Student Loan Defaults: Department of Education Limitations in Sanctioning
Problem Schools (Letter Report, 06/19/95, GAO/HEHS-95-99).

Pursuant to a congressional request, GAO reviewed the Department of
Education's efforts to resolve disputes arising from its debarment of
schools from federally guaranteed student loan programs, focusing on:
(1) how many schools have contested Education decisions and what are
their main points of contention; (2) whether Education has taken
sufficient steps to implement the 1993 amendments to the Higher
Education Act and address the schools' concerns; and (3) what needs to
be done to resolve problems with Education's default reduction
initiative.

GAO found that: (1) as of September 30, 1994, 601 schools were barred
from the Federal Family Education Program and 250 schools had pending
administrative appeals challenging Education's default rate
determinations; (2) 111 schools had filed 22 lawsuits over default rate
issues, of which 10 have been dismissed or terminated by agreement; (3)
the schools alleged that Education used erroneous data in its default
rate calculations and failed to exclude improperly serviced loans in its
calculations; (4) the inaccuracies in Education's databases concerning
loan defaults were well documented; (5) the schools and Education did
not agree on what constituted an improperly serviced loan; and (6) the
schools complained that they had insufficient access to loan information
which limited their ability to detect servicing problems. GAO also found
that: (1) the 1993 amendments should reduce, but not eliminate,
challenges to Education's default rate determinations; (2) schools'
increased access to loan information should resolve misunderstandings on
matters of fact and implementing regulations should make adjudications
more straightforward and less time-consuming; (3) these regulatory
changes will not fully protect the government's interest in these
disputes, since unscrupulous schools continue to accumulate additional
loan default costs during the appeal process; and (4) to protect the
government from these additional costs, schools should be held liable
for additional loan default costs that occur during the appeals process
or required to post performance bonds as a condition of filing an
appeal.

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

 REPORTNUM:  HEHS-95-99
     TITLE:  Student Loan Defaults: Department of Education Limitations 
             in Sanctioning Problem Schools
      DATE:  06/19/95
   SUBJECT:  Student loans
             Government guaranteed loans
             Data integrity
             Data bases
             Loan defaults
             Vocational schools
             Eligibility determinations
             Student financial aid
             Loan accounting systems
             Appellate procedure
IDENTIFIER:  Dept. of Education Default Reduction Initiative
             Federal Family Education Loan Program
             Dept. of Education Stafford Student Loan Program
             Dept. of Education Parent Loans for Undergraduate Students 
             Program
             Dept. of Education National Student Loan Data System
             
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Cover
================================================================ COVER


Report to the Ranking Minority Member, Subcommittee on Human
Resources and Intergovernmental Relations, Committee on Government
Reform and Oversight, House of Representatives

June 1995

STUDENT LOAN DEFAULTS - DEPARTMENT
OF EDUCATION LIMITATIONS IN
SANCTIONING PROBLEM SCHOOLS

GAO/HEHS-95-99

Student Loan Default Data


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

  FFELP - Federal Family Education Loan Program
  OGC - Office of General Counsel
  OIG - Office of Inspector General
  SLS - Supplemental Loans for Students

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


B-255079

June 19, 1995

The Honorable Edolphus Towns
Ranking Minority Member
Subcommittee on Human Resources
 and Intergovernmental Relations
Committee on Government Reform
 and Oversight
House of Representatives

Dear Mr.  Towns: 

Some schools, particularly proprietary for-profit trade schools whose
profits come from student tuition payments, have enrolled students
whose tuition is heavily financed by federally guaranteed student
loans.  Some of these schools are not overly concerned about their
students completing an educational program or the frequency of their
students defaulting on student loans.  Although annual federal costs
for defaulted student loans have begun to decline from their high of
$3.6 billion in 1991, in 1994 the federal government paid out $2.4
billion to make good its guarantee on these defaulted loans. 

In 1991, the Department of Education, under its Default Reduction
Initiative, which implemented the Student Loan Default Prevention
Initiative Act of 1990 (P.L.  101-508), began to bar postsecondary
schools from federally guaranteed student loan programs if their
students had exceptionally high loan default rates.  Congressional
hearings in 1990 had shown that some for-profit trade schools with
high loan default rates received substantial proceeds from such loans
while providing students with little or no education in return. 
Under this new initiative, the Department could stop a school from
participating in federal loan programs if the school's default rate
exceeded statutory thresholds in 3 consecutive fiscal years--in
general, about a 25-percent default rate.  However, once the
initiative was under way, many schools complained that the Department
was not using accurate information in setting default rates.  A
number of schools filed administrative appeals or took court action
to block the Department's denial of their participation in federal
loan programs. 

