Federal Family Education Loan Program: Increased Department of
Education Oversight of Lender and School Activities Needed to
Help Ensure Program Compliance (31-JUL-07, GAO-07-750).
Concerns have been raised about the Department of Education's
(Education) role in overseeing the lenders and schools that
participate in the largest of the federal government's student
loan programs, the Federal Family Education Loan Program (FFELP).
GAO was asked to analyze Education's use of its oversight,
guidance, and enforcement authorities under FFELP. To do this,
GAO reviewed departmental documents and federal laws,
regulations, and cases and interviewed officials from Education
and the student loan industry.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-750
ACCNO: A73754
TITLE: Federal Family Education Loan Program: Increased
Department of Education Oversight of Lender and School Activities
Needed to Help Ensure Program Compliance
DATE: 07/31/2007
SUBJECT: Audit oversight
Education program evaluation
Ethical conduct
Federal aid programs
Federal regulations
Higher education
Internal controls
Lending institutions
Noncompliance
Protocols
Student financial aid
Student loans
Sanctions
Dept. of Education Federal Family
Education Loan Program
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO Product. **
** **
** 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-07-750
* [1]GAO Contact
* [2]Staff Acknowledgments
* [3]GAO's Mission
* [4]Obtaining Copies of GAO Reports and Testimony
* [5]Order by Mail or Phone
* [6]To Report Fraud, Waste, and Abuse in Federal Programs
* [7]Congressional Relations
* [8]Public Affairs
Report to Congressional Requesters
United States Government Accountability Office
GAO
July 2007
FEDERAL FAMILY EDUCATION LOAN PROGRAM
GAO-07-750
Contents
Letter 1
Appendix I Briefing Slides 6
Appendix II Scope and Methodology 42
Appendix III Comments from the Department of Education 44
Appendix IV GAO Contact and Staff Acknowledgments 48
Related GAO Products 49
Abbreviations
DCL Dear Colleague Letter
Education Department of Education
FFELP Federal Family Education Loan Program
FSA Federal Student Aid
HEA Higher Education Act of 1965
OIG Office of Inspector General
OPE Office of Postsecondary Education
This is a work of the U.S. government and is not subject to copyright
protection in the United States. The published product may be reproduced
and distributed in its entirety without further permission from GAO.
However, because this work may contain copyrighted images or other
material, permission from the copyright holder may be necessary if you
wish to reproduce this material separately.
United States Government Accountability Office
Washington, DC 20548
July 31, 2007
The Honorable Edward M. Kennedy
Chairman
Committee on Health, Education,
Labor, and Pensions
United States Senate
The Honorable George Miller
Chairman
Committee on Education and Labor
House of Representatives
The Honorable Richard J. Durbin
United States Senate
The Honorable Dale Kildee
House of Representatives
Concerns have been raised about the Department of Education's (Education)
role in overseeing lenders and schools that participate in the largest of
the federal government's student loan programs, the Federal Family
Education Loan Program (FFELP), through which over $46 billion in new
student loans was disbursed in fiscal year 2006. Education is responsible
for overseeing whether FFELP participants comply with federal laws and
regulations that prohibit lenders from using inducements to increase loan
volume1 and that prohibit schools from limiting a borrower's choice of
lender.2
To respond to your interest in this subject, we answered the following
questions:
o To what extent has Education conducted oversight to help ensure
compliance with prohibitions on improper inducements and
limitations on borrower choice within FFELP?
o To what extent has Education provided guidance to address
concerns about improper inducements and limitations on borrower
choice within FFELP?
o To what extent has Education used its enforcement authority to
help ensure compliance with prohibitions on improper inducements
and limitations on borrower choice within FFELP?
