media have reported, 
schools, including those that have participated in the federal 
government's other major student loan program--the William D. Ford 
Direct Student Loan Program (FDLP), created in 1993--are becoming 
increasingly interested in entering the student loan business as 
lenders.[Footnote 4] The possibility of an increasing number of schools 
becoming FFELP lenders and receiving revenues from the loans they make 
has raised concerns. Specifically, questions have been raised about 
whether it is appropriate for schools to become lenders, given that 
they both determine students' eligibility for loans and in some cases 
set the price of attendance. Additional concerns have been raised about 
the propriety of the schools' contractual relationships with other 
FFELP participants and whether these relationships create an incentive 
for schools to encourage student borrowing. In light of these issues 
and the pending reauthorization of the HEA, we are providing 
information and analysis on three issues:

1. To what extent have schools participated in FFELP as lenders and 
what are their characteristics?

2. How have schools structured their lending operations and what are 
the benefits for schools and borrowers?

3. What statutory and regulatory safeguards exist to protect the 
interests of taxpayers and borrowers?

To assess the extent to which schools have participated in FFELP as 
lenders, we analyzed data from Education's information systems on 
school lenders' loan volume in each school year from 1993-1994 to 2003-
2004, which we converted to real 2003 dollars; the amount of loans made 
by other FFELP lenders for students attending these schools; and 
characteristics of school lenders, such as whether they are private or 
public schools. On the basis of our review of the documentation for 
these data and our discussions with Education officials about the steps 
they take to ensure the reliability and validity of these data, we 
determined that the data from these systems were sufficiently reliable 
for the purpose of our study. To assess school lending operations and 
benefits to schools and borrowers, we conducted site visits and 
interviews with 13 school lenders and reviewed their contracts with 
other lenders and servicers. We also interviewed 12 other lenders, 
including secondary markets; 2 state-designated guaranty agencies, 
which perform a variety of administrative functions on behalf of the 
federal government in the FFELP; and related higher education and 
financial aid associations. We also interviewed officials of all 
schools that were lenders in school year 2003-2004 or planning to lend 
in 2004-2005, to gather information on what type of lender purchased 
their loans. To assess existing safeguards for borrowers and taxpayers, 
we reviewed the HEA, related regulations, guidance issued by Education, 
and court decisions. We also interviewed officials in Education's FSA, 
Office of General Counsel, Office of Inspector General, and Office of 
Postsecondary Education. See appendix I for a more detailed discussion 
of our scope and methodology. We conducted our work from December 2003 
to December 2004 in accordance with generally accepted government 
auditing standards.

Results in Brief:

In school year 2003-2004, 64 schools, chiefly private nonprofit 
institutions, made over $1.5 billion in FFELP loans, primarily to 
graduate and professional students. This represents a dramatic increase 
from school year 1993-1994, when only 22 schools participated in FFELP 
as lenders, making loans totaling about $155 million.[Footnote 5] 
Several schools we interviewed reported that a primary reason to become 
a FFELP lender was to generate more revenue for the school. The amount 
of loans originated by school lenders will likely continue to increase 
because 17 schools are in the process of establishing an FFELP lending 
program. Despite the large increase in loans made by school lenders, 
such loans remain a small proportion (3 percent) of overall FFELP loan 
volume. Loans made by a school lender can, however, constitute a 
significant portion of all FFELP loans borrowed by graduate students at 
such schools. For example, at almost a third of the schools in 2003-
2004, graduate students borrowed almost exclusively from the school 
lender rather than from other FFELP lenders. School lenders that 
originated loans in school year 2003-2004 had higher average tuition 
and larger enrollments and were more likely to be private nonprofit 
than schools that were not FFELP lenders. About 80 percent of school 
lenders in school year 2003-2004 were private nonprofit schools, and 
almost all of them had graduate and professional programs in law, 
business, medicine, or other health specialties.

By and large, school lenders contracted with other FFELP organizations 
to administer their loan programs and subsequently sold their loans to 
receive revenue, which some reported using to lower students' borrowing 
costs and provide need-based aid. The 13 school lenders we interviewed 
typically entered into contracts for loan origination, servicing, and 
sale by selecting one organization or multiple organizations to perform 
all three components. About a third of the school lenders we 
interviewed used their own money to finance the loans they made, while 
the others obtained a line of credit from a bank or secondary market, 
in some cases from the same organization that eventually purchased the 
loans originated by the school lender. Several school lenders 
emphasized that revenue received by selling loans was a significant 
factor in their decision to become a lender and outweighed the 
administrative burden and costs of becoming a lender. The premiums 
received by the school lenders we visited ranged from about 2 percent 
to 6 percent of the total face value of the loans. While some schools 
receive revenue only from selling loans, others hold on to the loans 
and also receive borrower interest payments and special allowance 
payments from Education as compensation for holding FFELP loans, which 
are required by the HEA to be used for need-based grant or reasonable 
direct administrative expenses. School lenders, however, have 
discretion in how they use revenues received from the premiums paid on 
loans sold. Officials from most of the schools we interviewed reported 
that they used or were planning to use their premium revenue for need-
based aid. In addition, officials from some school lenders also 
reported that by becoming FFELP lenders, they were able to offer 
students reduced loan origination fees and better repayment terms upon 
graduation.

A number of statutory and regulatory provisions applicable to all 
lenders and schools, and some applicable only to school lenders, exist 
to safeguard the interests of taxpayers and borrowers. FSA, however, 
has little information about how school lenders have complied with 
these requirements. Under the HEA, FFELP lenders that originate or hold 
more than $5 million in FFELP loans must submit annually audited 
financial statements and independent compliance audits to assist 
Education in detecting fraud, waste, abuse, and mismanagement 
potentially contributing to borrower defaults. Another provision in the 
HEA, commonly called the "anti-inducement provision" is designed to 
protect borrowers' interests by prohibiting any lender from offering 
gifts or other incentives to schools or individuals to secure FFELP 
applicants. To address problems among school lenders in the 1970s, 
Congress added several provisions that apply only to them. For example, 
under the HEA, schools with high rates of borrower default are 
prohibited from participating in FFELP as lenders. FSA, which is 
responsible for ensuring compliance with laws and regulations, has not 
provided timely and adequate oversight of school lenders. For example, 
in October 2004, FSA discovered that 10 of 29 school lenders required 
to submit a compliance audit for fiscal year 2002 had not done so. 
Furthermore, until 2004 FSA had not used its authority to conduct 
program reviews of school lenders, which supplement the information 
contained in audits and are intended to improve the integrity of the 
program. During the course of our review, FSA asked 31 school lenders 
about their compliance with the regulation pertaining to the use of 
interest income and special allowance payments.

In this report, we are recommending that FSA's Chief Operating Officer 
take the steps necessary to ensure that all school lenders are 
consistently complying with FFELP statutory and regulatory provisions 
intended to protect the interests of taxpayers and borrowers.

We provided Education with a copy of our draft report for review and 
comment. In written comments on our draft report, Education generally 
agreed with our reported findings and recommendation. Education's 
written comments appear in appendix IV.

Background:

In fiscal year 2004, students received over $84 billion in federal 
loans to finance postsecondary education. The major federal loans 
include:

* Stafford subsidized and unsubsidized loans, which are available to 
both undergraduate and graduate students--the federal government pays 
the interest on behalf of subsidized loan borrowers while students are 
in school[Footnote 6] and:

* Parent Loans for Undergraduate Students (PLUS), which are made to 
parents on behalf of undergraduate students.

Students can also receive consolidation loans, which allow them to 
combine multiple federal student loans into a single loan and to make 
one monthly payment.[Footnote 7] In fiscal year 2004, about $65 billion 
was disbursed through FFELP and about $19 billion was disbursed through 
FDLP.

Since FFELP (originally called the guaranteed student loan program) was 
created in the HEA of 1965, the student loan market has changed 
significantly. First, there has been a dramatic growth in student loan 
volume, with more students relying on private loans, which are not part 
of FFELP, than at any point in the past. Combined with the recent 
increases in tuition rates and thus in the revenues generated by school 
tuition, this makes the student loan market an important economic 
concern. Second, a few very large lenders provide the capital for most 
of the loan volume. Specifically, in fiscal year 2003, 10 lenders 
originated 54 percent of all FFELP loans. Third, the creation of FDLP 
in 1993 and the significant growth of private alternative nonfederal 
loans have increased competition across loan programs. The primary 
result of this competition has been an improvement in benefits for 
borrowers and of loan management in both FFELP and FDLP, with most 
loans today being originated, disbursed, and serviced electronically, 
according to financial aid officials.

