Student Loans: Direct Loan Default Rates (Letter Report, 10/17/2000,
GAO/GAO-01-68).

This document focuses on student loans, specifically direct loan default
rates. Two major federal student loan programs, the Federal Direct Loan
Program (FDLP) and the Federal Family Education Loan Program (FFELP),
together provided student borrowers with about 9 million loans totaling
about $42.9 billion in fiscal year 1999. The most recent student loan
default rate statistics for schools showed that overall, the direct and
guaranteed student loan programs had similar default rates at 6.6
percent for FDLP and 6.7 percent for FFELP. The two programs had similar
default rates when the comparisons focused on the type of school. FDLP
has two types of loans, consolidated and nonconsolidated. Generally,
borrowers with consolidated loans who used the standard payment plan had
a lower default rate than borrowers with nonconsolidated loans. However,
when income contingent repayment plans were used, borrowers with
consolidated loans had a higher default rate than those with
nonconsolidated loans. The Department of Education has various
procedures to ensure that loans are properly serviced and collected,
including independent monitoring and external assessments of monitoring
results.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GAO-01-68
     TITLE:  Student Loans: Direct Loan Default Rates
      DATE:  10/17/2000
   SUBJECT:  Student loans
	     Statistical data
	     Government guaranteed loans
	     Colleges and universities
	     Loan defaults
	     Loan repayments
	     Comparative analysis
	     Debt collection
IDENTIFIER:  William D. Ford Federal Direct Loan Program
	     Federal Family Education Loan Program
	     Dept. of Education Parent Loans for Undergraduate Students
	     Program

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Testimony.                                               **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************

GAO-01-68

A Report to Congressional Requesters

October 2000 STUDENT LOANS Direct Loan Default Rates

GAO-01-68

Letter 3 Appendixes Appendix I: Scope and Methodology 22

Appendix II: Cohort Default Rates for FDLP and FFELP Borrowers by Type of
School, Cohort Years 1997 and 1998 25

Appendix III: Data on FDLP Nonconsolidated and Consolidation Loans in
Repayment 26

Appendix IV: Data on FDLP Consolidation Loans in Repayment, by Borrower Risk
28

Appendix V: Comments From the Department of Education 30 Tables Table 1:
Number of Borrowers in Repayment and Default Rates

as of March 31, 2000, for FDLP Nonconsolidated and Consolidation Loans, by
Type of Repayment Plan 6 Table 2: FDLP Nonconsolidated and Consolidation
Loans in

Repayment as of March 31, 2000 12 Table 3: Distribution of FDLP Borrowers in
Repayment as of

March 31, 2000, by Repayment Plan 13 Table 4: FDLP Consolidation Loan
Default Rates and Number

of Borrowers in Repayment as of March 31, 2000, by Type of Repayment Plan 16
Table 5: Repayment Plans for Borrowers With All Kinds of FDLP

Loans, as of March 31, 2000 26 Table 6: Repayment Plans for Borrowers With
Nonconsolidated

Loans, as of March 31, 2000 26 Table 7: Repayment Plans for Borrowers With
Consolidation

Loans, as of March 31, 2000 27 Table 8: Repayment Plans for Borrowers With
Consolidation

Loans, as of March 31, 2000 28 Table 9: Repayment Plans for Lower- Risk
Borrowers With

Consolidation Loans, as of March 31, 2000 28 Table 10: Repayment Plans for
Higher- Risk Borrowers With

Consolidation Loans, as of March 31, 2000 29

Figures Figure 1: Student Loan Default Rates for FDLP and FFELP by School
Type, Cohort Year 1998 10

Figure 2: Default Rates for FDLP Nonconsolidated and Consolidation Loans in
Repayment as of March 31, 2000, by Type of Repayment Plan 14

Abbreviations

ACS Affiliated Computer Services, Inc. AFSA Academic Financial Services
Association FDLP Federal Direct Loan Program FFELP Federal Family Education
Loan Program PLUS Parent Loans for Undergraduate Students

Lett er

October 17, 2000 The Honorable William F. Goodling Chairman, Committee on
Education and the Workforce House of Representatives

The Honorable Peter Hoekstra Chairman, Subcommittee on Oversight and
Investigations Committee on Education and the Workforce House of
Representatives

The Honorable Howard P. McKeon Chairman, Subcommittee on Postsecondary

Education, Training, and Life- long Learning Committee on Education and the
Workforce House of Representatives

Two major federal student loan programs, the Federal Direct Loan Program
(FDLP) and the Federal Family Education Loan Program (FFELP), together
provided student borrowers with about 9 million loans totaling $42.9 billion
in fiscal year 1999. The federal government's role differs significantly
between the two programs. Under FDLP, often referred to as the direct loan
program, students or their parents borrow money directly from the federal
government through the schools the students attend. The first FDLP loans
were made in the fourth quarter of fiscal year 1994. Under FFELP, also known
as the guaranteed student loan program, money is borrowed from private
lenders such as banks, and the federal government guarantees repayment if
the borrowers default. FFELP is the older of the two programs, having
started in fiscal year 1966. The Department of Education administers both
programs.

As of March 31, 2000, borrowers were repaying on more than $34 billion in
direct loans. Yet little information has been available on the extent to
which borrowers in the direct loan program are defaulting on their loans.
Consequently, you requested that we provide information on recent FDLP
default rates. We focused our work on answering the following questions:

What are the default rates for FDLP loans, both overall and by type of
school, and how do these rates compare with FFELP rates?

