Guaranteed Student Loans: Actions to Ensure Continued Student Access to
Subsidized Loans (Letter Report, 02/24/95, GAO/HEHS-95-64).

Recent changes to the Federal Family Education Loan Program, formerly
the Guaranteed Student Loan Program, as well as the introduction of the
Federal Direct Student Loan Program, have raised concerns about whether
eligible borrowers will continue to have access to subsidized loans.
Many lenders and guaranty agencies expect some eligible students to have
difficulty obtaining subsidized Stafford loans during the next few
years. Guaranty agencies generally have arrangements to provide loans to
these students.  The Education Department has arranged with Sallie Mae
to make loans to students to whom guaranty agencies cannot provide them.
The Department has also arranged with a new agency to serve as a
guarantor of last resort if existing guaranty agencies cannot provide
guarantees to lenders. Predicting how well these arrangements will
ensure access to loans after fiscal year 1995 is difficult, and the
issue may need to be revisited later.

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

 REPORTNUM:  HEHS-95-64
     TITLE:  Guaranteed Student Loans: Actions to Ensure Continued 
             Student Access to Subsidized Loans
      DATE:  02/24/95
   SUBJECT:  Educational programs
             Government guaranteed loans
             Student loans
             Lending institutions
             Higher education
             Student aid programs
             Aid for education
             Student financial aid
             Subsidies
             Financial management
IDENTIFIER:  Federal Family Education Loan Program
             Guaranteed Student Loan Program
             Dept. of Education Stafford Student Loan Program
             National Direct Student Loan Program
             Dept. of Education Parent Loans for Undergraduate Students 
             Program
             Dept. of Education Supplemental Loans for Students Program
             
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Cover
================================================================ COVER


Report to the Chairman and Ranking Minority Member, Committee on
Economic and Educational Opportunities
House of Representatives

February 1995

GUARANTEED STUDENT LOANS - ACTIONS
TO ENSURE CONTINUED STUDENT ACCESS
TO SUBSIDIZED LOANS

GAO/HEHS-95-64

Access to Student Loans


Abbreviations
=============================================================== ABBREV

  FDSLP - Federal Direct Student Loan Program
  FFELP - Federal Family Education Loan Program
  FFY - federal fiscal year
  LLR - lender-of-last-resort
  PLUS - Parent Loans for Undergraduate Students
  SLS - Supplemental Loans for Students

Letter
=============================================================== LETTER


B-254781

February 24, 1995

The Honorable William F.  Goodling
Chairman, Committee on Economic and
 Educational Opportunities
House of Representatives

The Honorable William L.  Clay
Ranking Minority Member
Committee on Economic and
 Educational Opportunities
House of Representatives

Each year millions of students needing financial assistance to attend
postsecondary institutions rely on private lenders to provide
federally subsidized Stafford loans through the Federal Family
Education Loan Program (FFELP) (formerly the Guaranteed Student Loan
Program).\1

In fiscal year 1994 lender commitments for subsidized Stafford loans,
accounting for most FFELP loans, totaled about $14.8 billion.  You
asked us to study the availability of federally subsidized Stafford
student loans for postsecondary education in light of recent
legislated changes.  The Higher Education Amendments of 1992 and the
Student Loan Reform Act of 1993 authorized the Federal Direct Student
Loan Program (FDSLP) and brought changes to FFELP including decreases
in the interest rates lenders may charge for Stafford loans and the
rate at which lenders receive reimbursement if borrowers fail to
repay the loans.  These changes have raised concerns about whether
lenders will continue to make these loans. 

As agreed with your offices, our objectives were to determine (1) how
guaranty agency and lender representatives, Department of Education
officials, and others perceive the risk that eligible borrowers will
have difficulty obtaining subsidized Stafford loans; (2) what
arrangements guaranty agencies have in place or are adopting to
provide loans to eligible borrowers that may have difficulty; and (3)
what the Department is doing to ensure continued access to subsidized
Stafford loans. 

To address these objectives, we sent a questionnaire to each guaranty
agency inquiring about access to subsidized Stafford loans through
fiscal year 1995 and their "lender-of-last-resort" (LLR) programs and
plans.\2 Of the 45 guaranty agencies making new guarantees at that
time, 43 responded to the survey.  See the appendix for a copy of the
questionnaire with summary results.  We did not verify agencies'
responses to the questionnaire. 