Disbursing Loans through FFELP:

In order to receive a Stafford loan through FFELP, students must fill 
out and submit a Free Application for Federal Student Aid (FAFSA). 
Additionally, parents must have their credit checked to receive a PLUS 
loan. A school's financial aid office assesses a student's financial 
need and creates a package of financial aid of grants, loans--which may 
include Stafford loans--and work-study, a federal program in which 
students are provided on-or off-campus jobs. Lenders provide the 
capital for loans to both undergraduate and graduate students. Under 
the HEA, eligible FFELP lenders include banks, postsecondary schools, 
credit unions, and state nonprofit agencies. For a lender to originate 
a loan, the school must certify that a student is enrolled and 
therefore eligible to receive a loan, and the borrower must complete a 
promissory note.

After a loan is disbursed to a borrower, lenders may either service or 
sell their loans. Servicing includes sending bills to borrowers and 
collecting loan payments after the loan has entered repayment. Lenders 
may contract with an outside organization for loan servicing. Lenders 
also have the option of selling loans to a secondary market, thereby 
freeing up capital to make additional student loans. To encourage 
lenders' participation in FFELP, the federal government guarantees 
FFELP lenders a minimum rate of return, called the lender yield. When 
the interest rate paid by borrowers is below the lender yield, the 
federal government makes special allowance payments. Lenders receive 
these special allowance payments for loans that they hold.

State-designated guaranty agencies, which are nonprofit organizations 
designated by the state to administer FFELP loans, perform a variety of 
administrative functions under the program. With federal funding, 
guaranty agencies generally provide insurance to the lenders for 98 
percent of the unpaid principal of defaulted loans.[Footnote 8] The 
guaranty agencies also work with lenders and borrowers to prevent loan 
defaults and to collect on the loans after default.

Borrower Fees, Benefits, and Payment Plans under FFELP:

Students who borrow through FFELP may pay fees on their loans and have 
a variety of repayment options from which to choose. Specifically, 
students may pay a 3 percent loan origination fee and a 1 percent 
guarantor fee for each loan. Lenders may pay some or all of the 
origination fee to the federal government on behalf of the student, and 
guaranty agencies may waive the guarantor fee. While in repayment, 
borrowers in FFELP can choose from four repayment plans, including:

* standard repayment--borrowers pay a fixed monthly amount of at least 
$50 up to 10 years,

* graduated repayment--borrowers pay smaller monthly amounts initially 
and larger amounts in later years,

* extended repayment--borrowers pay a fixed monthly amount that can be 
repaid over a time period as long as 25 years under FFELP, and:

* income-sensitive repayment--borrowers pay a monthly amount that 
varies according to the borrower's income.

In addition, while students are in repayment, lenders or loan servicers 
may offer interest rate reductions or cancel all or part of the loan.

FSA's Oversight Responsibilities:

In response to concerns about fraud, waste, and abuse associated with 
the student aid programs and other management weaknesses, Congress 
established FSA as the government's first performance-based 
organization in October 1998. FSA's primary objectives are to improve 
the efficacy and efficiency of student aid delivery and to make it less 
expensive. FSA administers and provides oversight for all federal 
student aid programs, including FFELP. Currently, FSA oversees or 
directly manages approximately $320 billion in outstanding loans 
representing over 22 million borrowers.

FSA has 10 organizational units, 2 of which provide oversight and 
guidance for schools and lenders that participate in FFELP: 
Application, School Eligibility, and Delivery Services (ASEDS) and 
Financial Partners Services (FPS). The ASEDS office verifies the 
eligibility of schools to participate in FFELP and other federal aid 
programs. The FPS office provides oversight to all guaranty agencies, 
lenders, and servicers to ensure compliance with FFELP requirements.

FFELP Lending by Schools--Mostly Private Nonprofit Schools--Has 
Increased Significantly in the Last Five Years:

FFELP lending by schools--chiefly private nonprofit schools providing 
Stafford loans to their graduate and professional students--has 
increased significantly between school years 1993-1994 and 2003-2004 
rising from $155 million to $1.5 billion.[Footnote 9] The amount of 
loans originated by school lenders is likely to increase because 17 
schools are in the process of establishing their lending programs. 
Despite the increases in school lending, it is still a small proportion 
of total FFELP loan volume. More than three-quarters of school lenders 
in school year 2003-2004 were private nonprofit schools, and all but 
one of them had graduate and professional programs in law, business, 
medicine, or other health specialties. Moreover, prior to becoming 
school lenders, several school lenders provided loans through FDLP. 
Some of these school lenders continue to participate in both FFELP and 
FDLP.

Between School Years 1993-1994 and 2003-2004, the Amount of Stafford 
and PLUS Loans Originated by School Lenders Increased by Over a Billion 
Dollars:

The amount of loans originated by school lenders has increased by over 
a billion dollars since school year 1993-1994, with the most 
significant increases occurring in the past 5 years. Between school 
year 1999-2000 and 2003-2004, the amount of loans originated by school 
lenders has almost tripled, from $535 million to over $1.5 
billion.[Footnote 10]As shown in figure 1, school lender loan volume 
has increased in each school year since 1993-1994.

Figure 1: Amount of FFELP Loans Originated by School Lenders, by School 
Year:

[See PDF for image]

[End of figure]

The vast majority of loans originated by school lenders are Stafford 
subsidized and unsubsidized loans to graduate students--over 99 percent 
of FFELP loans originated by school lenders in school year 2003-2004. 
Despite limitations on lending to undergraduates, Education officials 
reported that school lenders may originate PLUS loans so long as they 
do so to no more than 50 percent of their undergraduates. School 
lenders reported differing interpretations of the law regarding their 
authority to originate PLUS loans. Some reported that they interpreted 
the statute to allow school lenders to originate PLUS loans, while 
others--such as one large school lender and one large secondary market-
-believed that they could not. Because of this confusion, school 
lenders that may wish to originate PLUS loans and could legally do so 
have not done so. Moreover, school lenders currently originating PLUS 
loans may not be aware of the limitations in originating such loans. 
Education has responded to inquiries from school lenders that have 
asked for clarification on the issue but has not issued guidance 
available to all school lenders. More recently, a bill proposed by some 
members of Congress includes a provision that specifies school lenders 
may not originate PLUS loans, unless the school has already issued a 
loan to the student.[Footnote 11]

Since school year 1996-1997, the increase in loans originated by school 
lenders has been due primarily to more schools participating as lenders 
rather than a stable number of schools originating more loans. Several 
schools we interviewed reported that a primary reason to become a FFELP 
lender was to generate more revenue for the school. As shown in figure 
2, the number of school lenders increased dramatically from 19 in 
school year 1999-2000 to 64 in school year 2003-2004. (See app. II for 
the list of all school lenders in school year 2003-2004.) School 
lending likely will continue to grow in the coming years because 
another 17 schools are in the process of establishing their loan 
programs and preparing to originate FFELP loans in school year 2004-
2005.

Figure 2: Number of School Lenders Providing FFELP Loans, by School 
Year:

[See PDF for image]

[End of figure]

Some school lenders are among the largest loan originators in FFELP. 
For example, in fiscal year 2003, 14 school lenders were among the top 
100 FFELP loan originators. (See app. III for the top 100 FFELP 
originating lenders.) Despite the large increase in loans made by 
school lenders, the proportion of total FFELP loan volume from school 
lenders has remained small, rising from 2 percent in fiscal year 2000 
to 3 percent in fiscal year 2003. Loans made by a school lender can, 
however, constitute a significant portion of all FFELP loans to 
graduate students at such schools. At several school lenders, graduate 
students borrowed almost exclusively from the school. At other school 
lenders, the proportion of graduate students that borrowed from the 
school was low--less than 10 percent.

School lenders have also made loans to not only students who attend 
their school but also students who do not attend their school. 
Specifically, four school lenders originated loans to students that did 
not attend their school in school year 2003-2004. Officials at an 
osteopathic medicine school that serves as a school lender reported 
that they lend to students at other osteopathic medicine schools as a 
way to meet the school's mission to promote osteopathic medicine 
nationally.

Most School Lenders Are Private Nonprofit Schools That Offer Graduate 
or Professional Programs, And a Few Once Provided Loans Through The 
FDLP:

More than three-quarters of school lenders are private nonprofit 
schools representing a range of schools that offer graduate and 
professional programs in law, business, medicine, or other health 
specialties. Of the 64 school lenders in school year 2003-2004, 53 were 
private nonprofit schools, 1 was a private for-profit school, and 10 
were public schools. Private nonprofit school lenders ranged from a 
university with a large student body (over 10,000 students) and 
graduate degree programs in law, business, medicine, and other academic 
disciplines to a small specialized school (just over 300 students) 
providing only a graduate degree in chiropractic medicine. Compared 
with schools that were not lenders in school year 2003-2004, school 
lenders were more likely to be private nonprofits; have higher tuition 
costs; larger student enrollments; and offer a law, business, or 
medical degree. (See table 1.)

Table 1: School Lenders Compared with Nonlending Schools in School Year 
2003-2004:

Number of schools in 2003-2004; 
School lenders: 64; 
Nonlending schools[A]: 5,414.

Percent private; 
School lenders: 84; 
Nonlending schools[A]: 65.

Percent public; 
School lenders: 16; 
Nonlending schools[A]: 35.