Do default rates for FDLP loans differ according to the various repayment
options available? What measures has Education taken to ensure that FDLP
student loans

are being properly serviced and collected? In comparing the default rates of
the FDLP and FFELP programs, we relied upon Education's annually calculated
school cohort default rates, which are the rates at which schools' FDLP and
FFELP borrowers have defaulted on their loans within 2 years of beginning
repayment. 1 In comparing default rates within the FDLP program, we used a
different database that gave a more complete and current view of all FDLP
defaults by two main categories of loans- nonconsolidated and consolidation-
and, within these categories, by four repayment options. The default rates
within FDLP were calculated using a different time frame- namely, defaults
that occurred at any time during repayment- and are not comparable to the
school cohort default rates that Education computes annually. 2
Nonconsolidated loans are the basic loans with which students or their
parents can help finance postsecondary education, while consolidation loans
allow borrowers to combine their various federal education loans into a
single loan. The four repayment plans- standard, extended, graduated, and
income contingent- differ in the length of the repayment period and the
flexibility of the repayment schedule. We were unable to compare FDLP and
FFELP cohort default rates by type of repayment options student borrowers
used because Education's National Student Loan Data System did not have
information on repayment plans used by FFELP borrowers. Appendix I further
describes our scope and methodology. We conducted our review between March
and September 2000 in accordance with generally accepted government auditing
standards.

1 Education gathers data required for calculating school default rates by
cohort. Covering a 2- year period, a cohort constitutes a group of student
borrowers who began repaying their loans during a given fiscal year and also
identifies those in the group who defaulted before the end of the next
fiscal year. Although it covers a 2- year period, a cohort is identified by
its first fiscal year. For example, borrowers in the 1998 cohort began
repaying during the 1998 fiscal year, and the default rate for the 1998
cohort reflects defaults through fiscal year 1999.

2 For FDLP nonconsolidated and consolidation loans in repayment as of March
31, 2000, we computed simple borrower- based default percentages that
reflected the total number of borrowers who had entered repayment status and
had subsequently defaulted (had not made a payment for more than 270 days)
at any time during repayment.

Results in Brief The most recent student loan default rate statistics for
schools- the 1998 cohort default rates- showed that overall, the direct and
guaranteed

student loan programs had similar default rates- 6. 6 percent for FDLP and
6.7 percent for FFELP. The two programs also had similar default rates when
the comparisons focused on the type of school. At 4- year schools, for
example, the default rate was 5. 3 percent for FDLP borrowers and 4. 9
percent for FFELP borrowers. At 2- year and proprietary (for profit)
schools, both programs had default rates about twice this high. The higher
default rates for borrowers attending 2- year and proprietary schools are
indicative of the higher risk of default that has historically been
associated with these borrowers. Considering that FDLP is a relatively new
program, more time will be needed to tell whether this similarity in rates
will continue.

Within FDLP, default rates differed substantially between nonconsolidated
and consolidation loans for two of the four repayment options- standard and
income contingent repayment. Among borrowers using standard repayment, those
with consolidation loans had a much lower default rate (5. 1 percent versus
9. 6 percent). Among borrowers using income contingent repayment, the
opposite was true: borrowers with consolidation loans had a much higher
default rate (9. 3 percent versus 4. 3 percent). (See table 1.) Although the
reasons for these differences are not clear, student loan experts we talked
with said the results tended to reflect differences in the overall
creditworthiness of borrowers who used the various options. For example,
over 20, 000 borrowers repaying consolidation loans under the income
contingent option had already defaulted on one or more of their underlying
loans. This group of previous defaulters continues to have high default
rates under consolidation (above 40 percent).

Table 1: Number of Borrowers in Repayment and Default Rates as of March 31,
2000, for FDLP Nonconsolidated and Consolidation Loans, by Type of Repayment
Plan

Nonconsolidated loans Consolidation loans Type of payment and maximum

Borrowers in Default

Borrowers in Default Repayment plan repayment period

repayment rate (%) repayment rate (%)

Standard Fixed; 10 years 1, 861, 908 9.6 308,835 5. 1 Extended Fixed; 30
years 68,124 1. 7 81,101 1. 8 Graduated Increasing; 30 years 269, 764 3.8
132,523 3. 3 Income contingent Flexible with income; 25 years 13, 647 4.3
172,945 9. 3

All plans 2, 213,443 8. 6 695,404 5. 4

Source: U. S. Department of Education.

With regard to ensuring proper loan servicing and collection, Education and
its prime loan- servicing contractor assess the appropriateness of FDLP loan
servicing and collections through ongoing monitoring and periodic reviews.
The prime contractor uses a subcontractor with FFELP loanservicing
experience to service FDLP loans and a separate subcontractor, a major
public accounting firm, to independently monitor loan- servicing activities
and report its findings to Education. The Department regularly reviews the
prime contractor's compliance with contract loan- servicing requirements.
Several recent external reviews have also been conducted, revealing no
significant loan- servicing problems.

Background FDLP and FFELP provide funding that is vital to helping students
meet postsecondary education costs. FDLP has two types of loans and offers

multiple repayment options. FDLP Has Nonconsolidated

Nonconsolidated loans are the basic loans with which students or their and
Consolidation Loans

parents can help finance postsecondary education. Within FDLP, which was our
main focus for considering loans by type, there are three kinds of
nonconsolidated loans: subsidized and unsubsidized Stafford loans and Parent
Loans for Undergraduate Students (PLUS) loans. Subsidized Stafford loans,
available only to students with a demonstrated financial need, are
considered subsidized in that the federal government does not charge
interest while the student is in school at least half- time, during a 6-
month grace period after the student graduates or otherwise leaves school,
and during periods in which loan repayment is deferred (such as when the

borrower is seeking but unable to find full- time employment). In contrast,
unsubsidized Stafford loans are available to all students regardless of
financial need and do not include an interest subsidy. If the borrower
chooses not to make interest payments while in school, the interest is added
to the principal balance to be repaid as part of the total loan amount. PLUS
loans are available to parents of dependent students to help pay for their
children's education; they are unsubsidized loans, and parents are
responsible for paying all interest charges.

Consolidation loans are the second major type. During the course of their
education, students may obtain loans from more than one federal program. By
obtaining a direct consolidation loan, borrowers may combine their loans
from different programs and make only one monthly payment. 3 Borrowers may
consolidate their loans at any time, and the interest on their consolidation
loans may be subsidized or unsubsidized, depending on the kind of original
loans they consolidated. Borrowers in default on a student loan who have
made satisfactory arrangements to repay the defaulted loan, or who agree to
repay under the income contingent repayment plan, may also obtain direct
consolidation loans. Parents with multiple PLUS loans may combine them into
a single PLUS consolidation loan.