120 U.S.C. S 1085(d)(5)(A).
234 C.F.R. S 682.603(e)(3).
On June 29, 2007, we briefed interested congressional staff on the results
of our study, and this report formally conveys the information provided
during this briefing. In general, we found that Education has no tools for
proactively detecting potential instances of prohibited inducements and
the limiting of borrower choice, although the department is considering
revising some of its processes used to oversee general compliance with
FFELP to begin detecting potential instances of these activities. Also,
Education has been limited in its guidance and enforcement activity but
has recently issued proposed regulations on inducements and borrower
choice. More specifically, we found that:
o While Education has some processes in place to oversee general
compliance with FFELP requirements, it has no oversight tools
designed to proactively identify potential instances of prohibited
inducements or limitations on borrower choice of lender. Instead,
Education primarily depends on complaints to identify potential
non-compliance. However, Education has begun to conduct lender and
school reviews to gather information on inducements and is
considering updating audit guides to begin detecting these
prohibited lending activities.
o The department has not updated comprehensive guidance on
inducements since 1989--despite requests for more guidance from
the student loan community--but it has responded to individual
queries regarding allowable practices. In June 2007, Education
issued proposed regulations that could become effective in July
2008 at the earliest.
o As of June 2007, Education had either sanctioned or attempted to
sanction a total of two lenders in the past 20 years. In
particular, Education disqualified one lender from FFELP in 1988
and attempted to limit the participation of a second lender
starting in 1995, both for offering prohibited inducements. More
frequently, Education has written letters to offending parties
when it responds to instances of non-compliance instead of
imposing sanctions, but it has not routinely assessed the
effectiveness of these letters.
In order to protect students and parents from paying unnecessarily high
interest rates and fees because of improper lending activities among FFELP
participants, we are recommending that the Secretary of Education update
the department's oversight tools, more proactively investigate possible
cases of program non-compliance, issue guidance on inducements, and
develop a protocol to determine the appropriate level of response for
cases of non-compliance and assess the effectiveness of its responses. In
particular, we recommend that Education should:
o Update its oversight tools--such as financial audit and program
review guidance--to identify possible instances of improper
inducements and limitations on borrower choice.
o Be more proactive in examining situations involving possible
improper inducements and limitations on borrower choice, such as
exploring how schools generate preferred lender lists to determine
if improper inducements have occurred.
o Issue new guidance--for example, through a Dear Colleague Letter
(DCL)--regarding inducements to guide the industry until the
relevant proposed regulations become effective in 2008 at the
earliest.
o Establish a protocol for determining the level of response
appropriate for different cases of non-compliance involving
improper inducements or limitations on borrower choice--from
writing letters to imposing fines to terminating
participation--and assess the effectiveness of these actions to
inform and improve this protocol.
We used the following methodology to develop our findings. To understand
the framework of Education's oversight, guidance, and enforcement
authorities, we reviewed relevant laws, regulations, and cases pertaining
to prohibited inducements and limitations on borrower choice. To assess
the extent of Education's oversight activities, we interviewed Education
officials and reviewed departmental documents. Specifically, we reviewed
and catalogued complaints received by Education and the department's
responses to those complaints. We also reviewed the department's audit
guides and its evaluations of program performance. To determine the extent
to which Education provided guidance to the student loan community, we
interviewed Education officials and student loan industry representatives.
We also reviewed the department's various forms of guidance, including
DCLs and individual letters to FFELP participants in response to their
requests for guidance. To assess the extent of Education's enforcement
activities, we interviewed Education officials, reviewed departmental
documents, and reviewed the case between Education and a lender pertaining
to prohibited inducements. For additional information on our scope and
methodology, please see appendix II. We conducted our work in accordance
with generally accepted government auditing standards from February 2007
through June 2007.
We provided a draft copy of this report to the Department of Education for
review and comment and also for technical review. In written comments on
our draft report, Education concurred with our recommendations that the
department update its oversight tools and that the department more
proactively investigate possible cases of program non-compliance.
Education also provided updates on its activities in these areas that we
incorporated into this report, where appropriate.
With regard to our third recommendation that Education issue new guidance
regarding inducements to guide the industry until the relevant proposed
regulations are finalized and become effective, Education did not
explicitly agree or disagree with the recommendation. Instead, Education
noted that, as circumstances dictate, it may determine that specific
guidance regarding inducements is appropriate. Education also stated that
it will encourage schools and lenders to voluntarily implement the new
regulations before they go into effect. Given that the proposed
regulations will not become effective until July 1, 2008, at the earliest,
we believe that Education should issue interim guidance on inducements to
help ensure that schools and lenders comply with program requirements.