Average graduate in-state tuition; 
School lenders: $ 13,534; 
Nonlending schools[A]: $ 7,899.

Average enrollment; 
School lenders: 7,669; 
Nonlending schools[A]: 2,070.

Percent offering a law, business, medical, or other health degree; 
School lenders: 98; 
Nonlending schools[A]: 68.

Percent offering a law degree; 
School lenders: 47; 
Nonlending schools[A]: 11.

Percent offering a business degree; 
School lenders: 64; 
Nonlending schools[A]: 54.

Percent offering a medical degree; 
School lenders: 39; 
Nonlending schools[A]: 7.

Percent offering another health degree; 
School lenders: 89; 
Nonlending schools[A]: 45. 

Source: GAO analysis of National Student Loan Data System and 
Integrated Postsecondary Education Data System.

[A] Nonlending schools are schools eligible to participate in the 
federal financial aid programs but do not serve as FFELP lenders to 
their students.

[End of table]

Ten school lenders had once provided all student loans through FDLP. In 
school year 2003-2004, 7 of those school lenders only offered loans 
through FFELP. Another 3 school lenders have continued providing loans 
through both FFELP and FDLP--the schools lend to their graduate 
students, and undergraduates borrow through FDLP.

School Lenders Contract with Other FFELP Participants to Provide 
Student Loans and Later Sell Them to Receive Money, Which May Be Used 
to Lower Students' Borrowing Costs:

Generally school lenders contracted with other FFELP organizations to 
administer their loan programs and subsequently sold their loans to 
receive revenue. School lenders typically entered into contracts with 
other organizations that participate in FFELP to perform key components 
of the FFELP program: financing, originating (i.e., ensure that 
borrowers complete promissory notes), servicing, and purchasing loans. 
Differences existed in how school lenders financed and when they chose 
to sell their loans. School lenders emphasized that the potential 
revenue received by selling loans, which ranged from 2 to 6 percent of 
the total value of the loans sold by these schools, was a significant 
factor in their decision to become a lender and outweighed the costs of 
the program. In addition to receiving revenue from selling loans, 
school lenders may also receive borrower interest payments and special 
allowance payments from Education as compensation for holding FFELP 
loans. Several school lenders reported using or planning to use premium 
revenue to provide borrower benefits such as reduced loan origination 
fees, better repayment terms upon graduation, and need-based aid.

Typically School Lenders Contracted with Other FFELP Organizations to 
Administer Their Loan Program, but Differences Existed in How They 
Financed Loans, When They Sold Loans, and the Costs Incurred in Selling 
Loans:

In order to provide FFELP loans, school lenders we interviewed 
generally entered into contracts with other organizations that 
participate in FFELP to perform key components of the FFELP program: 
financing, originating, servicing, and purchasing loans. To select the 
organizations that a school lender would use to finance, originate, 
service, and purchase its FFELP loans, some school lenders asked for 
organizations to submit contract proposals. For example, one school 
lender we interviewed specifically asked organizations to submit 
proposals that included:

1. a line of credit to finance its loans with a below-market interest 
rate;

2. a fixed premium for loans sold rather than one that varied;

3. better financial benefits to borrowers, such as a 1.5 percent 
origination fee reduction; and:

4. specifications for electronic loan processing.

These school lenders then would review the proposals and select the one 
that best met the school lenders' needs. While assessing submitted 
proposals, officials from two school lenders told us that they worked 
with a private company that assists schools in structuring loan 
programs and negotiating the prices paid for loans. For one public 
school lender, the process to review proposals was subject to the same 
requirements that state agencies must follow when selecting 
contractors, including having the proposals reviewed by a board that 
included the governor of the state:

School lenders that originated loans in school year 2003-2004, or are 
in the process of establishing their FFELP lending programs, contracted 
with one of three types of organizations--private for-profit company, 
state agency, or private nonprofit company--to purchase their loans. As 
shown in figure 3, most school lenders sold their loans to private for-
profit companies.

Figure 3: Percentage of School Lenders That Sold Loans to Either a 
Private For-Profit Company, State Agency, or Private Nonprofit Company:

[See PDF for image]

Note: The figure shows the purchasers for all school lenders that 
originated loans in school year 2003-2004 or school lenders that are 
planning to provide loans for school year 2004-2005. The percentages 
add to more than 100 because of rounding.

[End of figure]

While All School Lenders We Interviewed Contracted for the Sale of 
Loans, They Varied in the Extent to Which They Contracted for the 
Financing, Originating, and Servicing of Loans:

The 13 school lenders we interviewed typically entered into contracts 
for loan origination, servicing, and sale by selecting one organization 
or multiple organizations to perform all three components. About a 
third of the school lenders we interviewed used their own money to 
finance the loans they made, while the others obtained a line of 
credit, in some cases from the same organization that eventually 
purchased the loans originated by the school lender. Some school 
lenders used the same organization to finance, originate, service, and 
purchase their loans. Officials with one school lender reported that 
contracting with one organization simplified the loan process and was 
operationally efficient. Figure 4 illustrates how one school lender we 
interviewed structured its program by contracting with one organization 
to finance, originate, service, and purchase its loans.

Figure 4: Structure of Lending Operation for One School Lender That 
Contracts with One Organization to Finance, Originate, Service, and 
Purchase Loans:

[See PDF for image]

[End of figure]

In contrast, five school lenders we interviewed contracted with two or 
more organizations to finance, originate, service, and purchase loans. 
Figure 5 depicts how one school lender has structured its lending 
program by contracting with multiple organizations. In this example, 
the school received financing from a bank and loan servicing from a 
private nonprofit company and eventually sold the loans to a state 
secondary market.

Figure 5: Structure of Lending Operation for One School Lender That 
Contracted with Three Organizations to Finance, Originate, Service, and 
Purchase Loans:

[See PDF for image]

[End of figure]

Further, one school lender we interviewed had a unique approach in how 
it structured its lending program. The actual lender was a foundation 
affiliated with the school because state law prohibits public schools 
from incurring debt in that state. According to a school official, the 
foundation finances the loans, provides them to borrowers, collects 
interest payments from borrowers and special allowance payments from 
Education, and is responsible for having the loans serviced until they 
are later sold to the secondary market. After the foundation covers its 
administrative expenses, the official stated it gives the school any 
remaining money. As shown in figure 6, the foundation contracted with a 
secondary market, in this example a state agency, to originate, 
service, guarantee, and purchase the loans.

Figure 6: Structure of Lending Operation for One School Lender That 
Used an Affiliated Foundation and State Agency to Finance, Originate, 
Service, and Purchase Loans:

[See PDF for image]

[End of figure]

By and large, school lenders contracted with others to operate their 
lending program, but some school lenders reported that it was 
beneficial to assume financing, origination, or servicing 
responsibilities themselves rather than contract with others. For 
example, four school lenders used endowment or other institutional 
funds to finance their loans, and one school lender's affiliated 
foundation issued a taxable bond to raise the funds needed to finance 
the loans. One school lender that used its own funds also performed its 
own loan origination. Moreover, this school lender performed its own 
servicing of the loans--monitoring student enrollment, billing 
borrowers, providing periodic reports to Education, and collecting 
payments for students no longer enrolled--before it sold the loans.

School Lenders Differed in Terms of When They Sold Loans and the Costs 
Incurred:

School lenders we interviewed differed in terms of when they sold their 
loans, with most selling them 60 to 90 days after full disbursement, as 
shown in table 2.[Footnote 12]

Table 2: Length of Time School Lenders Owned Loans before Selling to 
Another Lender to Receive a Premium:

Number of school lenders: 1; 
Number of days school lender owns the loans before selling them: 7.

Number of school lenders: 9; 
Number of days school lender owns the loans before selling them: 
60-90[A].

Number of school lenders: 1; 
Number of days school lender owns the loans before selling them: 
Up to 120.

Number of school lenders: 2; 
Number of days school lender owns the loans before selling them: Until 
student graduates or leaves school[B].

Source: GAO analysis.

[A] One school lender receives a portion of the premium when it sells a 
legal interest in the loans the same day they are originated. Legal 
interest entitles the secondary market to all principal payments, 
accrued interest, government subsidies, and special allowance payments. 
The school lender transfers legal title within 60 days following full 
disbursement.

[B] Two school lenders sold PLUS loans 30 and 60 days after full 
disbursement but retain Stafford loans until time of graduation.

[End of table]

The decision to sell a loan can be motivated by a variety of factors. 
Typically, officials from school lenders that sold the loans before 90 
days after they were fully disbursed reported doing so in part to 
minimize risk associated with potential default on loans and associated 
servicing costs. Moreover, some school lenders reported that they 
preferred to make and sell loans within the same fiscal year so that 
they could repay lines of credit to avoid having to record outstanding 
debt on the school's annual financial statements. For one school lender 
it was important not to record additional debt because of concerns 
about the impact of such debt on the school's bond rating. The school 
lender that sold the loans a week after first disbursement received the 
premium much sooner than those schools that sold the loans after full 
disbursement. Two school lenders that sold loans after the student had 
graduated or left the school were private schools with sufficient 
resources to finance the loans and were not as concerned about 
financial liability or receiving revenue quickly.

