Guaranteed Student Loans:

Lenders' Interest Billings Often Result in Overpayments

HRD-88-72: Published: Aug 31, 1988. Publicly Released: Aug 31, 1988.

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Linda G. Morra
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GAO reviewed lenders' billings under the Guaranteed Student Loan Program to determine whether the Department of Education was incurring excessive costs related to its payment of interest and special-allowance subsidies, focusing on the extent to which: (1) lenders erred in billing Education for interest and special-allowance payments; (2) lender billing errors resulted in federal overpayments; and (3) Education established adequate procedures to detect billing errors and prevent overpayments.

GAO found that, from its review of 16 lenders' accounts over one quarterly billing period: (1) all 16 lenders submitted erroneous billings to Education, resulting in a net overpayment of at least $1.8 million; (2) 18 percent of loan accounts were erroneous or lacked adequate documentation to support the billed amount; (3) errors typically resulted from lenders miscalculating loan principal balances and interest subsidies or continuing to bill Education after borrowers began repaying; and (4) three of the lenders voluntarily repaid Education for overbillings. GAO found that Education: (1) relied on lenders to maintain current and complete loan files, submit accurate billings, and make adjustments promptly; (2) required only summary information from lenders regarding bills, since supporting documentation was too voluminous for it to validate; (3) limited its verification of bills to checking mathematical accuracy and completeness; (4) conducted fewer than 500 on-site reviews of the 14,000 participating lenders in 1986; and (5) charged lenders interest on overbillings from the date it notified lenders of the error, but lacked authority to charge interest from the date of the actual overpayments.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: The reauthorization of the Higher Education Act, completed in July 1992, did not include enacting the GAO recommendation, and it appears that Congress will not do so in the forseeable future.

    Matter: Congress should amend the Higher Education Act to authorize the Secretary of Education to assess lenders' interest due to lender billing errors from the date of overpayment of interest and special allowance.

  2. Status: Closed - Implemented

    Comments: The Higher Education Amendments of 1992 strengthened section 487(c) of the Higher Education Act which, in part, addressed part of this recommendation. But it appears that Congress will not act of the major features of the recommendations in the forseeable future.

    Matter: Congress should amend the Higher Education Act to require lenders to: (1) specify to their independent auditors that the verification of loan accounts and interest and special-allowance billing should be included in periodic independent financial audits; and (2) provide that errors identified are promptly reported to Education and the guaranty agency.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Education distributed review guides to agencies for conducting audits, supplemented by 3-day training sessions.

    Recommendation: The Secretary of Education should revise the Guaranteed Student Loan Program regulations to require the Office of the Inspector General to assist program officials in developing audit standards for the guaranty agencies to use in reviewing lender billing systems and practices.

    Agency Affected: Department of Education

  2. Status: Closed - Not Implemented

    Comments: When section 682.305(c) of title 34 CFR was revised on December 18, 1992, it provided for independent audits of lenders and guaranty agencies, but did not specify testing to determine the statistical validity of lender billings. It is unlikely that further action will be taken on this recommendation.

    Recommendation: The Secretary of Education should revise the Guaranteed Student Loan Program regulations to stipulate that Education and guaranty agency audits of lenders include tests of the accuracy of lender loan accounts and billing statements to provide a statistically valid basis for recovering overpayments.

    Agency Affected: Department of Education


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