Federal Family Education Loan Program: Eliminating the		 
Exceptional Performer Designation Would Result in Substantial	 
Savings without Adversely Affecting the Loan Program (26-JUL-07, 
GAO-07-1087).							 
                                                                 
The federal government guarantees loans in the Federal Family	 
Education Loan program (FFELP) so that private lenders that	 
participate in the program will be reimbursed if a borrower	 
defaults, and about $4.6 billion was spent in fiscal year 2006 to
repay lenders for defaulted loans. To retain the guarantee on	 
their loans, all FFELP lenders must comply with minimum due	 
diligence requirements for servicing loans, including		 
establishing a borrower's first repayment due date and making a  
certain number of attempts to contact delinquent borrowers.	 
Lenders that adhere to these requirements are eligible to receive
at least a standard reimbursement rate of 97 percent of the	 
outstanding principal and accrued interest for defaults. However,
pursuant to a provision of the Higher Education Amendments of	 
1992, the Secretary of Education has the authority to designate  
lenders and loan servicers as "exceptional performers" in	 
servicing FFELP loans, and loans serviced by those with the	 
exceptional performer designation qualify for a 99 percent	 
reimbursement rate. The amendments also provided authority to the
Secretary of Education to terminate the exceptional performer	 
program following a GAO study, if such termination is in the	 
fiscal interest of the United States. To obtain the exceptional  
performer designation, loan servicers have to obtain an initial  
audit, by independent auditors, demonstrating at least 97 percent
compliance with due diligence requirements for a random sample of
loans they service, and they must continue to demonstrate	 
compliance through quarterly and annual audits to maintain the	 
designation. The first exceptional performer designation that	 
Education granted took effect in January 2004, and 18		 
organizations that service about 90 percent of all FFELP loans	 
currently have the exceptional performer designation. Congress	 
asked us to conduct a review of the exceptional performer program
to answer the following questions: (1) To what extent is the	 
exceptional performer program meeting its objectives of improving
loan servicing and decreasing defaults? (2) What are the costs	 
and benefits of the exceptional performer program?		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-1087					        
    ACCNO:   A73432						        
  TITLE:     Federal Family Education Loan Program: Eliminating the   
Exceptional Performer Designation Would Result in Substantial	 
Savings without Adversely Affecting the Loan Program		 
     DATE:   07/26/2007 
  SUBJECT:   Aid for education					 
	     Cost analysis					 
	     Cost effectiveness analysis			 
	     Education						 
	     Education program evaluation			 
	     Internal controls					 
	     Lending institutions				 
	     Loan defaults					 
	     Federal Family Education Loan Program		 

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GAO-07-1087

   

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Report to the Chairman, Committee on Education and Labor, House of
Representatives

United States Government Accountability Office

GAO

July 2007

FEDERAL FAMILY EDUCATION LOAN PROGRAM

Eliminating the Exceptional Performer Designation Would Result in
Substantial Savings without Adversely Affecting the Loan Program

GAO-07-1087

Contents

Letter 1

Appendix I Briefing Slides 5
Appendix II Comments from the Department of Education 24

Abbreviations

FFELP Federal Family Education Loan program
NSLDS National Student Loan Data System

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United States Government Accountability Office
Washington, DC 20548

July 26, 2007

The Honorable George Miller
Chairman
Committee on Education and Labor
House of Representatives

Dear Mr. Chairman:

The federal government guarantees loans in the Federal Family Education
Loan program (FFELP) so that private lenders that participate in the
program will be reimbursed if a borrower defaults, and about $4.6 billion
was spent in fiscal year 2006 to repay lenders for defaulted loans. To
retain the guarantee on their loans, all FFELP lenders must comply with
minimum due diligence requirements for servicing loans, including
establishing a borrower's first repayment due date and making a certain
number of attempts to contact delinquent borrowers. Lenders that adhere to
these requirements are eligible to receive at least a standard
reimbursement rate of 97 percent of the outstanding principal and accrued
interest for defaults. However, pursuant to a provision of the Higher
Education Amendments of 1992, the Secretary of Education has the authority
to designate lenders and loan servicers as "exceptional performers" in
servicing FFELP loans, and loans serviced by those with the exceptional
performer designation qualify for a 99 percent reimbursement rate. The
amendments also provided authority to the Secretary of Education to
terminate the exceptional performer program following a GAO study, if such
termination is in the fiscal interest of the United States.1

To obtain the exceptional performer designation, loan servicers have to
obtain an initial audit, by independent auditors, demonstrating at least
97 percent compliance with due diligence requirements for a random sample
of loans they service, and they must continue to demonstrate compliance
through quarterly and annual audits to maintain the designation. The first
exceptional performer designation that Education granted took effect in
January 2004, and 18 organizations that service about 90 percent of all
FFELP loans currently have the exceptional performer designation.

1The Higher Education Amendments of 1992 provided for a GAO study of the
exceptional performer designation to be conducted within 3 years of
enactment of the legislation, but the study could not be undertaken until
recently because no organizations had received the designation.