Several of the school lenders we interviewed reported that operating as 
a lender was only marginally more labor intensive and costly than the 
traditional processes for schools that are not FFELP lenders, and that 
the premium received when loans are sold makes being a lender 
worthwhile. Generally, school lenders incur initial start-up and 
ongoing costs when serving as a FFELP lender. Start-up costs can 
include staff time to research and sign contracts with other FFELP 
participants and training staff on new software to process loans. 
Ongoing costs include payment of a 0.5 percent fee to the federal 
government for each loan and staff to manage the loan process and 
originate and service loans. The extent of these costs borne by a 
school lender depended on how school lenders negotiated their 
contracts, with some negotiating contracts in which they did not have 
to pay for costs normally paid by FFELP lenders. For example, school 
lenders we interviewed that obtained a line of credit to finance their 
FFELP loans typically were charged market interest rates on the money 
borrowed. However, according to one contract, the secondary market that 
provided the line of credit for the school lender to finance its loans 
did not charge the school lender interest. In exchange, this school 
lender sold a legal interest in the loans on the day they are first 
disbursed, entitling this secondary market to all principal payments, 
accrued interest, government subsidies, and special allowance payments. 
Additionally, several of the school lenders did not pay for loan 
servicing, while most school lenders interviewed paid about $2 a month 
per loan for servicing. Moreover, one school lender also told us that 
it receives a special rate on private loans offered to students to 
supplement FFELP loans from the purchaser because of the volume of 
graduate loans it sells.

Many School Lenders Reported Using or Planning to Use the Money from 
Selling Loans to Lower Borrowing Costs or Provide Need-Based Aid, but 
They Are Not Required to Do So:

Many school lenders interviewed reported using the premium received on 
the sale of the loans to lower borrowing costs and provide need-based 
aid to students, although current law does not specify how premiums 
should be used. The premiums that school lenders receive are based on 
several factors, such as the default rate of the students attending the 
school, the average amount borrowed by students, and the number of 
loans per borrower. Some school lenders received a fixed premium for 
their loan portfolio, while other schools were paid a variable premium 
that corresponded to the average amount borrowed. For example, one 
school lender's premium increased by 0.25 percentage points for nearly 
all increases of $1,000 in the average amount borrowed by students. The 
premiums received by school lenders we interviewed ranged from 1.85 
percent to 6 percent of the total value of the loans sold, with an 
average premium of 4.4 percent.[Footnote 13]

Unlike special allowance payments and interest income that under HEA 
must be used for need-based grants, school lenders may choose how they 
use premiums received when selling loans. Premiums are the primary 
source of revenue for many school lenders since most choose to quickly 
sell loans, thereby giving up the right to receive special allowance 
payments and interest income. Officials from several school lenders 
emphasized that as their financial budgets have been constrained, the 
revenue received from being a lender is a primary motivation for 
becoming a school lender. For example, one large public school lender 
estimated that it will receive about $7.5 million over a 3-year period. 
A smaller private school lender estimated it will receive less than $1 
million over the next 3 years. Most of the school lenders interviewed 
reported that they used or plan to use premium money for student 
financial aid. However, they differed in how they allocated the money. 
For example, two school lenders reported using premium revenues to pay 
part of the origination fee for borrowers and generate revenue for 
need-based aid, while another school lender reported using premium 
revenue for only need-based aid. School lenders either used money to 
lower borrowing costs and/or provide need-based grants to its students. 
For some school lenders, the financial benefits offered to students who 
borrow through them are better than those offered prior to the school 
becoming a lender.

Although most of the school lenders reported using the premium revenues 
to provide financial benefits for students, under current law they 
could use the money to meet other institutional needs, such as student 
recruitment or facility improvement. One school lender told us that it 
does not plan to use premium revenue for need-based aid but instead 
will use it for initiatives that would improve students' educational 
environment, such as enhancing technological equipment. Legislation 
proposed in the House of Representatives in May 2004 would require 
school lenders to use the premium for need-based aid.[Footnote 14] 
Generally, school officials told us that the requirement seems 
reasonable because most of the school lenders already use the revenue 
for that purpose. According to officials from two school lenders, they 
plan to use the premium for need-based aid but are still determining 
specifically how the money will be allocated. One school lender noted 
that the premium is applied to the school's general operating budget 
and that it is used in part for need-based aid.

The school lenders we interviewed differed in the loan origination and 
guarantor fees charged to borrowers as well as repayment terms offered, 
and certain school lenders offered more financial benefits to borrowers 
than others. Four of the 13 school lenders we interviewed waived 
origination fees for their students. Additionally, several school 
lenders used guaranty agencies that did not charge or reduced the 
guarantor fee. Moreover, some school lenders sold their loans to 
secondary markets that offered better repayment terms than others, such 
as interest-rate reductions and principal rebates for timely payments. 
Table 3 shows the range of financial benefits offered to borrowers 
among selected school lenders.

Table 3: Comparison of Benefits for Stafford Borrowers among Selected 
School Lenders Interviewed:

School lender: School lender A; 
Origination fee: 0%; 
Guarantor fee: 0%; 
Repayment incentives: 0% interest rate charged if first 36 consecutive 
payments made on time; 0.25 percentage point interest rate reduction 
for repaying electronically.

School lender: School lender B; 
Origination fee: 3%; 
Guarantor fee: 0%; 
Repayment incentives: 1.25 percentage point interest rate reduction at 
first payment; 0.25 percentage point interest rate reduction for 
repaying electronically.

School lender: School lender C; 
Origination fee: 0%; 
Guarantor fee: 0%; 
Repayment incentives: 2 percentage point interest rate reduction after 
48 on-time payments; 0.25 percentage point interest rate reduction for 
repaying electronically.

School lender: School lender D; 
Origination fee: 1.5%; 
Guarantor fee: .5%; 
Repayment incentives: 
For loans disbursed 1/1/93-6/30/02: 2 percentage point reduction on 
interest rate for 48 consecutive on-time payments; 
For loans disbursed 7/1/02-6/30/04: 3.3% of the original loan amount as 
either a credit or a check to the borrower; 0.25 percentage point 
interest rate reduction for repaying electronically.

School lender: School lender E; 
Origination fee: 3%; 
Guarantor fee: 1%; 
Repayment incentives: 2 percentage point interest rate reduction after 
first 30 on-time payments; 0.25 percentage point interest rate 
reduction for repaying electronically. 

Source: GAO analysis.

[End of table]

Officials from two school lenders stated that they contracted to sell 
their loans to the agencies in their states because of the benefit 
programs offered to borrowers. For example, one school lender 
contracted with a state agency for the sale of its loans because the 
state agency agreed to pay the origination fees for borrowers, reduce 
borrowers' interest rate to 0 percent if they made the first 36 
payments on time, and reduce interest rates 0.25 percent for making 
payments electronically. Officials from two state agencies that 
purchase loans from school lenders said they were able to fund borrower 
benefits to residents of their state or students attending schools in 
the state in part with earnings from loans financed with tax-exempt 
bonds issued by their states prior to October 1, 1993. The federal 
government guarantees holders of loans financed with such bonds a 
minimum 9.5 percent yield, providing these agencies a source of 
relatively higher revenues in light of low current market interest 
rates.[Footnote 15]

A Number of Statutory and Regulatory Provisions Exist to Safeguard the 
Interests of Taxpayers and Borrowers, but FSA Has Not Regularly 
Monitored School Lenders' Compliance with the Provisions:

A number of statutory and regulatory provisions applicable to all 
lenders and schools, and some applicable only to school lenders, exist 
to safeguard the interests of taxpayers and borrowers. FSA however, has 
little information on school lenders' compliance because it has not 
provided timely and adequate oversight of school lenders. Under the 
HEA, lenders and schools must submit annual audits to demonstrate 
compliance with laws and financial stability. Another provision in the 
HEA, commonly called the anti-inducement provision, is designed to 
protect borrowers' interests by prohibiting any lender from offering 
gifts or other incentives to schools or individuals to secure 
applicants that may result in increased student borrowing. Not only 
must school lenders comply with audits and provisions of the HEA 
applicable to all lenders, but they must also comply with provisions 
specific to them. FSA has little information about how school lenders 
are complying with laws and regulations, and until this year, FSA had 
not used its authority to conduct program reviews of school lenders, 
which supplement the information contained in audits.