FDLP Offers a Variety of Borrowers most commonly repay their FDLP loans
using one of four

Repayment Options repayment plans: standard, extended, graduated, or income
contingent. 4

These four options differ by the amount of time allowed to repay loans and
the flexibility of the repayment schedule. With standard repayment,
borrowers make fixed payments of at least $50 a month for up to 10 years.
With extended repayment, they make fixed payments of at least $50 a month
over a period generally ranging from 12 to 30 years, depending on the total
amount borrowed. With graduated repayment, borrowers' payments start out low
and then increase, usually every 2 years; the repayment period generally
ranges from 12 to 30 years, depending on the total amount borrowed. The
income contingent repayment plan is the most

3 Some of the federal student loans that are permitted to be incorporated
into an FDLP consolidation loan include FDLP, FFELP, and Perkins loans, as
well as health professions loans such as Health Education Assistance and
Nursing Student loans.

4 A fifth type of repayment plan- alternative repayment- is also available
to FDLP borrowers. Because data showed that borrowers rarely used this plan
(only 0. 1 percent of FDLP borrowers), we excluded it from our analysis.
Also, the income contingent repayment plan is not available to borrowers of
nonconsolidated or consolidation PLUS loans.

flexible, allowing borrowers to make monthly payments that are based on
adjusted gross income, family size, and the total amount of their
outstanding loans. The maximum repayment period for income contingent
repayment is 25 years; if the loan is not repaid after 25 years, the
remaining balance is canceled, but the unpaid amount is considered income
for tax purposes. Borrowers must use the income contingent repayment plan
for consolidation loans if they have not made satisfactory repayment
arrangements on any underlying defaulted loans prior to loan consolidation.

Education's Default Rate An accurate measure of student loan defaults is an
important means for

Monitoring Focuses on monitoring the extent of financial risk to the
Department from its student

Schools loan programs. When borrowers fail to meet their financial
obligations by

not repaying their federal student loans, it is the government, and through
it the taxpayer, that ultimately must pay for this failure. Education
estimated that default costs would amount to a combined $4. 3 billion for
FDLP and FFELP in fiscal year 1999.

For Education, monitoring default rates has tended to be focused at the
school level and has not been broken down by type of loan or repayment
program. Each year, the Department assesses a school's eligibility to
continue participating in FDLP and FFELP on the basis of the school's
default rates (which are primarily based on nonconsolidated Stafford loans)
for the most recent 3 consecutive years for which data are available. For
fiscal year 2001, for example, eligibility is based on default rates for
fiscal years 1996, 1997, and 1998. A school remains eligible if its default
rate is below a 25- percent threshold in at least 1 of these years. Most
schools become ineligible if their default rate equals or exceeds the
default threshold in all 3 fiscal years. 5

As required by the Higher Education Act of 1965, as amended, Education
calculates a default rate for each school by creating a cohort consisting of
all the school's students who are expected to begin repaying their loans in
a given year. The Department then determines how many of these students

5 The Higher Education Act of 1965 exempted historically black colleges and
universities, tribally controlled institutions, and Navajo community
colleges from the threshold requirement through June 1999.

default on their loans in that year or by the end of the following year. For
a school with 30 or more borrowers entering repayment status, 6 the default
rate is the percentage that results from dividing (1) the number of students
who entered repayment status in a given fiscal year and defaulted in that
year or before the end of the next fiscal year (the numerator) by (2) the
number of students who entered repayment status in that given fiscal year
(the denominator). For example, if 100 students from a school were scheduled
to begin repaying their loans in fiscal year 1998 and 25 defaulted on their
loans by the end of fiscal year 1999, the school's 1998 default rate would
be 25 percent. 7

FDLP and FFELP Loan The most recent available default rate data- Education's
data for the 1998

Programs Have Similar cohort- showed little difference between the overall
default rates for

FDLP and FFELP student loan borrowers. The overall default rate was 6. 6
Default Rates

percent for FDLP and 6. 7 percent for FFELP. The similarity in default rates
between the two programs was still apparent when viewed by the type of
school the borrowers attended, though the rates for the two programs were
somewhat more alike for borrowers attending 4- year schools than for
borrowers attending 2- year and proprietary schools. (See fig. 1.)

6 If a school has fewer than 30 borrowers entering repayment, Education
calculates a 3- year average default rate. 7 FDLP and FFELP have different
criteria for determining when a loan is in default for the purpose of being
placed in the numerator of the cohort default calculation. For FDLP, loans
are considered to be in default if payments have been delinquent for a
specified period of time. For FFELP, a default is considered to occur on the
date that the guaranty agency pays a claim for insurance on the loan. See
app. I for more detail on default criteria.

Figure 1: Student Loan Default Rates for FDLP and FFELP by School Type,
Cohort Year 1998

Percentage

14

12.5

12 FDLP

FFELP

11.6 10.1 10.2

10 8

6.6 6.7

6

5.3 4.9

4 2 0

4- Year 2- Year Proprietary All Schools Type of School

Source: U. S. Department of Education, Default Management Division.

For 4- year schools, the rate of default was 5. 3 percent for FDLP
borrowers, compared with 4. 9 percent for FFELP. Both rates are
substantially lower than the default rates for 2- year and proprietary
schools. The lower default rates at 4- year schools reflect the fact that
students at 4- year schools have long tended to be at lower risk of default.
Because most students in the cohort attended 4- year schools, the overall
default rates for the two programs are closer to the rates at 4- year
schools than to the rates at 2- year and proprietary schools. 8

The greatest disparities in default rates between FDLP and FFELP occurred
among borrowers attending 2- year and proprietary schools. Default rates
under FDLP were higher than under FFELP for 2- year schools (12.5 percent
versus 10.1 percent), but FDLP default rates were lower at proprietary
schools (10.2 percent versus 11. 6 percent). Neither Education nor we could
explain these default rate differences. In past work, we referred to
research that linked characteristics such as a person's academic preparation
for higher education or the family's socioeconomic status to likelihood of
default. 9 This research suggests that the disparity in default rates
between FDLP and FFELP for both 2- year and proprietary schools is more
likely attributable to specific differences in such characteristics of
individual student borrowers than to characteristics of the schools they
attended. Appendix II contains additional detail on FDLP and FFELP cohort
default rates.