With regard to our fourth recommendation that Education develop a protocol
to determine the appropriate level of response for incidents of
non-compliance involving improper inducements or limitations of borrower
choice and that Education routinely assess the effectiveness of its
responses, Education again did not explicitly agree or disagree with the
recommendation. Instead, Education discussed its review procedures to
assess compliance with general FFELP regulations and noted its recent and
ongoing updates to those procedures, points that were included in the
draft copy of our report. Education added that these procedures include an
explanation of which responses are appropriate for varying degrees of
general non-compliance and stated that the procedures require FFELP
participants to provide evidence of corrective action, and it noted that
it will continue to review and enhance its existing protocols in these
areas. Because routine and consistent follow-up in incidents of
non-compliance involving improper inducements or limitations on borrower
choice has not occurred, even with the updated review procedures, we
continue to believe that Education should develop a response protocol
specific to improper inducements and limitations on borrower choice and to
routinely assess the effectiveness of its responses.
Education's written comments appear in appendix III. We also incorporated
Education's technical comments and other updates that the department
provided on its activities, where appropriate.
We are sending copies of this report to relevant congressional committees,
the Secretary of Education, and other interested parties. We will also
make copies available to others upon request. In addition, this report
will be available at no charge on GAO's Web site at [9]www.gao.gov .
If you or your staff have any questions about this report, please contact
me at (202) 512-7215 or [10][email protected] . Contact points for our
Congressional Relations and Public Affairs offices may be found on the
last page of this report. Other major contributors to this report are
listed in appendix IV.
George A. Scott
Director, Education, Workforce, and Income Security Issues
Appendix I: Briefing Slides
Appendix II: Scope and Methodology
To understand the framework of Education's oversight, guidance, and
enforcement authorities, we reviewed relevant laws, regulations, and cases
pertaining to prohibited inducements and limitations on borrower choice of
lender.
To assess the extent of Education's oversight activities, we interviewed
Education officials and reviewed departmental documents. In particular, we
interviewed officials from the Office of Postsecondary Education, Federal
Student Aid, Ombudsman Office, and Office of the Inspector General. With
regard to documentation, we reviewed and catalogued complaints received by
Education and documentation of the department's responses to those
complaints. However, the complaints we received from Education may not
represent all complaints submitted to the department because, prior to
October 2006, Education did not record all the complaints received or
document its responses. We also reviewed the department's audit guides and
its evaluations of program performance.
To determine the extent to which Education provided guidance to the
student loan community, we interviewed Education officials and student
loan industry representatives, and we reviewed departmental guidance.
Within Education, we interviewed staff from the Office of Postsecondary
Education, Federal Student Aid, Ombudsman Office, and Office of the
Inspector General. Within the student loan industry, we interviewed
representatives from the Consumer Bankers Association, Education Finance
Council, National Council of Higher Education Loan Programs, and National
Association of Student Financial Aid Administrators. We reviewed the
department's various forms of guidance--including DCLs and individual
letters to FFELP participants in response to their requests for guidance.
We also documented Education's practices for making determinations
concerning the alleged activity and catalogued the department's written
responses to these concerns and inquiries. Education provided us all the
requests for guidance made in writing since 1990 that it had on file.
However, the requests we received from the department may not represent
all requests submitted to the department for clarification since some
could have been submitted by phone or not documented.
To assess the extent of Education's enforcement activities, we interviewed
Education officials and reviewed departmental documents and applicable
federal laws. Specifically, within Education, we interviewed staff from
the Office of Postsecondary Education, Federal Student Aid, Ombudsman
Office, and Office of the Inspector General to examine actions taken to
address inducement and borrower choice issues. Furthermore, we reviewed
information used by Education to make determinations regarding alleged
improper lending activities (e.g., lender marketing materials containing
alleged inducements and lender inducements resulting in preferred
placement on preferred lender lists). We also examined several Education
offices' protocols for performing reviews in the context of program
compliance.
We conducted our work in accordance with generally accepted government
auditing standards from February 2007 through June 2007.
Appendix III: Comments from the Department of Education
Appendix IV: GAO Contact and Staff Acknowledgments
GAO Contact
George Scott, Director, at (202) 512-7215 or [11][email protected] .