Several Statutory and Regulatory Provisions Applicable to All Lenders 
and Schools, and Some Applicable Only to School Lenders, Exist to 
Protect the Interests of Taxpayers and Borrowers:

To protect the interests of taxpayers and borrowers, a number of 
statutory and regulatory provisions exist regarding, among other 
things, application processes and audit requirements for schools and 
lenders; these also provide FSA and guaranty agencies the authority to 
review lenders and schools. For example, in determining whether a 
lender will be granted a lender identification number and permitted to 
provide FFELP loans, according to HEA regulations, Education considers 
several factors. These include:

* whether the applicant is capable of implementing adequate procedures 
for making, servicing, and collecting loans;

* the financial resources of the applicant; and:

* in the case of a school that is seeking approval as a lender, its 
accreditation status.[Footnote 16]

Additionally, under the HEA, all FFELP lenders that originate or hold 
more than $5 million in FFELP loans must have an independent annual 
compliance audit, which examines the lender's compliance with the HEA 
and relevant regulations as well as its financial management of FFELP 
activities. Lenders must then submit this audit to FSA. About 17 
percent of the school lenders in school year 2003-2004 did not 
originate more than $5 million and therefore were not required to have 
a compliance audit. Schools that participate in federal financial aid 
programs must submit audited financial statements and compliance audits 
that attest to their compliance with laws and regulations governing 
federal financial aid programs, including FFELP.

FSA and guaranty agencies have the authority to conduct program reviews 
of lenders or schools, which are intended to assess, promote, and 
improve compliance with laws and regulations and to help ensure program 
integrity. Program reviews can supplement the information provided 
through the required annual compliance audits. According to FSA, 
program reviews of lenders tend to focus on lenders' billing of 
Education for interest and special allowance payments. FSA reviews 
schools that participate in federal financial aid programs and will 
target schools that have a cohort default rate in excess of 25 percent 
or have significant fluctuation in Stafford loan volume from year to 
year. Guaranty agencies also conduct program reviews of lenders and 
schools. Every 2 years guaranty agencies must review any lender that 
meets one of the following criteria:

* lender's loan volume represented 2 percent or more of the guarantor's 
volume of FFELP loans guaranteed during the preceding year,

* lender was one of the guarantor's top 10 lenders as measured by its 
loan volume for the preceding year, or:

* lender's loan volume during the most recent fiscal year equaled or 
exceeded $10 million.

Guaranty agencies also have the authority to review any lender that has 
more than $100,000 in defaulted loans and a cohort default rate above 
20 percent. Guaranty agencies review schools to assess, among other 
things, how schools certify loan applications and maintain loan 
records.

Congress Adopted the Anti-Inducement Provision to Protect Borrowers' 
Interests:

Another provision in the HEA, anti-inducement provision is designed to 
protect borrowers' interests by prohibiting any lender from offering 
gifts or other incentives to schools or individuals to secure 
applicants that may result in increased student borrowing. Education 
once attempted to enforce the anti-inducement provision with respect to 
school lenders. Specifically, Education proposed to limit the 
participation of a secondary market based on its financing and 
purchasing contracts with a school lender. Education contended that 
these contracts provided the school with an improper financial 
inducement to solicit more loan applications from students than it 
would have otherwise. The secondary market challenged Education's 
actions in federal district court, which found that the school lender's 
financing, servicing, and loan purchase contracts were not uncommon 
among traditional FFELP lenders. Moreover, the premium paid and other 
economic benefits received by the school lender were unremarkable and 
did not rise to the level of an improper inducement. The court found 
also that there was no evidence that borrowers were counseled 
improperly or encouraged to borrow more than they needed. Finally, 
while the court pointed out that under the anti-inducement provision, 
lenders are prohibited from offering "inducements" to educational 
institutions, including school lenders, it found that Congress' intent 
was unclear. Nevertheless, the court stated that Congress did not 
intend that all incentives be treated as inducements.[Footnote 17]

Since the court's decision in this case, Education has not clarified 
its definition of inducements, and according to an Education official, 
the court's decision makes it much harder for Education to show that 
school lending arrangements violate the inducement provision. The lack 
of clarity surrounding the issue of inducements is not solely a problem 
for school lenders. In an August 2003 memo, Education's Office of 
Inspector General (OIG) noted that it had concerns about bargaining 
practices between schools and lenders for private loans that students 
may obtain to supplement FFELP loans and preferred lender status that 
may violate the anti-inducement provision. OIG recommended that 
Education reevaluate the anti-inducement provision and determine if 
statutory revisions should be proposed during HEA reauthorization, but 
Education has not taken any action in response to OIG's memo. A work 
group representing FFELP lenders, guaranty agencies, and financial aid 
officers has developed guidelines for what constitutes an inducement, 
but these guidelines do not specifically address school lenders' 
contracts.

School Lenders Are Subject to a Number of Regulations:

Not only must school lenders comply with audits and provisions 
applicable to all lenders, but Congress has added provisions that apply 
only to school lenders--in part to address past problems among school 
lenders. In the early to mid-1970s, certain school lenders--
particularly vocational schools--did little to ensure that students 
paid back loans, such as informing and counseling borrowers about 
repayment obligations and options, which contributed to high default 
rates. Congress was also concerned that schools were determining the 
cost of attendance and also awarding students financial aid while 
investing few resources in preventing loan default. While there was 
pressure from some groups for Congress to eliminate the school lender 
provision in the 1976 reauthorization of the HEA, there were still 
concerns about students' access to loans and school lenders' roles in 
helping meet students' need. Rather than eliminating school lenders, 
Congress enacted and revised several provisions designed to reduce the 
number of school lenders with abusive practices that contributed to 
high default rates. In 1992, Congress added another requirement 
specific to school lenders that they use interest income and special 
allowance payments for need-based grants. Since 1992, Congress has not 
added any statutory provisions regarding school lenders. Figure 7 shows 
the primary statutory provisions applicable to school lenders today 
that were, for the most part, enacted in the mid-1970s.

Figure 7: Statutory and Regulatory Provisions Specific to School 
Lenders:

[See PDF for image] --graphic text: 

School lenders: 

* shall employ full-time at least one person whose responsibilities are 
limited to the administration of financial aid programs for students 
attending the school;

* may not be a correspondence school;

* may not make or originate loans that would be outstanding to or on 
behalf of more than 50 percent of the undergraduates in attendance at 
that school on at least a half-time basis unless the secretary waives 
this rule because of extreme hardship to the school;

* shall inform any undergraduate student who has not previously 
obtained a loan that was made or originated by the school and who seeks 
to obtain such a loan that he or she must first make a good faith 
effort to obtain a loan from a commercial lender;

* may not make or originate a loan for an academic period to an 
undergraduate student unless the student provides the school with 
evidence of denial of a loan by a commercial lender for the same 
academic period;

* may not have a default rate exceeding 15 percent; and

* except for reasonable administrative expenses directly related to 
FFELP, school must use interest and special allowance payments for 
need-based grant programs for its students.

[End of figure]

FSA Has Little Information about How School Lenders Are Complying with 
Laws and Regulations because It Has Not Provided Timely and Adequate 
Oversight of School Lenders:

FSA has minimal information about how school lenders are complying with 
laws and regulations, and until this year, FSA had not used its 
authority to conduct program reviews of school lenders to assess 
compliance with regulations specific to them. For example, FSA does not 
check a school's accreditation status when the school applies to be a 
lender, as specified in HEA regulations. FSA was unaware that in fiscal 
year 2004, one school lender who received a lender identification 
number, which is needed to originate loans, had been placed on 
probation by its accrediting agency. According to the accrediting 
agency, the school lender was on probation because of concerns about 
the school's financial stability. In general, the lack of financial 
stability at a school can have a serious impact on the funding of 
instructional programs, the quality of learning resources available to 
students, and the number of faculty and staff employed.

FSA is also responsible for ensuring that lenders submit required 
annual compliance audits that attest to the lender's financial 
stability and compliance with laws and regulations. Compliance audits 
are but one source of information about a lender's compliance with laws 
and regulations and are a mechanism to assess an organization's 
internal controls. Without these audits, Education's ability to monitor 
and detect significant fraud or other illegal acts is compromised. 
Compliance audits are generally due 6 to 9 months after the end of the 
lender's fiscal year.[Footnote 18] If a lender does not submit the 
compliance audit, then Education may suspend the lender's participation 
in the FFELP program. For fiscal year 2002, FSA did not verify, on a 
timely basis, that all school lenders required to submit compliance 
audits, which were due between June and August 2003, had done so. As a 
result, FSA did not realize, until September 2004, that 10 of 29 school 
lenders had failed to submit required compliance audits for fiscal year 
2002. Moreover, while FSA had previously notified 6 of these 10 school 
lenders that FSA had not received the required compliance audits, it 
had not yet notified the remaining 4 schools of their failure to submit 
such audits. FSA subsequently reminded the 4 school lenders to submit 
their required compliance audits and suspended the remaining 6 school 
lenders from receiving interest and special allowance payments for 
their failure to submit compliance audits. After FSA contacted or 
suspended the school lenders in September 2004, 3 school lenders 
subsequently submitted their fiscal year 2002 compliance audits. FSA 
officials told us that school lenders required to submit compliance 
audits for fiscal year 2003 had done so.