Default Rates for FDLP As of March 31, 2000, 2. 9 million FDLP borrowers
were in repayment

Loans Vary by Type of status. Most had nonconsolidated loans, and most were
using the standard

repayment plan. For two of the four repayment options (standard Loan and
Repayment

repayment and income contingent repayment), the default rates for Plan

borrowers with nonconsolidated and consolidation loans differed
substantially. While the reasons for these differences were not clear,
student loan experts said they likely reflected differences in the overall
creditworthiness of borrowers who used the different options- differences
that translate into varying tendencies to default. Education officials told
us

8 Distribution of the cohort by type of school was as follows: 4- year
schools- about 78 percent of the cohort for the FDLP program and 69 percent
for FFELP; 2- year schools- 9 percent for FDLP and 16 percent for FFELP; and
proprietary schools- about 14 percent for each program.

9 Student Loans: Characteristics of Students and Default Rates at
Historically Black Colleges and Universities( GAO/ HEHS- 98- 90, Apr. 9,
1998).

that these differences in default rates are consistent with their experience
that borrowers who choose a repayment plan are less likely to default than
those who fail to choose a plan.

Most Borrowers Had The original loan dollars of the FDLP borrowers in
repayment status as of

Nonconsolidated Loans, and March 31, 2000, amounted to $34.1 billion. Over
76 percent of these

Most Used Standard borrowers had nonconsolidated loans. On average,
borrowers who had

Repayment consolidation loans had larger loan balances than borrowers with

nonconsolidated loans ($ 19,167 versus $9,395). (See table 2.)

Table 2: FDLP Nonconsolidated and Consolidation Loans in Repayment as of
March 31, 2000 Nonconsolidated loans Consolidation loans Total

Borrowers in repayment a 2,213,443 695,404 2,908, 847

Percentage of total borrowers in repayment 76.1 23.9 100

Loan dollars in repayment b $20,795,152,674 $13, 329, 017,731 $34, 124,170,
405

Percentage of total loan dollars in repayment 60.9 39.1 100

Average loan amount $9,395 $19,167 $11, 731

a Some borrowers were counted more than once because they had more than one
loan being paid under different types of repayment or they had both
nonconsolidated and consolidation loans. b Loan dollars reflect original
loan amounts.

Source: U. S. Department of Education.

Most borrowers used the standard repayment plan. This was particularly the
case for borrowers with nonconsolidated loans, 84 percent of whom used this
option. While borrowers with consolidation loans also used the standard
option more than any other, as a group they made more use of the other
repayment options. (See table 3.) The standard repayment option may be used
more than the other repayment options because borrowers are assigned to this
option unless they specifically choose otherwise, and because it is
generally the least costly option. The standard repayment plan usually
results in the lowest total interest paid (in current dollars) because the
monthly payment is higher and the repayment period is shorter than under the
other plans. Appendix III contains additional information about FDLP
nonconsolidated and consolidation loans in repayment.

Table 3: Distribution of FDLP Borrowers in Repayment as of March 31, 2000,
by Repayment Plan

Nonconsolidated loans Consolidation loans Borrowers in

Borrowers in Repayment plan

repayment % of total repayment % of total

Standard 1, 861,908 84. 1 308, 835 44. 4 Extended 68, 124 3. 1 81, 101 11. 7
Graduated 269,764 12. 2 132, 523 19. 1 Income contingent 13, 647 0. 6 172,
945 24. 9

Total 2, 213, 443 100. 0 695, 404 100.1 a

a Percentages do not total 100 because of rounding. Source: U. S. Department
of Education.

Default Rates for Standard Among borrowers using the standard repayment
plan, those with

and Income Contingent consolidation loans had a much lower default rate than
those with

Repayment Borrowers nonconsolidated loans: 5.1 percent versus 9. 6 percent.
However, among

Varied Substantially borrowers using income contingent repayment plans,
those with

consolidation loans had a much higher default rate: 9.3 percent versus 4.3
percent. Also, among those borrowers who had nonconsolidated loans, standard
repayers had a much higher default rate than did borrowers using the
nonstandard repayment plans- extended, graduated, and income contingent-
with rates ranging from 1.7 percent to 4.3 percent. 10 (See fig. 2.)

10 As noted earlier, these default rates within FDLP were calculated using
defaults that occurred at any time during repayment and are not comparable
to the school cohort default rates presented earlier.

Figure 2: Default Rates for FDLP Nonconsolidated and Consolidation Loans in
Repayment as of March 31, 2000, by Type of Repayment Plan

Percentage

10.0

9.6 9.3

9.0 Nonconsolidated

Consolidation

8.6

8.0 7.0 6.0

5.4 5.1

5.0

4.3

4.0

3.8 3.3

3.0 2.0

1.7 1.8

1.0 0.0

Standard Extended Graduated Income

All Plans Contingent

Repayment Plan

Source: U. S. Department of Education.

The reasons for these differences are not clear. The FDLP program is still
in the early phases of its development, with its first loans having been
originated in the fourth quarter of fiscal year 1994. Student loan experts
we talked with were unaware of any studies or analyses that might explain
the differences. In addressing this question, Education officials told us
that their experience has been that borrowers who choose a repayment plan
are less likely to default on their loans than those who fail to choose a
plan or are required to use a specified payment plan. For example, all of
the borrowers with standard repayment plans for consolidation loans chose
that repayment option. In contrast, some borrowers with standard repayment
plans for nonconsolidated loans were assigned to that plan by their loan
servicer because they did not choose a repayment plan. This

difference may help explain why the default rate for those with
nonconsolidated loans was almost twice as high as for those with
consolidation loans among borrowers using standard repayment plans.