Staff Acknowledgments
Melissa Emrey-Arras, Assistant Director, and Jeffrey W. Weinstein,
Analyst-in-Charge, managed this assignment. Other staff members who made
key contributions to the assignment include Summer Pachman, Kenrick Isaac,
Debra Prescott, Charlie Willson, Ramona Burton, and Lorin Obler. Sheila
McCoy, Doreen S. Feldman, and Richard Burkard provided legal assistance.
Luann Moy assisted with methodology. Karen Burke provided assistance with
graphics and layout.
Related GAO Products
Federal Family Education Loan Program: More Oversight Is Needed for
Schools That Are Lenders. [12]GAO-05-184 . Washington, D.C.: January 2005.
Financial Regulation: Industry Changes Prompt Need to Reconsider U.S.
Regulatory Structure. [13]GAO-05-61 . Washington, D.C.: October 2004.
Better Information Sharing among Financial Services Regulators Could
Improve Protections for Consumers. [14]GAO-04-882R . Washington, D.C.:
June 2004.
Department of Education: Guaranteed Student Loan Program Vulnerabilities.
[15]GAO-03-268R . Washington, D.C.: November 2002.
Federal Student Aid: Additional Management Improvements Would Clarify
Strategic Direction and Enhance Accountability. [16]GAO-02-255 .
Washington, D.C.: April 2002.
Federal Student Loans: Flexible Agreements with Guaranty Agencies Warrant
Careful Evaluation. [17]GAO-02-254 . Washington, D.C.: January 2002.
Financial Management: Financial Management Challenges Remain at the
Department of Education. T-AIMD-00-323. Washington, D.C.: September 2000.
Benefit and Loan Programs: Improved Data Sharing Could Enhance Program
Integrity. HEHS-00-119. Washington, D.C.: September 2000.
Financial Management: Education's Financial Management Problems Persist.
T-AIMD-00-180. Washington, D.C.: May 2000.
Financial Management: Education Faces Challenges in Achieving Financial
Management Reform. T-AIMD-00-106. Washington, D.C.: March 2000.
Department of Education: Information Needs Are at the Core of Management
Challenges Facing the Department. T-HEHS-98-124. Washington, D.C.: March
1998.
Department of Education: Multiple, Nonintegrated Systems Hamper Management
of Student Financial Aid Programs. T-HEHS/AIMD-97-132. Washington, D.C.:
May 1997.
Department of Education: Status of Actions to Improve the Management of
Student Financial Aid. HEHS-96-143. Washington, D.C.: July 1996.
Financial Regulation: Modernization of the Financial Services Regulatory
System. T-GGD-95-121. Washington, D.C.: March 1995.
Financial Management: Education's Student Loan Program Controls over
Lenders Need Improvement. AIMD-93-33. Washington, D.C.: September 1993.
Financial Audit: Guaranteed Student Loan Program's Internal Controls and
Structure Need Improvement. AFMD-93-20. Washington, D.C.: March 1993.
(130648)
GAO's Mission
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities and to help improve the performance and
accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony
The fastest and easiest way to obtain copies of GAO documents at no cost
is through GAO's Web site ( [18]www.gao.gov ). Each weekday, GAO posts
newly released reports, testimony, and correspondence on its Web site. To
have GAO e-mail you a list of newly posted products every afternoon, go to
[19]www.gao.gov and select "Subscribe to Updates."
Order by Mail or Phone
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent of
Documents. GAO also accepts VISA and Mastercard. Orders for 100 or more
copies mailed to a single address are discounted 25 percent. Orders should
be sent to:
U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
D.C. 20548
To order by Phone: Voice: (202) 512-6000
TDD: (202) 512-2537
Fax: (202) 512-6061
To Report Fraud, Waste, and Abuse in Federal Programs
Contact:
Web site: [20]www.gao.gov/fraudnet/fraudnet.htm
E-mail: [21][email protected]
Automated answering system: (800) 424-5454 or (202) 512-7470
Congressional Relations
Gloria Jarmon, Managing Director, [22][email protected] , (202) 512-4400
U.S. Government Accountability Office, 441 G Street NW, Room 7125
Washington, D.C. 20548
Public Affairs
Paul Anderson, Managing Director, [23][email protected] , (202) 512-4800
U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548
[24]www.gao.gov/cgi-bin/getrpt?GAO-07-750 .
To view the full product, including the scope
and methodology, click on the link above.