According to FSA officials, the Financial Partners office is 
responsible for monitoring school lenders and may conduct program 
reviews to determine compliance with regulations. FSA has not conducted 
such reviews of school lenders. However, during the course of our 
review, three regional offices asked 31 school lenders about their 
compliance with the regulation pertaining to the use of interest income 
and special allowance payments for need-based grants. The school 
lenders told FSA that they were in compliance with this regulation and 
provided information on their servicing costs and interest rates paid 
for lines of credit. FSA is planning to conduct a more thorough review 
of 10 school lenders to gain a further understanding of how school 
lenders are structuring their lending programs. FSA officials reported 
that school lenders will be selected based on several risk factors, 
such as a large increase in loan volume or an increase in default 
rates. As part of these reviews, FSA will follow the review guide used 
for traditional lenders, and it will also review contracts to ensure 
there are no violations of the anti-inducement provision and that fee 
arrangements are appropriate. However, FSA officials told us that they 
had not determined the criteria for what would constitute an improper 
inducement.

Conclusions:

When FFELP was created, in 1965, Congress was concerned about lenders' 
capacity and willingness to make loans to students who had little 
credit history and when the economic returns on such loans were 
uncertain. Postsecondary schools were included in the definition of 
eligible FFELP lenders as one way to help ensure that all students 
would have access to student loans. In recent years, an increasing 
number of schools are becoming FFELP lenders as a way to generate more 
revenue for the school, rather than ensure students' access to loans. 
As the number of schools becoming lenders continues to increase, it is 
critical for FSA to ensure school lenders' compliance with laws and 
regulations designed to ensure program integrity, thereby protecting 
taxpayer dollars and student interests. For one such requirement--
annual submission of compliance audits--FSA has not ensured that school 
lenders have submitted them in a timely manner. Without this 
information, FSA is unaware of, among other things, whether school 
lenders disburse loans only to eligible students in accordance with the 
law and are financially stable. A school's financial stability is 
important because if a school is unable to meet its financial 
obligations, it may place into jeopardy students' completion of their 
educational programs and, in turn, their ability to repay their student 
loans. Future FSA plans to review selected school lenders should 
provide useful information about how school lenders operate, but 
without consistent oversight, FSA may be unaware of practices that 
could place taxpayer dollars at risk.

Recommendation for Executive Action:

To ensure program integrity, we recommend that FSA's Chief Operating 
Officer take the steps necessary to ensure that school lenders are 
consistently complying with statutory and regulatory provisions. As a 
first step, FSA should ensure that school lenders consistently submit 
audited financial statements and compliance audits in a timely manner.

Agency Comments:

We provided Education with a copy of our draft report for review and 
comment. In written comments on our draft report, Education generally 
agreed with our reported findings and recommendation. Education agreed 
that increased oversight is necessary given "the very substantial 
growth in the number of school lenders and the loan volume associated 
with these lenders." Education stated that it believed the efforts it 
undertook to verify that lenders submitted required annual compliance 
audits for fiscal year 2002 were instrumental in ensuring compliance 
and further noted that all school lenders that were required to submit 
such audits for fiscal year 2003 had done so. As a result, Education 
noted that it believed our "criticism that FSA has little information 
about how school lenders are complying with laws and regulations is 
misplaced." As we describe in our report, compliance audits are but one 
source of information concerning the extent to which school lenders 
comply with laws and regulations. FSA staff could also learn about 
school lender compliance issues by collecting information themselves, 
such as--as described in our report--determining a school's 
accreditation status when the school applies to be a lender and by 
conducting program reviews. Finally, Education noted in its comments 
that FSA is planning to conduct a more thorough review of 10 school 
lenders. Education's written comments appear in appendix IV.

We are sending copies of this report to the Secretary of Education, 
appropriate congressional committees, and other interested parties. In 
addition, the report will be available at no charge on GAO's Web site 
at http://www.gao.gov.

If you or your staff have any questions about this report, please call 
me on (202) 512-8403 or Jeff Appel on (202) 512-9915. Other contacts 
and staff acknowledgments are listed in appendix IV.

Signed by: 

Cornelia M. Ashby: 
Director, Education, Workforce, and Income Security Issues:

[End of section]

Appendix I: Scope and Methodology:

To address our research objectives we analyzed data from the Department 
of Education (Education); interviewed officials with school lenders, 
Education, lenders, and others; and reviewed relevant laws and 
regulations. To assess the extent to which schools have participated in 
the Federal Family Education Loan Program (FFELP) as lenders, we 
obtained a list from Education of schools approved to be FFELP lenders 
and then, using data in the National Student Loan Data System (NSLDS), 
we analyzed the dollar amount of FFELP loans made by each school lender 
in each school year from 1993-1994 to 2003-2004.[Footnote 19] We 
converted loan volume to real 2003 dollars using the Department of 
Commerce's Gross Domestic Product (GDP) Deflator and the Congressional 
Budget Office's GDP Deflator projections. We also analyzed the amount 
of loans made by other FFELP lenders for students attending these 
schools. We used the Integrated Postsecondary Education Data System 
(IPEDS) to determine the characteristics of schools that were lenders, 
including whether they were private or public schools, whether they 
provided graduate or professional programs, average tuition, and 
average enrollment.[Footnote 20] To identify school lenders that once 
provided or still participate in the FDLP, we analyzed data on the 
amount of FDLP loans provided at a school between school years 1994-
1995 and 2003-2004.[Footnote 21] On the basis of our review of the 
documentation for these data and our discussions with Education 
officials about the steps they take to ensure the reliability and 
validity of these data, we determined that the data from these systems 
were sufficiently reliable for the purpose of our study.

To assess school lending operations and benefits to schools and 
borrowers, we conducted site visits and interviews with 13 school 
lenders. We selected school lenders that have been FFELP lenders for 
several years and some that have just begun lending. Moreover, the 
school lenders selected included public and private institutions, 
schools that had once participated in the FDLP, and some of the largest 
school lenders in terms of loan volume. We also interviewed 12 other 
lenders, including secondary markets; two state-designated guaranty 
agencies; and related higher education and financial aid associations. 
We reviewed contracts between schools and secondary markets and 
servicers. To determine the types of lenders purchasing loans from all 
64 school lenders in school year 2003-2004 and the 17 in the process of 
establishing their loan programs, we interviewed officials with the 
school lender or with the secondary market.

To assess existing safeguards for borrowers and taxpayers, we reviewed 
the Higher Education Act (HEA), related regulations, guidance issued by 
Education, and court decisions. We also interviewed officials in 
Education's Office of Federal Student Aid, Office of General Counsel, 
Office of Inspector General, and Office of Postsecondary Education.

[End of section]

Appendix II: Top 100 FFELP Originating Lenders in Fiscal Year 2003:

(Volume in millions of dollars).

 
 
Lender: Bank One Ed Fin Group; 
Loan Volume: $3,318. 

Lender: Sallie Mae; 
Loan Volume: $3,161. 

Lender: Citibank, Student Loan Corp; 
Loan Volume: $2,995. 

Lender: JP Morgan Chase Bank; 
Loan Volume: $2,466. 

Lender: Bank of America; 
Loan Volume: $2,158. 

Lender: Wells Fargo Education Financial Services; 
Loan Volume: $2,042. 

Lender: Wachovia Bank/Classnotes (Educaid); 
Loan Volume: $1,781. 

Lender: National City Bank; 
Loan Volume: $1,378. 

Lender: U.S. Bank; 
Loan Volume: $1,031. 

Lender: Pittsburgh National Corp; 
Loan Volume: $671. 

Lender: Suntrust Bank; 
Loan Volume: $661. 

Lender: EdAmerica; 
Loan Volume: $652. 

Lender: Northstar Guarantee; 
Loan Volume: $635. 

Lender: Penna Higher Education Assistance Agency; 
Loan Volume: $633. 

Lender: Fleet Bank; 
Loan Volume: $593. 

Lender: Academic Management Services; 
Loan Volume: $480. 

Lender: College Foundation Inc.; 
Loan Volume: $477. 

Lender: Citizens Bank, Education Finance; 
Loan Volume: $441. 

Lender: College Loan Corp; 
Loan Volume: $427. 

Lender: Union Bank & Trust Company; 
Loan Volume: $417. 

Lender: Nova Southeastern University*; 
Loan Volume: $376. 

Lender: S C Student Loan Corp; 
Loan Volume: $370. 

Lender: Key Corp; 
Loan Volume: $366. 

Lender: Education Lending Group; 
Loan Volume: $318. 

Lender: Teachers Insurance & Annuity Assn of America; 
Loan Volume: $307. 

Lender: Brazos Group; 
Loan Volume: $289. 

Lender: Illinois Student Assistance Comm/IDAAP; 
Loan Volume: $280. 

Lender: Commerce Bank; 
Loan Volume: $257. 

Lender: Amsouth Bancorp Ed Fin Group; 
Loan Volume: $253. 