You asked us to determine whether sufficient steps were being taken
to resolve these issues.  These steps included the Department's
implementation of certain amendments to the Higher Education Act,
enacted in 1993, that were designed to address the schools' concerns. 
As agreed with your office, we focused our work on the following
questions: 

  How many schools have contested the Department's decisions, and
     what are the main points of their contention? 

  To what extent are the schools' concerns addressed by the 1993
     amendments and the Department's efforts to implement them? 

  What more, if anything, may need to be done to resolve problems
     with the default reduction initiative? 

We examined Department information on defaulted student loans to
determine the extent to which schools were filing administrative
appeals challenging the accuracy of the Department's default rate
data.  We also examined documents filed in the courts by the schools
and the Department to determine the nature and outcomes of the
lawsuits that the schools have filed against the Department over
default rate issues. 


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

As of September 30, 1994, 250 schools had administrative appeals
pending with the Department challenging the accuracy of their default
rates.  The 250 schools constituted about one-third of all schools
identified by the Department as being above the statutory default
thresholds in fiscal years 1991 to 1994.  In addition, 111 schools
and their trade associations filed 22 lawsuits over default rate
issues.  In the appeals and lawsuits, the main issues under
contention were that the Department (1) used erroneous data in the
default rate calculations or (2) failed to follow the law by
including defaulted loans that had not been properly serviced by
lenders in the default rate calculations. 

In our view, the 1993 amendments will not eliminate challenges to the
Department's default rate determination, but should reduce the
likelihood of such challenges.  The amendments require that schools
be given an opportunity to verify the accuracy of loan data and
examine loan servicing records.  This access to information should
help resolve misunderstandings on matters of fact and allow a clearer
focus in those areas in which disagreements remain.  Regulations
issued in November 1994 to implement these amendments should make
adjudication of appeals more straightforward and less time-consuming. 

These recent changes, while addressing schools' concerns, did not
contain measures to fully protect the government's interest in such
disputes.  Current policies and practices leave open the possibility
that unscrupulous schools can saddle the government with additional
loan default costs by continuing their same pattern of operation
during the appeals process.  Possible ways to address this concern
include (1) holding a school liable for costs associated with
defaults on loans made to its students during the appeals process and
(2) requiring that a school post a performance bond as a condition of
filing an appeal.  The first alternative was used in an earlier
federal student loan program; the second alternative has been ordered
by a court in one of the lawsuits against the Department. 


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

In 1990, the Senate Permanent Subcommittee on Investigations
conducted a series of hearings on fraud and abuse in the Federal
Family Education Loan Program (FFELP).\1 Evidence provided to the
Subcommittee showed that operators of some for-profit trade schools
made substantial amounts of money by taking payments from students in
the form of federally guaranteed student loans while providing little
or no education in return.  Faced with large debts and no marketable
training, these students often defaulted on their loans.  Based on
this and other evidence, the Subcommittee concluded that high default
rates were both a warning sign of potential abuse and a common thread
of actual abuse in problem schools. 

In response to this information and to loan defaults that increased
from $1.4 billion in fiscal year 1988 to over $2.6 billion in fiscal
year 1990, the Congress enacted the Student Loan Default Prevention
Initiative Act of 1990.  This legislation, together with the
Department's Default Reduction Initiative, established a process for
discontinuing participation in FFELP for postsecondary institutions
with default rates over certain statutory thresholds. 

Under this process, the Department annually computes a default rate
(known as the cohort default rate) for all participating schools.  In
general, the default rate is the percentage of a school's borrowers
who enter repayment in one fiscal year and default by the end of the
next fiscal year.  For example, if 100 former students from a school
were scheduled to begin repaying their loans in fiscal year 1990 and
25 defaulted on their loans by the end of fiscal year 1991, the
school's fiscal year 1990 default rate would be 25 percent. 

To compute default rates, the Department uses data submitted annually
on computer tapes by guaranty agencies that administer FFELP at the
state level.  This database, commonly called the tape dump, contains
information showing the status of the program at the end of each
federal fiscal year (September 30).  Guaranty agencies, which use
information provided by lenders, schools, and borrowers, are required
to certify that the annual data tapes are complete and accurate.  The
Department checks the data tapes for missing or erroneous entries and
returns tapes to the agencies for correction if it finds what it
considers to be a significant number of errors. 