Student loan experts also suggested that these default rates may reflect the
differences in the creditworthiness of the borrowers in these loan
categories. Accordingly, we examined information on two groups of
consolidation loan borrowers to obtain insight into their creditworthiness.
Our analysis of information on whether these borrowers had previously
defaulted on one or more of the underlying loans that were consolidated
indicated that characteristics of borrowers, rather than some factor of
their repayment plan, might explain the reason for default rate differences.
11 Borrowers who had defaulted before could be considered “higher
risk,” while borrowers who had not defaulted before could be
considered “lower risk.” For each repayment category, we divided
the consolidation loan borrowers into two groups: those who had previously
defaulted and those who had not. In each repayment category, the borrowers
who had defaulted before had higher default rates on their consolidation
loans. More specifically, with regard to borrowers with standard and income
contingent repayment plans, we found the following:

Within the standard repayment plan, lower- risk borrowers had a default rate
of 1. 6 percent on their consolidation loans and were far greater in number
than higher- risk borrowers. Lower- risk borrowers' relatively low default
rate and higher numbers kept the overall default rate at 5.1 percent, even
though the higher- risk borrowers had a rate of 17 percent.

11 This information was not available for borrowers with nonconsolidated
loans.

Within the income contingent plan, higher- risk borrowers had a default rate
of 40. 9 percent. Even though they were a small portion of the total group,
their relatively high rate raised the overall average to 9.3 percent. The
student loan experts we consulted noted that the high rate of default for
the higher- risk income contingent repayers may be reflective of less
motivated former defaulters who were required to use the income contingent
option in order to consolidate their loans. Borrowers who have defaulted on
their underlying loans must consolidate them using the income contingent
repayment option, unless they have actively taken measures to make
satisfactory repayment arrangements on their defaulted loans prior to
consolidation. 12 (See table 4.)

Table 4: FDLP Consolidation Loan Default Rates and Number of Borrowers in
Repayment as of March 31, 2000, by Type of Repayment Plan

Lower risk a Higher risk b Combined Borrowers in

Default rate Borrowers in

Default rate Borrowers in

Default rate Repayment plan

repayment (%) repayment (%) repayment (%)

Standard 238, 777 1.6 70, 058 17.0 308, 835 5. 1 Extended 73, 820 0.7 7, 281
12.2 81, 101 1. 8 Graduated 102, 162 0.7 30, 361 11.9 132, 523 3. 3 Income
contingent 152, 810 5.1 20, 135 40.9 172, 945 9. 3

All plans 567, 569 2.3 127, 835 19.3 695, 404 5.4 a Lower- risk borrowers
had not defaulted on an underlying loan for consolidation. b Higher- risk
borrowers had defaulted on an underlying loan for consolidation.

Source: U. S. Department of Education.

Appendix IV contains additional information on the work we conducted to
assess consolidation loans according to borrower risk.

12 Under FDLP and FFELP, for the purpose of consolidation, three
consecutive, voluntary, on- time, full monthly payments constitute
satisfactory repayment arrangements. Making such arrangements gives
borrowers the option of selecting the standard, extended, or graduated
repayment plan (in addition to the income contingent plan) for repaying
their consolidation loans.

Education Uses The Department's procedures for ensuring that FDLP loans are
properly

Several Means to serviced and collected involve several outside contractors.
Education

requires the contractors and subcontractors involved in loan servicing to
Ensure Proper FDLP

apply a program of procedures, standards, checks, and measures to ensure
Loan Servicing and

that all specific requirements of the contracts are fulfilled, and it
requires Collection

regular reports that can call attention to servicing or collection problems
needing management attention. External audits and reviews have shown that
the contractors were meeting loan- servicing requirements, and Education has
encountered few situations in which schools' default rates needed to be
revised because the loans used to compute the rates were improperly
serviced.

Education and Its Loan Education services FDLP loans through a contract with
Affiliated

Servicers Have Monitoring Computer Services, Inc. (ACS), an information
technology systems and

Requirements services company. As prime contractor, ACS has overall
responsibility for

FDLP loan servicing. ACS has a subcontract with Academic Financial Services
Association (AFSA) Data Corporation, under which AFSA has the main
responsibility for FDLP loan- servicing operations. 13 Some of the
operational activities AFSA performs include establishing payment plans for
borrowers, maintaining and updating borrowers' loans on a central database,
providing billing services, collecting on delinquent loans, and reporting to
credit bureaus.

Education and ACS both monitor the performance of FDLP loan- servicing
activities to ensure that all specific contract requirements are met. The
Department oversees contract compliance through frequent contact with loan-
servicing managers, on- site inspections of service centers, and requiring
ACS to submit periodic monitoring reports. For its part, ACS has a quality
control unit that performs day- to- day process monitoring. Under the
contract, services to be monitored include receipt and processing of
materials, data entry, editing, turnaround times, storage of documents,
printing, mailing, customer service, correspondence imaging, and
collections.

13 AFSA also provides student loan servicing for banks and secondary markets
under FFELP.

Accounting Firm Provides The FDLP loan- servicing contract also requires ACS
to provide for

Independent Monitoring independent monitoring of the loan- servicing system.
Deloitte and Touche,

LLP, a major public accounting firm, is the subcontractor for this task.
Deloitte and Touche alerts Department and contractor managers to problems in
the FDLP loan- servicing system so that they can take corrective action. The
firm provides weekly written updates, monthly reports, and quarterly
presentations. For example, the monthly report contains information on key
quality indicators, quality control measures, and issues that could
materially affect the program. The report's graphs, charts, and trend lines
track various loan- servicing activities. The April 2000 report, for
instance, showed that 98 percent of the delinquent accounts sampled in March
2000 were in compliance with due diligence requirements and that each of the
previous 15 months generally had similarly high compliance rates. 14

External Assessments Verify In addition to these regular monitoring efforts,
several assessments of

Monitoring Results FDLP loan servicing have been conducted, and none have
identified major

problems. In June 1999, the Fleet Financial Group, AFSA's parent company,
issued an audit report that found FDLP loan servicing to be operating with a
“strong” system of internal controls and to have policies and
procedures in place to ensure contract compliance. We also examined a sample
of loans in 1999 and found that the contractor followed policies and
procedures for all the loans in the sample by, for example, promptly sending
delinquency notices and other correspondence and contacting delinquent
borrowers by telephone. In April 2000, after doing a preliminary review of
the accuracy of loans being serviced by the contractor, Education's
Inspector General said the discrepancies identified were not sufficient to
warrant a more extensive review.

