Guaranteed Student Loans:

Better Criteria Needed for Financing Guarantee Agencies

HRD-86-57: Published: Jul 2, 1986. Publicly Released: Jul 2, 1986.

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William J. Gainer
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GAO reported on the financing of guarantee agencies under the Department of Education's Guaranteed Student Loan Program, specifically whether reserves exceed the risks guarantee agencies are asked to assume, at the expense of the federal government and student borrowers.

GAO found that: (1) guarantee agencies decided for themselves the levels of reserve funds they needed, but they accumulated more reserves than necessary; (2) the agencies had $986 million in cash reserves at the end of fiscal year (FY) 1985; (3) Education is seeking legislative action to reduce certain sources of funds available to the guarantee agencies; (4) Congress passed a bill requiring Education to recall $75 million in federal advances from the guarantee agencies during FY 1988; and (5) agencies used some of their reserves for non-program purposes. GAO believes that the recall of advances should be conducted over 2 years, rather than as a single payback.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The Higher Education Amendments were signed into law on October 17, 1986. These amendments, in conjunction with April 1986 amendments to the Higher Education Act, require guarantee agencies to return $110 million in federal advances by 1989.

    Matter: Congress should amend the Higher Education Act of 1965 to require the Secretary of Education to: (1) establish, in consultation with the guarantee agencies, criteria for the appropriate levels of reserves guarantee agencies should retain, based on the financial risks they face; and (2) recall federal advances from the guarantee agencies beyond the amounts needed to maintain reserves at the established levels.

  2. Status: Closed - Implemented

    Comments: The 1987 Omnibus Budget Reconciliation Act signed into law on December 22, 1987, requires guaranty agencies to reduce excess reserves by $250 million using the guidelines developed by GAO.

    Matter: Congress should amend the Higher Education Act of 1965 to restrict the growth of future agency reserves beyond the established levels. In this regard, Congress should consider adjustments to one or more of the financing provisions for guarantee agencies. Options for consideration include: (1) reducing administrative cost allowance reimbursements, reinsurance, or the percentage of collections guarantee agencies may retain, if the preference is to reduce federal expenditures; (2) reducing insurance premiums charged by agencies if the preference is to reduce student costs; or (3) some combination of these.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: The regulations, 34 C.F.R. 682, were issued on November 10, 1986, and took effect in early 1987. An accomplishment report is to be prepared.

    Recommendation: The Secretary of Education should finalize the Department's proposed regulations to require that all funds received as a result of the guarantee agencies' loan insurance program be used only in support of the program.

    Agency Affected: Department of Education


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