You asked us to conduct a review of the exceptional performer program to
answer the following questions: (1) To what extent is the exceptional
performer program meeting its objectives of improving loan servicing and
decreasing defaults? (2) What are the costs and benefits of the
exceptional performer program?

We briefed your staff on the results of our analysis on June 28, 2007.
This report formally conveys the information provided during that
briefing. In summary, we reported the following findings:

           o The exceptional performer program has not materially affected
           loan servicing, and default claims have not declined in the years
           following the first exceptional performer designation.
           Specifically, representatives from each of the exceptional
           performers we interviewed told us they did not make substantive
           changes to their loan servicing to obtain the designation, and
           technological advances made prior to the first exceptional
           performer designation automated much of loan servicing, which
           simplified compliance with due diligence requirements.
           Additionally, both the number and dollar amount of default claims
           relative to all out-of-school FFELP loans increased from fiscal
           years 2004 to 2006.

           o The federal government incurs substantial costs, while lenders
           receive most of the benefits for the exceptional performer
           program. The Congressional Budget Office estimates that the
           federal government will spend $1 billion during the next 5 years
           on the extra 2 percent reimbursement for default claims on loans
           serviced by exceptional performers.

Providing an extra 2 percent reimbursement rate for default claims
serviced by exceptional performers is not in the fiscal interest of the
federal government because lenders are being paid a premium to perform due
diligence activities that are already required of all lenders. The risk of
having default claims rejected already provides lenders with sufficient
incentive to comply with due diligence requirements. Further, the criteria
established in 1992 for the exceptional performer designation do not
indicate exceptional performance today because technological advances have
made it easier for lenders to meet these criteria.

Congress has included language to eliminate the exceptional performer
designation as part of proposed legislation on federal student aid. The
House and Senate each passed different versions of this legislation that
would eliminate the provision, and action is pending on final
legislation.2 On the basis of our findings, we agree that the exceptional
performer program should be eliminated. If the proposed legislation is not
enacted by the end of the current session of Congress, we recommend that
the Secretary of Education use her existing authority to eliminate the
exceptional performer program.

We provided copies of a draft of this report to the Department of
Education for review and comment. In written comments, Education agreed
with our recommendation to eliminate the exceptional performer program and
said it was hopeful that Congress would do so through reauthorization of
the Higher Education Act. See appendix II for the department's comments.

We used the following methodologies to develop our findings. To understand
the history and requirements of the exceptional performer program, we
reviewed relevant laws, regulations, and guidance related to the
exceptional performer program. To determine whether the exceptional
performer program is meeting its objectives and the costs and benefits of
the program, we conducted semistructured interviews with officials at the
first 7 organizations that received the exceptional performer designation,
3 loan servicers that have not applied for the designation, and 6 of the
35 state-designated guaranty agencies that administer most aspects of the
FFELP program. To ensure that the guaranty agencies we interviewed did not
have a vested interest in the exceptional performer program, we selected
guaranty agencies that do not have organizational components or affiliates
that make or service FFELP loans that could be eligible to become
exceptional performers. Further, we selected guaranty agencies from
different regions in the country. We also conducted interviews with two
trade associations representing FFELP lenders and servicers, two leading
financial research services that provide credit ratings of lenders and
securities issued by lenders, and officials at the Department of
Education.

To assess changes in defaults on FFELP loans since the exceptional
performer designation was granted, we analyzed data from the National
Student Loan Data System (NSLDS) covering fiscal years 1998 to 2006. To
control for portfolio growth, we analyzed defaulted loans relative to all
out-of-school loans, that is, all loans that were in repayment, deferment,
forbearance, and default. To assess the reliability of NSLDS data, we
talked with agency officials about data quality control procedures and
reviewed relevant documentation. We determined the data were sufficiently
reliable for the purposes of this study. We conducted our work from
October 2006 through June 2007 in accordance with generally accepted
government auditing standards.

2The legislation being considered is H.R. 2669, the College Cost Reduction
Act of 2007.

We are sending copies of this report to relevant congressional committees,
the Secretary of Education, and other interested parties and will make
copies available to others upon request. In addition, this report will be
available at no charge on GAO's Web site at [7]www.gao.gov .

If you or your staff have any questions about this report, please contact
me at (202) 512-7215 or [8][email protected] . Contact points for our Office
of Congressional Relations and Public Affairs may be found on the last
page of this report. Key contributors to this report include Debra
Prescott (Assistant Director), Kathy Peyman (Analyst-in-Charge), Carlo
Salerno, Jeff Appel, Jessica Botsford, Crystal Bernard, Doreen Feldman,
Cynthia Grant, Jean McSween, and Charles Willson.

Sincerely yours,

George A. Scott
Director, Education, Workforce, and Income Security Issues

Appendix I: Briefing Slides

Appendix II: Comments from the Department of Education

(130651)

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