Another type of assessment results when schools question the validity of
their cohort default rates on the basis of having identified some aspect of
improper loan servicing. If a school believes that improper loan- servicing
and collection activities were responsible for some loans (either FDLP or
FFELP) not being paid, and if it has a cohort default rate equal to or
greater than 20 percent, it may challenge the Department- calculated default
rate. An FDLP loan is considered to have defaulted because of improper loan

14 Due diligence and collection activities include generating and mailing
billing and past- due letters, attempting to contact delinquent borrowers by
telephone, and attempting to obtain borrowers' new addresses or phone
numbers.

servicing if a school can document that the loan servicer failed to perform
such activities as mailing required letters to delinquent borrowers or
trying to call them by telephone. Of 941 schools in the fiscal year 1997
cohort with default rates equal to or greater than 20 percent, 42 (4. 5
percent) submitted appeals that were based on claims of improper loan
servicing and 9 (about 1 percent) had their official cohort default rates
revised by Education on the basis of their appeals. All nine schools whose
rates were revised were proprietary schools participating in both FDLP and
FFELP.

Conclusions Because FDLP loan origination began only 6 years ago, the
patterns in default rates for the program's various loan types and repayment
options

are just beginning to emerge. Thus far, FDLP's overall cohort default rate
is about the same as that of FFELP. Considering that FDLP and FFELP have
similar loan products targeted to similar student populations attending
similar kinds of schools, it is not surprising to see similar rates of
default between the two programs. More time will be needed to tell whether
this similarity in rates will continue.

Within FDLP itself, borrowers with nonconsolidated and consolidation loans
differed in their default rates. For nonconsolidated loans- generally the
type of loans included in school cohort default rate calculations- defaults
were lower for borrowers with nonstandard repayment plans than for borrowers
with standard repayment plans. These lower default rates may reflect various
factors, such as differences among borrowers in whether they actively chose
their repayment plans. However, we cannot conclusively determine the extent
to which the lower default rates currently occurring under the nonstandard
repayment plans are attributable to characteristics of the plans, as opposed
to characteristics of the borrowers who use these repayment options. As a
result, it is not apparent whether this current pattern of default rates
will continue as the FDLP matures.

Agency Comments We obtained comments on this report from Education (see app.
V). Education said that the report will provide the Congress valuable

information on FDLP and Education's oversight of this program. Education
also commented that it has developed a successful approach to FDLP loan
servicing and collection through procedures such as ongoing monitoring,
periodic reviews, and student counseling. As we noted in the report, recent
reviews of FDLP have revealed no significant loan- servicing problems.

Education also provided technical comments, which we incorporated where
appropriate.

As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days after
its issue date. At that time, we will send copies to the Honorable James M.
Jeffords, Chairman, and the Honorable Edward M. Kennedy, Ranking Minority
Member, Senate Committee on Health, Education, Labor, and Pensions; the
Honorable Richard W. Riley, Secretary of Education; appropriate
congressional committees; and other interested parties. We will also make
copies available upon request.

If you or your staff have any questions or wish to discuss this material
further, please call me or Andrew Sherrill at (202) 512- 7215. Other staff
who made key contributions to this report include Daniel Jacobsen, Robert
Miller, and Stanley Stenersen.

Barbara D. Bovbjerg Director, Education, Workforce,

and Income Security Issues

Appendi Appendi xes xI

Scope and Methodology To compare the default rate experience under the
Federal Direct Loan Program (FDLP) and the Federal Family Education Loan
Program (FFELP) for our first objective, we obtained school cohort default
rate data from the Department of Education's National Student Loan Data
System through the Default Management Division. We used school cohort
default data for years 1997 and 1998, the two most recent years for which
both FDLP and FFELP borrowers had entered repayment and been included by
Education in its school cohort default rate calculations. These are the
default rates annually computed by Education in accordance with the Higher
Education Act of 1965, as amended, and its default reduction initiative, to
identify those schools participating in federal student loan programs whose
students are collectively exceeding statutorily defined rates of loan
default.

The criterion for determining when an FDLP borrower has defaulted for the
purpose of being placed in the numerator of the cohort default calculation
varies from that used for the FFELP program. For FDLP, loans are considered
to be in default if payments have been delinquent for a specified period of
time. For FFELP, a default is considered to occur on the date that the
guaranty agency pays a claim for insurance on the loan. Recent statutory
changes have affected the time frames for determining default for both
programs.

Effective October 7, 1998, the amendments to the Higher Education Act
changed the time frames applied to the definition of default for FDLP and
FFELP loans that are repayable in monthly installments from 180 days of
delinquency to 270 days. For FFELP loans, the time period between the date
that a borrower is determined to have defaulted and the date that an
insurance claim is paid on the loan can vary but has been estimated to be
about 90 days. Therefore, for the purpose of calculating a school's default
rate, an FFELP loan would be in delinquency approximately 270 days (180 days
plus about 90 days) on or after October 7, 1998, and approximately 360 days
(270 days plus about 90 days) on or after October 7, 1998. To make the FDLP
cohort default calculations consistent with the FFELP calculations, the time
frame for determining default for cohort default rate purposes for FDLP
loans was established by regulation to be 270 days (180 days plus 90 days)
before October 7, 1998, and 360 days (270 days plus 90 days) on or after
October 7, 1998.

To determine default rates by type of school, we used three school
categories: 4- year, 2- year, and proprietary. The school cohort default
rate statistics were available by 2- and 4- year public and private and
proprietary school categories. To simplify our analyses, we combined the 4-
year public

and private school data to create the “4- year” school category
and combined the 2- year public and private data to create the “2-
year” school category. For FDLP, there were no cohort default rate
statistics for foreign schools or for borrowers not classified by type of
school. We excluded such statistics for FFELP borrowers from our analyses.

