Federal Family Education Loan Program:

More Oversight Is Needed for Schools That Are Lenders

GAO-05-184: Published: Jan 24, 2005. Publicly Released: Jan 24, 2005.

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Cornelia M. Ashby
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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.

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. 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.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: The Department of Education issued guidance to school lenders on new requirements implemented under the Higher Education Reconciliation Act. In particular, all school lenders are now subject to the annual compliance audit requirement, must use proceeds from the sale of loans for need-based grants, and award any contract for financing, servicing, or administration of the loan program on a competitive basis. Education provided results of 9 program reviews of school lenders reported from January through October of 2005, and results of 12 reviews completed from April through November 2006. Of the 12 reviews completed in 2006, 4 had findings of non-compliance, and 8 had findings of compliance (although some included recommendations regarding changes in procedures).

    Recommendation: To ensure program integrity, FSA's Chief Operating Officer should 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 Affected: Department of Education: Office of Federal Student Aid


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