Lender: Washington Mutual Savings Bank; 
Loan Volume: $235. 

Lender: AELMAC/Southwest Student Services Corp; 
Loan Volume: $229. 

Lender: Kentucky Higher Ed Student Loan Corp; 
Loan Volume: $224. 

Lender: Vermont Ed Loan Finance Program; 
Loan Volume: $223. 

Lender: HSBC Bank USA; 
Loan Volume: $196. 

Lender: Comerica Bank; 
Loan Volume: $192. 

Lender: Rhode Island Student Loan Authority; 
Loan Volume: $187. 

Lender: New Hampshire Higher Ed Loan Corp; 
Loan Volume: $176. 

Lender: Regions Bank; 
Loan Volume: $172. 

Lender: Provincial Bank Academic Funding Group; 
Loan Volume: $164. 

Lender: Twin City Federal Savings Bank (TCF); 
Loan Volume: $162. 

Lender: All Student Loan Corp; 
Loan Volume: $154. 

Lender: First National Bank; 
Loan Volume: $153. 

Lender: Stillwater National Bank; 
Loan Volume: $148. 

Lender: Manufacturers & Traders Bank; 
Loan Volume: $141. 

Lender: Fifth Third Bank; 
Loan Volume: $130. 

Lender: Connecticut Student Loan Foundation; 
Loan Volume: $124. 

Lender: Bancorpsouth Bank; 
Loan Volume: $117. 

Lender: Zions First National Bank; 
Loan Volume: $112. 

Lender: EFS Finance Co; 
Loan Volume: $106. 

Lender: First Midwest Bank; 
Loan Volume: $104. 

Lender: National Ed Loan Network (Nelnet); 
Loan Volume: $98. 

Lender: University of Pennsylvania*; 
Loan Volume: $96. 

Lender: Louisiana Public Facilities Authority; 
Loan Volume: $96. 

Lender: Boone County National Bank; 
Loan Volume: $93. 

Lender: Union Planters National Bank; 
Loan Volume: $90. 

Lender: Hibernia National Bank; 
Loan Volume: $88. 

Lender: University of Southern California FCU; 
Loan Volume: $87. 

Lender: Bank of Oklahoma; 
Loan Volume: $79. 

Lender: Bank of North Dakota; 
Loan Volume: $79. 

Lender: Maine Educational Loan Marketing; 
Loan Volume: $76. 

Lender: Plains National Bank; 
Loan Volume: $75. 

Lender: New Mexico Ed Assistance Foundation; 
Loan Volume: $75. 

Lender: Frost National Bank; 
Loan Volume: $71. 

Lender: Kansas State Bank; 
Loan Volume: $69. 

Lender: Colorado Student Obligation Bond Auth; 
Loan Volume: $62. 

Lender: Kirksville College of Osteopathic Medicine*; 
Loan Volume: $62. 

Lender: University Federal Credit Union; 
Loan Volume: $61. 

Lender: Independence Federal Savings Bank; 
Loan Volume: $59. 

Lender: Arkansas Student Loan Authority; 
Loan Volume: $59. 

Lender: Midwestern University*; 
Loan Volume: $59. 

Lender: Georgia Student Finance Authority; 
Loan Volume: $58. 

Lender: Carnegie Insurance Company; 
Loan Volume: $57. 

Lender: Michigan State University*; 
Loan Volume: $56. 

Lender: University of Chicago*; 
Loan Volume: $56. 

Lender: Trustmark National Bank; 
Loan Volume: $54. 

Lender: Simmons First National Bank; 
Loan Volume: $54. 

Lender: University of Missouri*; 
Loan Volume: $54. 

Lender: First Tennessee Bank; 
Loan Volume: $53. 

Lender: Palmer College of Chiropractic Medicine*; 
Loan Volume: $52. 

Lender: Marshall & Ilsley Bank; 
Loan Volume: $51. 

Lender: Michigan Higher Ed Stud Loan Auth; 
Loan Volume: $51. 

Lender: University of Miami*; 
Loan Volume: $50. 

Lender: University of Denver*; 
Loan Volume: $50. 

Lender: BancFirst; 
Loan Volume: $50. 

Lender: Indiana Secondary Market; 
Loan Volume: $50. 

Lender: Southtrust Bank; 
Loan Volume: $49. 

Lender: Western University of Health Sciences*; 
Loan Volume: $47. 

Lender: First Federal Savings Bank; 
Loan Volume: $45. 

Lender: First National Bank; 
Loan Volume: $44. 

Lender: First National Bank; 
Loan Volume: $43. 

Lender: Compass Bank; 
Loan Volume: $43. 

Lender: Navy Federal Credit Union; 
Loan Volume: $42. 

Lender: Security Service Federal Credit Union; 
Loan Volume: $41. 

Lender: CA Higher Ed Loan Authority (Chela); 
Loan Volume: $41. 

Lender: Purdue Employees FCU; 
Loan Volume: $39. 

Lender: Dr Scholl College of Podiatric Medicine*; 
Loan Volume: $39. 

Lender: Whitney National Bank; 
Loan Volume: $39. 

Lender: Wyoming Student Loan Corp; 
Loan Volume: $37. 

Lender: Widener College*; 
Loan Volume: $36. 

Lender: Regis University*; 
Loan Volume: $33. 

[End of table]

Source: Financial Partners, Department of Education, "Top 100 
Originators of FFELP."

Notes: Fourteen school lenders are on the top 100 list; they are 
indicated with an asterisk. The top 100 FFELP lenders represented 91.7 
percent of the overall FFELP volume.

[End of section]

Appendix III: School Lender Loan Volume in School Year 2003-2004:

School lender: NOVA Southeastern University; 
Loan Volume: $302,613,491. 

School lender: University of Pennsylvania; 
Loan Volume: $86,090,323. 

School lender: Michigan State University; 
Loan Volume: $65,186,038. 

School lender: A.T. Still University of Health Sciences; 
Loan Volume: $60,757,687. 

School lender: Midwestern University; 
Loan Volume: $57,428,863. 

School lender: University of Chicago; 
Loan Volume: $52,951,854. 

School lender: University of Missouri - Kansas City; 
Loan Volume: $48,119,655. 

School lender: Palmer College of Chiropractic; 
Loan Volume: $46,215,953. 

School lender: University of Denver; 
Loan Volume: $41,243,023. 

School lender: University of Miami; 
Loan Volume: $39,965,978. 

School lender: Northwestern University; 
Loan Volume: $38,761,198. 

School lender: Western University of Health Sciences; 
Loan Volume: $37,645,505. 

School lender: SCPM at Finch University; 
Loan Volume: $36,885,485. 

School lender: University of Phoenix; 
Loan Volume: $35,772,707. 

School lender: Widener College; 
Loan Volume: $34,046,555. 

School lender: Regis University; 
Loan Volume: $29,950,388. 

School lender: Case Western Reserve University; 
Loan Volume: $28,952,721. 

School lender: Tufts University; 
Loan Volume: $27,190,067. 

School lender: Simmons College; 
Loan Volume: $20,744,189. 

School lender: Southern Methodist University; 
Loan Volume: $19,632,868. 

School lender: Wayne State University; 
Loan Volume: $19,511,499. 

School lender: George Washington University; 
Loan Volume: $19,035,444. 

School lender: Santa Clara University; 
Loan Volume: $18,526,486. 

School lender: Washington University; 
Loan Volume: $18,219,650. 

School lender: Duquesne University; 
Loan Volume: $17,959,741. 

School lender: University of Maryland, Baltimore; 
Loan Volume: $16,871,252. 

School lender: Yale University; 
Loan Volume: $16,788,402. 

School lender: Duke University; 
Loan Volume: $16,697,753. 

School lender: Illinois College of Optometry; 
Loan Volume: $16,508,709. 

School lender: Detroit College of Law (Michigan State U.); 
Loan Volume: $16,421,996. 

School lender: Cleveland Chiropractic College; 
Loan Volume: $15,591,030. 

School lender: Parker College of Chiropractic Medicine; 
Loan Volume: $15,400,240. 

School lender: University of Missouri, St. Louis; 
Loan Volume: $15,056,767. 

School lender: Pennsylvania College of Optometry; 
Loan Volume: $14,033,796. 

School lender: Life Chiropractic College West; 
Loan Volume: $13,819,336. 

School lender: University of Dayton; 
Loan Volume: $12,864,455. 

School lender: University of Oklahoma; 
Loan Volume: $11,950,895. 

School lender: Claremont Graduate University; 
Loan Volume: $11,787,491. 

School lender: St. Mary’s University; 
Loan Volume: $10,189,486. 

School lender: Northwestern Health Services University; 
Loan Volume: $10,084,693. 

School lender: National University of Health Sciences; 
Loan Volume: $9,833,038. 

School lender: The University of Tulsa; 
Loan Volume: $9,519,514. 

School lender: The University of Health Sciences; 
Loan Volume: $9,480,644. 

School lender: Illinois Institute of Technology; 
Loan Volume: $9,365,766. 

