GAO's Views on the Default Task Force's Recommendations for Reducing Default Costs in the Guaranteed Student Loan Program

T-HRD-88-7: Published: Feb 2, 1988. Publicly Released: Feb 2, 1988.

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GAO discussed the Default Task Force's recommendations concerning the increased costs of student loan defaults in the Guaranteed Student Loan (GSL) Program. GAO found that: (1) recent legislative and regulatory changes have subjected lenders and guaranty agencies to stronger loan origination and collection standards and increased oversight to help reduce defaults and increase collections; (2) since most of the defaulters were students who dropped out and were unable to pay, the recent changes would defer the repayments for up to 2 years to relieve any temporary financial burdens; (3) the typical defaulting student was independent, attended a vocational school, and had a below-average income and a small loan balance; (4) although the Task Force's recommendation to increase the maximum Pell Grant award for eligible students could substantially decrease default costs, default savings would not increase as quickly as the budgetary costs for the increase; (5) since lenders have little financial risk in the GSL program, a risk-sharing mechanism, where by lenders would receive less than full reimbursement when defaults occurred, would provide a stronger financial incentive to avoid defaults and improve collection efforts; and (6) charging an origination fee could help reduce loan program operating costs.

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