Guaranteed Student Loans: Legislative and Regulatory Changes Needed To Reduce Default Costs
HRD-87-76
Published: Sep 30, 1987. Publicly Released: Sep 30, 1987.
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Highlights
Pursuant to a congressional request, GAO examined needed legislative and regulatory changes for the Department of Education's Guaranteed Student Loan Program, focusing on: (1) guaranty agencies' loan collection practices and procedures; (2) ways to reduce default costs; (3) the amount of time defaulters have to repay loans; and (4) whether guaranty agencies are promptly remitting Education's share of collections.
Recommendations
Matter for Congressional Consideration
| Matter | Status | Comments |
|---|---|---|
| Congress should amend the Higher Education Act by requiring that a borrower's promissory note specify that, upon default, the loan interest rate will change to a variable rate with a ceiling of 12 percent, unless existing state law allows for a higher rate to be charged. |
Closed – Not Implemented
|
This recommendation was not adopted in the Higher Education Amendments of 1992, Public Law 102-325, and it is unlikely that the recommendation will be adopted in the forseeable future. |
| Congress should amend the Higher Education Act by providing the Department of Education with the authority to require that guaranty agencies use the National Student Loan Data System to verify borrower eligibility after the system is established. |
Closed – Implemented
|
The authority to require guaranty agencies to use the System was included in the Omnibus Budget Reconciliation Act of 1989. However, the department will not have the System implemented until 1993. As a result, GAO will delay preparing the accomplishment report until the System is on-line. |
| Congress should continue the income tax refund offset program for tax years 1987 and 1988 for defaulted student loans. |
Closed – Implemented
|
An accomplishment report was approved by OP on November 6, 1989 for $305 million. |
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of Education | The Secretary of Education should amend the regulations for the Guaranteed Student Loan Program to require that guaranty agencies adhere to criteria comparable to the Joint Standards, which require that, if possible, defaulted debts paid in installments be paid off in 3 years or less. |
Closed – Implemented
GAO asked Education for an estimate of how much will be saved by implementing this recommendation. After receiving this estimate, GAO will prepare the accomplishment report.
|
| Department of Education | The Secretary of Education should: (1) amend the Guaranteed Student Loan Program regulations to require that guaranty agencies submit Education's share of collections on reinsured loans within 30 days; and (2) explore a mechanism to assess penalties, similar to those included in the Prompt Payment Act, against agencies that submit their payments late. |
Closed – Implemented
Section 404(g)(2) of title 34 CFR was revised on December 18, 1992, to require guaranty agencies to pay the government its share of default collections within 45 days. However, no penalty provisions were included, and it is unlikely that action will be taken.
|
| Department of Education | The Secretary of Education should amend the Guaranteed Student Loan Program regulations by requiring that guaranty agencies share all borrower payments to offset collection costs on reinsured loans with Education. |
Closed – Implemented
Section 404(g)(3) of title 34 CFR was revised on December 18, 1992, to require that guaranty agencies share all borrower payments--including collection costs--with the government.
|
| Department of Education | The Secretary of Education should amend the Guaranteed Student Loan Program regulations by requiring that guaranty agencies post borrower payments in the same manner that federal agencies are required to in accordance with the Federal Claims Collections Standards. |
Closed – Not Implemented
Regulations issued on December 18, 1992, did not contain the provision regarding posting loan payments. It is unlikely that such action will be taken on this recommendation.
|
| Department of Education | The Secretary of Education should amend the Guaranteed Student Loan Program regulations by requiring that guaranty agencies capitalize interest on defaulters' unpaid costs when they fail to follow their repayment agreements. |
Closed – Implemented
Section 682.512(a)(ii) of title 34 CFR, when revised on December 18, 1992, retained capitalizing interest on defaulters claims an option, not a requirement. It is unlikely that further action will be taken on this recommendation.
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Topics
Collection proceduresDebt collectionDelinquent loansGovernment guaranteed loansIncome taxesInformation systemsLoan defaultsLoan repaymentsOffsetting collectionsStudent loans