To determine the extent to which borrowers using the standard, extended,
graduated and income contingent forms of loan repayment were defaulting on
their FDLP (direct nonconsolidated and direct consolidation) loans, we used
Education's direct loan servicer management information statistics on the
total number of borrowers and dollar amounts of FDLP loans in repayment as
of March 31, 2000. These data provided a more comprehensive and current
snapshot of FDLP program data than could be derived from the cohorts used by
the Department for calculating school default rates. We computed simple
borrower- based default percentages by dividing the number of borrowers who
were in repayment status and then defaulted (did not make a payment for more
than 270 days) by the total number of borrowers who were in repayment
status. These rates are not comparable to the annual school cohort default
rates that Education computes, which generally reflect the percentage of a
school's borrowers who entered repayment in one fiscal year and who
defaulted by the end of the next fiscal year.

Education has not accumulated data in its National Student Loan Data System
on repayment options used by FFELP borrowers. For this reason, we were
unable to compare FDLP and FFELP cohort default rates by type of repayment
options student borrowers used. Moreover, the validity of such comparisons
would be questionable because the types and terms of the repayment plans
differ between the two programs.

To determine whether Education had properly provided for collecting FDLP
loans, we spoke with Department and contractor representatives that
monitored the FDLP program. We reviewed various documents, including
excerpts from the statement of work for the FDLP service contract and the
business rules for the FDLP loan- servicing system. We also reviewed the
quality assurance and Electronic Data Processing audit plans, monthly
quality control statistics, monthly audit activity reports, and the results
of loan- servicing and collection process reviews. In addition, we obtained
relevant prior evaluations by external auditors. As another means of
assessing the adequacy of loan collection efforts, we reviewed default rate
collection appeals, based on improper loan servicing and collection,

submitted to the Department by FDLP and FFELP participating schools for
cohort year 1997.

In addition to contacting various Education officials, we reviewed laws,
regulations, and Department procedures associated with the management and
production of cohort default rates for postsecondary schools and the
administration of FDLP nonconsolidated and consolidation loans, including
options for repaying FDLP loans. We talked with various experts to obtain
their views on factors that would help explain differences we found among
default rates for certain groups of student loan borrowers. Relying on
Department procedures for ensuring data integrity, we did not verify the
accuracy of the information and data obtained and used in our analyses.
Education's cohort default data are generally accepted and widely used by
the agencies, schools, and organizations involved in federal student
financial aid programs.

Cohort Default Rates for FDLP and FFELP Borrowers by Type of School, Cohort
Years 1997

Appendi xII

and 1998 FDLP borrowers FFELP borrowers In

%in In

%in default Total default default Total default

Cohort year 1997

4- year schools 22, 789 366,593 6.2 77,427 1, 273, 190 6. 1 2- year schools
5, 966 38,927 15.3 36,350 298, 849 12. 2 Proprietary schools 8, 482 64,141
13.2 43,635 276, 233 15. 8

Total 37, 237 469,661 7.9 157, 412 1, 848,272 8. 5 Cohort year 1998

4- year schools 23, 976 451,826 5.3 59,319 1, 214, 556 4. 9 2- year schools
6, 276 50,368 12.5 29,085 286, 962 10. 1 Proprietary schools 8, 158 79,601
10.2 29,522 254, 173 11. 6

Total 38, 410 581,795 6.6 117, 926 1, 755,691 6. 7

Note: Borrowers attending foreign or unclassified schools are excluded.

Data on FDLP Nonconsolidated and

Appendi xI II

Consolidation Loans in Repayment Table 5: Repayment Plans for Borrowers With
All Kinds of FDLP Loans, as of March 31, 2000 Borrowers Original loan amount

Percentage of Amount

Percentage of Average loan

Borrower- based Repayment plan

Number total (in millions) total amount default rate (%) Standard 2,170,743
74. 6 $19,975.7 58.5 $9, 202 8. 9 Extended 149,225 5.1 3, 948.2 11.6 26, 458
1. 7 Graduated 402,287 13. 8 6,439.6 18.9 16, 007 3. 6 Income contingent
186,592 6.4 3, 760.6 11.0 20, 154 8. 9

Total 2, 908,847 99. 9 a $34,124.2 100. 0 $11, 731 7. 8

Note: Borrowers with alternative repayment plans are excluded. a Percentages
do not total 100 because of rounding.

Table 6: Repayment Plans for Borrowers With Nonconsolidated Loans, as of
March 31, 2000 Borrowers Original loan amount

Percentage Amount

Percentage of Average loan

Borrower- based Repayment plan

Number of total (in millions) total amount default rate (%) Standard 1,
861,908 84.1 $15,847. 8 76. 2 $8,512 9. 6 Extended 68, 124 3.1 1, 231. 8 5.9
18,082 1. 7 Graduated 269,764 12.2 3, 503. 3 16. 8 12,987 3. 8 Income
contingent 13, 647 0.6 212. 2 1.0 15,549 4. 3

Total 2, 213, 443 100.0 $20,795. 2 99. 9 a $9,395 8. 6

Note: Borrowers with alternative repayment plans are excluded. a Percentages
do not total 100 because of rounding.

Table 7: Repayment Plans for Borrowers With Consolidation Loans, as of March
31, 2000 Borrowers Original loan amount

Percentage of Amount

Percentage of Average loan

Borrower- based Repayment plan

Number total (in millions) total amount default rate (%) Standard 308, 835
44.4 $4, 127.9 31.0 $13, 366 5.1 Extended 81, 101 11. 7 2, 716.4 20.4 33,494
1.8 Graduated 132,523 19. 1 2, 936. 3 22. 0 22, 157 3. 3 Income contingent
172,945 24. 9 3, 548. 4 26. 6 20, 518 9. 3

Total 695, 404 100. 1 a $13, 329.0 100. 0 $19,167 5.4

Note: Borrowers with alternative repayment plans are excluded. a Percentages
do not total 100 because of rounding.

Data on FDLP Consolidation Loans in

Appendi xI V

Repayment, by Borrower Risk Table 8: Repayment Plans for Borrowers With
Consolidation Loans, as of March 31, 2000 Borrowers Original loan amount

Percentage of Amount

Percentage of Average loan

Borrower- based Repayment plan

Number total (in millions) total amount default rate (%) Standard 308,835
44. 4 $4,127. 9 31. 0 $13,366 5. 1 Extended 81, 101 11. 7 2,716. 4 20. 4 33,
494 1. 8 Graduated 132,523 19. 1 2, 936. 3 22. 0 22, 157 3. 3 Income
contingent 172,945 24. 9 3, 548. 4 26. 6 20, 518 9. 3

Total 695, 404 100. 1 a $13,329. 0 100.0 $19, 167 5. 4

Note: Borrowers with alternative repayment plans are excluded. a Percentages
do not total 100 because of rounding.