To supplement the questionnaire results, we reviewed guaranty agency
LLR plans that had been approved by the Department.  We discussed LLR
programs, contingency plans, and agency monitoring efforts with
officials from the Department; representatives at the Student Loan
Marketing Association (Sallie Mae), a government-sponsored enterprise
that purchases student loans from lenders; and with student loan
interest groups including the Consumer Bankers Association, which
provided us a written reply to questions based on responses from
several of its members that lend to students. 


--------------------
\1 Subsidized Stafford loans are made to financially needy students,
and the federal government pays the interest while students are in
school.  Students not qualified for a subsidized loan may obtain an
unsubsidized Stafford loan, but they will be responsible for the
interest beginning when the loan is made. 

\2 Through LLR programs guaranty agencies, or lenders that they
designate, provide Stafford loans to eligible students who are
otherwise unable to obtain them. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Recent changes to FFELP, as well as the introduction of FDSLP, have
raised concerns about whether eligible borrowers will continue to
have access to subsidized loans.  Many lenders and guaranty agencies
expect some eligible students to have difficulty obtaining subsidized
Stafford loans over the next few years.  Guaranty agencies generally
have arrangements to provide loans to these students.  If a guaranty
agency is unable to provide loans to a student, the Department has
arrangements with Sallie Mae to make loans.  The Department has also
made arrangements with a new agency to serve as a guarantor of last
resort if existing guaranty agencies are unable to provide guarantees
to lenders.  It is difficult to predict how well these arrangements
will ensure access to loans after fiscal year 1995, and the issue may
need to be reexamined at a later time. 


   BACKGROUND
------------------------------------------------------------ Letter :2

FFELP is the largest source of federal financial assistance to
students attending postsecondary institutions.  In fiscal year 1994
students received about $23 billion in FFELP loan commitments,
including about $14.8 billion in subsidized Stafford loans.\3 The
Department of Education pays interest to lenders on the behalf of
subsidized Stafford loan borrowers while they are in school and
during a subsequent 6-month grace period.  This interest benefit is
not available to borrowers for other FFELP loans.  The private
lenders that provide these loans may not discriminate on the basis of
race, national origin, religion, sex, marital status, age, or
handicapped status but, according to a Department policy official,
may deny loans to eligible borrowers who do not meet their lending
standards.  Lenders may, for example, deny loans to students
attending proprietary (for profit, typically trade and vocational)
institutions or schools with high loan default rates.  They may also
withdraw from the program. 

Guaranty agencies, designated state or private not-for-profit
entities, help administer FFELP by, for example, reimbursing lenders
if borrowers fail to repay their loans.  If an eligible borrower
experiences difficulty obtaining a subsidized Stafford loan, guaranty
agencies are required to provide one.  The agencies may do so either
directly or through a lender authorized to make LLR loans.  Guaranty
agencies must provide subsidized Stafford LLR loans to eligible
students that have been denied a loan by two or more participating
lenders.  This requirement does not apply to unsubsidized Stafford
loans. 

Several major changes to the subsidized loan program may influence
the availability of loans.  The 1992 amendments, for example, reduced
the interest revenue lenders can receive from subsidized loans, and
the 1993 Student Loan Reform Act reduced the rate at which guaranty
agencies generally reimburse lenders if borrowers fail to repay their
loans.\4 In addition, the 1993 act established FDSLP to provide loans
to students from the Department of Education rather than from private
lenders.  This program is expected to provide at least 60 percent of
federal student loans by the 1998-99 academic year.  Such reductions
in student loan revenue and competition from the direct student loan
program could reduce the profitability of student loans and reduce
lenders' willingness to offer new loans to students. 


--------------------
\3 The other FFELP loans were unsubsidized Stafford loans, Parent
Loans for Undergraduate Students (PLUS), and Supplemental Loans for
Students (SLS).  The SLS program was terminated July 1, 1994, and
merged into the unsubsidized Stafford loan program. 

\4 Lenders that make Stafford LLR loans are eligible for 100-percent
reimbursement for defaulted loans versus 98-percent reimbursement
under most other circumstances. 


   PRINCIPAL FINDINGS
------------------------------------------------------------ Letter :3

In response to our questionnaire and in discussions with us,
participants in the subsidized Stafford loan program expressed
differing views on the risk that eligible students could be denied
loans through the end of fiscal year 1995.  Most but not all guaranty
agencies have arrangements in place to provide loans to students that
have difficulty obtaining loans.  The Department has several options
for ensuring access if guaranty agencies are not able to do so
without assistance. 


