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G.A.O. Urges Department To Revamp Structure of the Student-Loan Program

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WASHINGTON--The Education Department should consider altering the structure of the Federal Family Education Loan Program to insure better internal and external management of the program and help reduce its burgeoning default rate, a General Accounting Office study suggests.

Reforms in the program could include reducing the number of lenders and guarantee agencies, the study says.

The report on the loan program is part of the G.A.O.'s "High Risk Series,'' 17 studies highlighting troubled management areas in government agencies. The student-loan program has long been under fire from Congressional, departmental, and outside critics, who point to the program's defaults, which reached a record $3.6 billion in 1991.

The escalating default rate is a result of "fundamental problems in the student-loan program's structure and management,'' the study contends.

"In part, this stems from the tension between the goals of providing steadily increasing loan funds, often through expanded or new loan programs, to enable students to meet rising higher education costs and the need to maintain accountability to the taxpayers,'' it continues. "Over the years, the federal government has tended to emphasize access to loans at the expense of accountability.''

Controlling the Risks

The study notes that lenders and guarantee agencies profit from making loans but carry little, if any, risk. Schools also bear little risk, and some fail to offer substantive education, the study says.

The department, meanwhile, carries most of the risk but has failed to enact mechanisms to control its losses, the study indicates.

The department has "failed to weed out schools that collect tuition payments for marginal instruction ... [made] loans to ineligible borrowers ... conducted little oversight of lenders and guarantee agencies [and] ... inadequately trained and organized program staff,'' the report maintains.

Among other recommendations, the study suggests that Congress pass legislation to increase the risk among lenders and guarantee agencies and strengthen incentives for those entities to provide effective loan servicing and default prevention.

The report also calls on the Education Department to:

  • Do a better job deciding which schools can participate in the program, perhaps by using graduation and job-placement data.
  • Require that audits of lenders and guarantee agencies include an affirmation that billings to the government are accurate and an opinion on the overall adequacy of the program's internal controls.
  • Hasten efforts to develop a long-term management plan for the program and implement a plan to improve data and information collection.
  • "Proceed cautiously with the implementation of the direct-lending demonstration program,'' under which the federal government makes loans directly to students.

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