Table 9: Repayment Plans for Lower- Risk Borrowers With Consolidation Loans,
as of March 31, 2000 Borrowers Original loan amount

Percentage of Amount

Percentage of Average loan

Borrower- based Repayment plan

Number total (in millions) total amount default rate (%) Standard 238,777
42. 1 $3,759.5 30.0 $15,745 1. 6 Extended 73,820 13. 0 2,646.6 21.1 35,853
0. 7 Graduated 102,162 18. 0 2,723.1 21.7 26,655 0. 7 Income contingent
152,810 26. 9 3,419.6 27.2 22,378 5. 1

Total 567,569 100. 0 $12,548.9 100.0 $22,110 2. 3

Notes: Borrowers with alternative repayment plans are excluded. Lower- risk
borrowers are those who had not defaulted on an underlying loan for
consolidation.

Table 10: Repayment Plans for Higher- Risk Borrowers With Consolidation
Loans, as of March 31, 2000 Borrowers Original loan amount

Percentage Amount

Percentage of Average loan

Borrower- based Repayment plan

Number of total (in millions) total amount default rate (%) Standard 70,058
54.8 $368.4 47.2 $5,258 17. 0 Extended 7,281 5.7 69.7 8. 9 9,577 12. 2
Graduated 30,361 23.8 213. 1 27. 3 7,020 11. 9 Income contingent 20,135 15.8
128. 9 16. 5 6,399 40. 9

Total 127,835 100.1 a $780.1 99.9 a $6, 103 19. 3

Notes: Borrowers with alternative repayment plans are excluded. Higher- risk
borrowers are those who had defaulted on an underlying loan for
consolidation. a Percentages do not total 100 because of rounding.

Comments From the Department of

Appendi xV

Education (104993) Lett er

GAO United States General Accounting Office

Page 1 GAO- 01- 68 Direct Loan Default Rates

Contents

Contents Page 2 GAO- 01- 68 Direct Loan Default Rates

Page 3 GAO- 01- 68 Direct Loan Default Rates United States General
Accounting Office

Washington, D. C. 20548 Page 3 GAO- 01- 68 Direct Loan Default Rates

Page 4 GAO- 01- 68 Direct Loan Default Rates

Page 5 GAO- 01- 68 Direct Loan Default Rates

Page 6 GAO- 01- 68 Direct Loan Default Rates

Page 7 GAO- 01- 68 Direct Loan Default Rates

Page 8 GAO- 01- 68 Direct Loan Default Rates

Page 9 GAO- 01- 68 Direct Loan Default Rates

Page 10 GAO- 01- 68 Direct Loan Default Rates

Page 11 GAO- 01- 68 Direct Loan Default Rates

Page 12 GAO- 01- 68 Direct Loan Default Rates

Page 13 GAO- 01- 68 Direct Loan Default Rates

Page 14 GAO- 01- 68 Direct Loan Default Rates

Page 15 GAO- 01- 68 Direct Loan Default Rates

Page 16 GAO- 01- 68 Direct Loan Default Rates

Page 17 GAO- 01- 68 Direct Loan Default Rates

Page 18 GAO- 01- 68 Direct Loan Default Rates

Page 19 GAO- 01- 68 Direct Loan Default Rates

Page 20 GAO- 01- 68 Direct Loan Default Rates

Page 21 GAO- 01- 68 Direct Loan Default Rates

Page 22 GAO- 01- 68 Direct Loan Default Rates

Appendix I

Appendix I Scope and Methodology

Page 23 GAO- 01- 68 Direct Loan Default Rates

Appendix I Scope and Methodology

Page 24 GAO- 01- 68 Direct Loan Default Rates

Page 25 GAO- 01- 68 Direct Loan Default Rates

Appendix II

Page 26 GAO- 01- 68 Direct Loan Default Rates

Appendix III

Appendix III Data on FDLP Nonconsolidated and Consolidation Loans in
Repayment

Page 27 GAO- 01- 68 Direct Loan Default Rates

Page 28 GAO- 01- 68 Direct Loan Default Rates

Appendix IV

Appendix IV Data on FDLP Consolidation Loans in Repayment, by Borrower Risk

Page 29 GAO- 01- 68 Direct Loan Default Rates

Page 30 GAO- 01- 68 Direct Loan Default Rates

Appendix V

Ordering Information The first copy of each GAO report is free. Additional
copies of reports are $2 each. A check or money order should be made out to

the Superintendent of Documents. VISA and MasterCard credit cards are
accepted, also.

Orders for 100 or more copies to be mailed to a single address are
discounted 25 percent.

Orders by mail: U. S. General Accounting Office P. O. Box 37050 Washington,
DC 20013

Orders by visiting: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW)
U. S. General Accounting Office Washington, DC

Orders by phone: (202) 512- 6000 fax: (202) 512- 6061 TDD (202) 512- 2537

Each day, GAO issues a list of newly available reports and testimony. To
receive facsimile copies of the daily list or any list from the past 30
days, please call (202) 512- 6000 using a touchtone phone. A recorded menu
will provide information on how to obtain these lists.

Orders by Internet: For information on how to access GAO reports on the
Internet, send an e- mail message with “info” in the body to:
info@ www. gao. gov or visit GAO's World Wide Web home page at: http:// www.
gao. gov

To Report Fraud, Waste, or Abuse in Federal Programs

Contact one: Web site: http:// www. gao. gov/ fraudnet/ fraudnet. htm e-
mail: fraudnet@ gao. gov 1- 800- 424- 5454 (automated answering system)

United States General Accounting Office Washington, D. C. 20548- 0001

Official Business Penalty for Private Use $300

Address Correction Requested Bulk Rate

Postage & Fees Paid GAO Permit No. GI00
*** End of document. ***