For more information, contact George A. Scott at (202) 512-7215 or
[25][email protected] .
Highlights of [26]GAO-07-750 , a report to Congressional Requesters
July 2007
FEDERAL FAMILY EDUCATION LOAN PROGRAM
Increased Department of Education Oversight of Lender and School
Activities Needed to Help Ensure Program Compliance
Concerns have been raised about the Department of Education's (Education)
role in overseeing the lenders and schools that participate in the largest
of the federal government's student loan programs, the Federal Family
Education Loan Program (FFELP). GAO was asked to analyze Education's use
of its oversight, guidance, and enforcement authorities under FFELP. To do
this, GAO reviewed departmental documents and federal laws, regulations,
and cases and interviewed officials from Education and the student loan
industry.
[27]What GAO Recommends
GAO recommends that the Secretary of Education (1) update the department's
oversight mechanisms to proactively identify possible instances of
improper inducements and limitations on borrower choice, (2) be more
proactive in investigating situations involving possible instances of
these prohibited activities, (3) issue new guidance regarding inducements
to guide the student loan industry until the relevant proposed regulations
are finalized and become effective, and (4) develop a protocol to
determine the appropriate level of response for cases of non-compliance
and assess the effectiveness of these actions to inform and improve this
protocol. Education agreed with the first two recommendations but did not
explicitly agree or disagree with the other two.
While Education has some processes to oversee general compliance in FFELP,
it has no oversight tools in place designed to proactively detect
potential instances of lenders providing improper inducements--such as
gifts to schools in exchange for preferred status on a school's suggested
lender list--or schools limiting borrower choice of lender, two activities
that are prohibited by law. Instead, the department primarily depends on
external complaints to identify potential instances of non-compliance with
these prohibitions. Historically, Education did not process these
complaints in a systematic manner because complaint processing was not
overseen by any one group. However, Education does have plans to conduct
lender and school reviews to gather information on inducements, and it is
considering updating its audit guides to begin detecting potential
instances of improper inducements.
Education has not implemented formal comprehensive guidance on inducements
since 1989, although it has repeated some of the information contained in
that guidance in subsequent financial aid handbooks and other department
publications. Instead, the department has responded informally to
individual queries from the student loan community regarding allowable
inducement practices. Education's Office of Inspector General recommended
in 2003--and members of the student loan community have previously
requested--that Education issue more guidance on these issues. In June
2007, Education issued proposed regulations that address improper
inducements and limitations on borrower choice, and these regulations
could become effective in July 2008 at the earliest.
Education has only attempted to use its sanctioning authority twice in the
past 20 years to enforce prohibitions on improper inducements or
limitations on borrower choice. In particular, Education disqualified one
lender from FFELP for using misleading advertising and providing improper
inducements to borrowers, and it initiated proceedings to limit the
participation of another lender in light of what it had determined to be
an improper inducement. When Education responds to non-compliance, the
department instead has commonly sent letters to offending parties noting
the prohibited activity and requesting they cease the activity. In
addition, Education has not established a protocol for how to best respond
to non-compliance--whether to write a letter requesting the activity to
cease or to sanction a lender or school--nor has it routinely assessed the
effectiveness of these actions in stopping prohibited activities.
References
Visible links
9. http://www.gao.gov/
10. mailto:[email protected]
11. mailto:[email protected]
12. http://www.gao.gov/cgi-bin/getrpt?GAO-05-184
13. http://www.gao.gov/cgi-bin/getrpt?GAO-05-61
14. http://www.gao.gov/cgi-bin/getrpt?GAO-04-882R
15. http://www.gao.gov/cgi-bin/getrpt?GAO-03-268R
16. http://www.gao.gov/cgi-bin/getrpt?GAO-02-255
17. http://www.gao.gov/cgi-bin/getrpt?GAO-02-254
18. http://www.gao.gov/
19. http://www.gao.gov/
20. http://www.gao.gov/fraudnet/fraudnet.htm
21. mailto:[email protected]
22. mailto:[email protected]
23. mailto:[email protected]
24. http://www.gao.gov/cgi-bin/getrpt?GAO-07-750
25. mailto:[email protected]
26. http://www.gao.gov/cgi-bin/getrpt?GAO-07-750
*** End of document. ***