School lender: Sherman College of Straight Chiropractic Medicine; 
Loan Volume: $7,352,179. 

School lender: Stanford University; 
Loan Volume: $6,768,517. 

School lender: Southwest College of Naturopathic Medicine; 
Loan Volume: $6,614,267. 

School lender: Naropa University; 
Loan Volume: $6,156,301. 

School lender: National College of Naturopathic Medicine; 
Loan Volume: $6,084,159. 

School lender: Western Illinois University; 
Loan Volume: $5,572,536. 

School lender: Pepperdine University; 
Loan Volume: $5,541,699. 

School lender: Creighton University; 
Loan Volume: $5,421,886. 

School lender: Oklahoma City University; 
Loan Volume: $5,102,086. 

School lender: Indiana Weslyan University; 
Loan Volume: $4,798,824. 

School lender: Eastern Michigan University; 
Loan Volume: $4,317,410. 

School lender: Drexel University; 
Loan Volume: $3,938,519. 

School lender: Philadelphia College of Osteopathic Medicine; 
Loan Volume: $3,275,418. 

School lender: University of San Francisco; 
Loan Volume: $3,107,009. 

School lender: University of Northern Colorado; 
Loan Volume: $2,335,397. 

School lender: University of La Verne; 
Loan Volume: $1,049,680. 

School lender: Texas Chiropractic College; 
Loan Volume: $360,336. 

School lender: Florida State University; 
Loan Volume: $220,448. 

School lender: Texas Christian University; 
Loan Volume: $186,235. 

School lender: Des Moines University; 
Loan Volume: $136,280. 

Source: GAO Analysis of Education Data.

Note: Total school lender loan volume in school year 2003-2004 was 
$1,534,011,817.

[End of table]

[End of section]

Appendix IV: Comments from the Department of Education:

UNITED STATES DEPARTMENT OF EDUCATION:

OFFICE OF POSTSECONDARY EDUCATION:

THE ASSISTANT SECRETARY:

JAN 10 2005:

Ms. Cornelia M. Ashby: 
Director, Education, Workforce, and Income Security Issues: 
United States Government Accountability Office: 
Washington, DC 20548:

Dear Ms. Ashby:

Thank you for the opportunity to respond to the U.S. Government 
Accountability Office's (GAO's) draft report entitled "Federal Family 
Education Loan Program: More Oversight Is Needed For Schools That Are 
Lenders" (GAO-05-184).

We appreciate GAO's review of this important and growing area in the 
Federal Family Education Loan Program and agree with the draft report's 
recommendations that increased oversight is necessary given the very 
recent, substantial growth in the number of school lenders and the loan 
volume associated with these school lenders.

The data presented in the draft report suggest that, in general, school 
lenders are those that the Congress intended - relatively large 
institutions of higher education that have significant graduate and 
first-professional programs. The fact that these programs generate 
institutional revenues is not problematic if these revenues are used 
appropriately. As you know, section 435(d)(2)(F) of the Higher 
Education Act provides that revenue derived from interest and special 
allowance payments must be used to support need-based student financial 
aid. We believe that there are a number of other appropriate uses of 
revenue received by an institution as a result of its status as an FFEL 
lender. For example, the institution may use such resources to support 
its educational programs, to increase educational access, or to reduce 
the rate of increase in tuition and fees charged students.

We appreciate you noting the importance of ensuring that lenders, 
including school lenders, submit required annual compliance audits that 
attest to the lenders' financial stability and compliance with 
applicable statutes and regulations. We believe that the steps we took 
to verify that such audits were submitted for fiscal year 2002 were 
instrumental in ensuring compliance. As you indicated, Federal Student 
Aid (FSA) can report that all school lenders that are required to 
submit such audits for fiscal year 2003 have done so. Therefore, your 
criticism that "FSA has little information about how school lenders are 
complying with laws and regulations" is misplaced.

We also appreciate you noting the importance of monitoring school 
lenders through program reviews. As you indicated, FSA has inquired of 
31 school lenders regarding compliance with the regulation pertaining 
to the use of interest income and special allowance payments for need-
based grants. As you additionally indicated, FSA plans to conduct a 
more thorough review of 10 school lenders. Again, we agree that 
increased oversight of school lenders is necessary given the very 
recent, substantial growth in the number of school lenders and the loan 
volume associated with these school lenders. FSA is taking steps to 
meet that important responsibility.

I appreciate your examination of this important issue.

Sincerely, 

Signed by: 

Sally Stroup: 

[End of section]

Appendix V: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Jeff Appel, Assistant Director: (202) 512-9915: 
Andrea Romich Sykes, Analyst-in-Charge: (202) 512-9660:

Staff Acknowledgments:

In addition to those named above, the following people made significant 
contributions to this report: Rebecca Christie, Jeffrey W. Weinstein, 
Richard Burkard, Margaret Armen, Mimi Nguyen, and Cynthia Decker.

FOOTNOTES

[1] Secondary markets are lenders that include Sallie Mae, banks, and 
nonprofit state agencies.

[2] Lenders are guaranteed a statutorily specified rate of return--
called lender yield--on the loans they hold. When the interest rate 
paid by borrowers is less than the lender yield, the government pays 
lenders the difference--a subsidy called special allowance payments.

[3] Under the HEA, a school lender may originate loans for 
undergraduates so long as it does not lend to more than 50 percent of 
its undergraduates and may only originate loans for students who have 
previously received a loan from the school or have been rejected by 
other lenders.

[4] GAO, Direct Student Loan Program: Management Actions Could Enhance 
Customer Service, GAO-04-107 (Washington D.C.: Nov. 20, 2003). Under 
FDLP, the federal government provides loans to students and their 
families, using federal capital, and owns the loans. Schools may serve 
as direct loan originators or the loans may be originated by 
contractors working for Education. 

[5] Loan volume in 1993-1994 was $184 million in 2003 dollars.

[6] Subsidized Stafford loans are made to students who are enrolled at 
least half-time and who have demonstrated financial need, while 
unsubsidized Stafford loans are made to any student enrolled at least 
half-time. Unsubsidized Stafford and PLUS loan borrowers must pay all 
loan interest costs.

[7] Borrowers may consolidate while in school if they are consolidating 
at least one direct loan but must wait until their grace period--the 
time period after a student graduates or leaves school but before any 
payments are due--or until they are in repayment if only consolidating 
FFELP loans.

[8] For loans disbursed on or after October 1, 1998, the government 
pays 95 percent of the default costs plus certain administrative costs, 
and the guaranty agency pays the remaining amount. The percentage of 
default costs paid by the federal government decreases if the guaranty 
agency's default claims are high compared with the amount of loans in 
repayment.

[9] Loan volume in 1993-1994 was $184 million in 2003 dollars.

[10] Loan volume in 1999-2000 was $573 million in 2003 dollars.

[11] College Access and Opportunity Act of 2004, H.R. 4283, 108th Cong. 
§ 428.

[12] Under the HEA, loans are disbursed in multiple payments. 

[13] This is based on premiums reported by 10 of the school lenders. 

[14] College Access and Opportunity Act of 2004, H.R. 4283, 108th Cong. 
§ 428.

[15] Under the Internal Revenue Code (IRC), earnings on loans financed 
by tax-exempt bonds are limited. Lenders can reduce their earnings on 
loans financed with tax-exempt bonds, and avoid exceeding IRC 
limitations, by providing benefits to borrowers. For additional 
information see GAO, Federal Family Education Loan Program: Statutory 
and Regulatory Changes Could Avert Billions in Unnecessary Federal 
Subsidy Payments, GAO-04-1070 (Washington D.C.: September 20, 2004).

[16] The purpose of accreditation is to provide public assurance of 
educational quality. There are two types of accreditation: 
institutional and specialized. Institutional accrediting examines the 
school as a whole and includes an assessment of the formal educational 
activities of the institution, governance and administration, financial 
stability, admissions and student personnel services, institutional 
resources, student academic achievement, institutional effectiveness, 
and relationships with constituencies inside and outside the 
institution. Specialized accreditation examines programs within a 
school, such as medicine or teacher education.

[17] Student Loan Marketing Assoc. v. Riley, 112 F. Supp. 2d 38 (D.D.C. 
2000).

[18] Lenders or servicers that are nonprofit or governmental 
organizations have the option of obtaining an audit in accordance with 
Office of Management and Budget Circular A-133, Audits of Institutions 
of Higher Education and Other Nonprofit Institutions. Such audits are 
due 9 months following the end of the lender's fiscal year. Audits 
submitted by other lenders are due 6 months following the end of the 
lender's fiscal year.

[19] The NSLDS is a national repository of information about federal 
loans and grants awarded to students.

[20] IPEDS is a collection of information obtained from surveys of all 
schools whose primary purpose is to provide postsecondary education and 
provides school-level data for a variety of characteristics.

[21] FDLP data is from Education's Committed Loan Volume Report, which 
includes data reported by schools and contractors.

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