      PERCEIVED RISK OF LOAN
      ACCESS PROBLEMS
---------------------------------------------------------- Letter :3.1

As some lenders become selective in making Stafford loans or stop
participating in the program, many lenders and guaranty agencies
expect some eligible subsidized Stafford loan borrowers to be denied
loans by one or more lenders. 

We asked program participants to describe the risk that 5 percent or
more of eligible borrowers will be refused a subsidized Stafford loan
by one or more lenders through the end of fiscal year 1995. 
Department officials with whom we spoke foresaw little or no risk
that lender refusals to make loans would be widespread.  Sallie Mae
officials also doubted that as many as 5 percent of eligible
borrowers would be denied a loan.  The President of the Consumer
Bankers Association said that there is "some" risk that 5 percent or
more would be denied a loan. 

The guaranty agencies that responded to our questionnaire had a wide
range of views on this question.  (See fig.  1.) Thirteen of these
agencies rated the risk "moderate," "great," or "very great," while
16 agencies said that there is "little or no risk." The remaining 13
agencies indicated "some risk." One responded that it did not know. 

   Figure 1:  Agencies'
   Assessments of Whether 5
   Percent or More of Eligible
   Borrowers Could Be Denied a
   Subsidized Stafford Loan

   (See figure in printed
   edition.)

Note:  Percentages do not add to 100 because of rounding. 

Concerns that some students will have difficulty obtaining access to
loans evolve from lenders' deciding to leave the program or to become
selective in making student loans.  Additional departures of lenders
from FFELP would represent a continuation of a trend begun in the
mid-1980s.  For example, during fiscal years 1984-1986, between
11,000 and 12,000 lenders participated in FFELP.  The number of
participating lenders has declined each year since, in part
reflecting the general trend of mergers and consolidations in the
financial community.  By fiscal year 1993 the Department counted
fewer than 7,500 active lenders.  In response to our questionnaire,
28 agencies said that one or more of their lenders--lenders whose
loans they guarantee--had indicated they plan to stop making
subsidized Stafford loans sometime in the future.  Six agencies said
that this included one of their five largest loan volume lenders. 
Three of these agencies referred to the same lender. 

In addition to lenders that may stop making loans, concerns about
loan access may arise if lenders choose to become more selective
about making loans.  Twenty agencies responded that one or more of
their lenders planned to stop making loans to students attending
institutions with student loan default rates that they--the
lenders--consider too high.  Most of these agencies said that 5 or
fewer lenders would stop making loans, but one agency said that more
than 200 lenders would stop. 


      GUARANTY AGENCY ARRANGEMENTS
      FOR PROVIDING LLR LOANS
---------------------------------------------------------- Letter :3.2

Most guaranty agencies--40 of the 43 respondents--had arrangements to
provide LLR loans to eligible students.  These arrangements included
agreements with state secondary markets or other participating
lenders to provide loans.  Through September 30, 1993, the volume of
loans provided through these arrangements had been small.  More than
half of the agencies said that they did not guarantee any LLR loans
in fiscal years 1992 or 1993.  The 16 agencies that provided data on
LLR loans they made in fiscal year 1993 had an aggregate LLR loan
volume of $32 million--about 0.3 percent of the $12.5 billion of
subsidized Stafford loans made in fiscal year 1993. 

Twenty-six of the responding guaranty agencies responded to our
question concerning the estimated capacity of their LLR arrangements. 
Twenty-two agencies estimated that they could have provided about
$1.8 billion in LLR loans in fiscal year 1994.  This represents an
amount that is more than 50 times the total LLR loan volume for
fiscal year 1993, and about one-eighth of total subsidized Stafford
loan volume in fiscal year 1994.  Three agencies cited "unlimited"
LLR capacity.  The largest guaranty agency, United Student Aid Funds,
Inc., said that it has no set maximum on its LLR capacity. 

Nearly all of the agencies indicated they had LLR arrangements, and
two-thirds had plans that the Department had approved.  Department
officials said that six agencies had not submitted plans for
approval.  Plans from the remaining agencies were either pending
approval, or the plans submitted had been denied approval and the
agencies had not resubmitted their plans.  (See table 1.)



                Table 1

  Status of Department of Education's
Approval of Guaranty Agency LLR Plans as
            of December 1994

