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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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.

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Recommendations for Executive Action

Agency Affected Recommendation Status
Office of Federal Student Aid 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.
Closed – Implemented
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).

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