To remain eligible for participation in FFELP, schools must have
default rates that are lower than the statutory thresholds, which
vary depending on the fiscal year or years covered.  For example, if
a school's annual default rate was 25 percent or greater for fiscal
years 1990, 1991, and 1992, it was subject to the loss of its
eligibility in FFELP beginning in fiscal year 1994.\2 According to
federal requirements, schools with default rates over statutory
thresholds can file an appeal with the Department (or seek relief
through litigation) if they believe that

  their default rates were calculated using erroneous data,

  their default rates were calculated using loans that fell into
     default as a result of improper loan servicing or collection
     procedures, or

  exceptional mitigating circumstances exist.\3


--------------------
\1 FFELP comprises several types of federally guaranteed student
loans:  Stafford loans, Parent Loans for Undergraduate Students, and
consolidated loans.  These loans are made by private lenders, but the
federal government--through a network of guaranty agencies--repays
the loan in the event of a default. 

\2 Schools with a single year default rate of 40 percent or higher
(for fiscal year 1992 or later) are also subject to limitation,
suspension, or termination actions that can result in the schools'
loss of eligibility for all federal student aid programs authorized
under title IV of the Higher Education Act of 1965, as amended. 

\3 A school is considered to have exceptional mitigating
circumstances if it can demonstrate that (1) either 15 percent or
fewer of its at least half-time students received Stafford or
Supplemental Loans for Students (SLS) in a recent 24-month period or
two-thirds or more of its at least half-time students in a recent
24-month period were economically disadvantaged; and (2) two-thirds
of its full-time students complete their course of study and
two-thirds or more of its graduating students find jobs or were
transferred to higher levels of education for which the school's
program provided substantial preparation. 


   DEPARTMENT'S DEFAULT RATES HAVE
   BEEN CHALLENGED
------------------------------------------------------------ Letter :3

During fiscal years 1991 to 1994, 890 schools became subject to the
loss of FFELP eligibility because their default rates were over the
statutory thresholds for at least 3 successive years.  As of
September 30, 1994, 601 of these schools were no longer eligible for
FFELP participation.  However, another 250 schools had appealed the
Department's calculation of their default rates and their appeals
were still pending.  Appendix II provides more details on the results
of the Department's Default Reduction Initiative. 

In addition to filing administrative appeals, some schools and their
trade associations have filed suit over the default rate issue.  In
total, 22 lawsuits have been filed, with 111 schools as parties to
one or more of them.  As of September 30, 1994, 10 of the lawsuits
(involving 17 of the schools) had been either dismissed by the courts
or had been terminated by agreements between the schools and the
Department.  The 12 other cases were pending, and the 94 schools
involved were continuing to participate in the program.\4

The appeals and lawsuits have centered on two allegations:  that the
Department used erroneous data in its computations and that it failed
to follow the law's requirement to exclude improperly serviced loans
when making its calculations.  The schools filing lawsuits have also
alleged that the loan servicing problems were aggravated by the
schools' lack of access to information. 


--------------------
\4 One of these cases also involved an association representing
proprietary schools.  This lawsuit was subsequently withdrawn. 


      DATA ACCURACY ISSUES
---------------------------------------------------------- Letter :3.1

The accuracy of the Department's data has been an issue raised in at
least 236 of the schools' administrative appeals and 17 of the 22
lawsuits.  In general, the schools' concerns have been based in part
on well-documented inaccuracies in the Department's loan database. 
For example, after releasing school default rates for fiscal year
1988, the Department learned that guaranty agencies for California,
Florida, and Washington had reported erroneous date-entered-repayment
dates to the Department.\5 This mistake contributed to the
Department's having to recompute rates for about 5,000 schools. 
Similar mistakes were subsequently found in the data of three other
guaranty agencies, leading to recomputations of default rates for
affected schools for fiscal years 1989 to 1991. 

Problems were also discovered in Department reviews of guaranty
agencies' data tapes for the period from March 1992 to January 1993. 
These reviews were undertaken to address problems like those
described above, and they disclosed inaccuracies in data supplied by
several guaranty agencies for such matters as the
date-entered-repayment, student enrollment status, and defaulted loan
amount.  The Department found that inaccuracies occurred in part
because guaranty agencies were estimating certain data elements
instead of using the most current information received from lenders
or schools. 

We have reported before on problems with the accuracy of the
Department's student loan data.  For example, in 1990 we reported
that the loan database often contained information that was suspect
or incomplete.\6 In an audit of the internal controls of FFELP, we
reported that none of the 10 guaranty agencies included in our review
routinely researched and corrected erroneous data before submitting
data tapes to the Department.\7 Most recently, in a joint financial
audit conducted with the Department's Office of Inspector General
(OIG), we found that some of the tape data were clearly wrong; for
example, data showing that borrowers defaulted before the date that a
loan was made.\8


--------------------
\5 The date-entered-repayment data element is significant because
that date determines the year that a borrower's loan is included in
the default rate calculation. 

\6 Stafford Student Loans:  Millions of Dollars in Loans Awarded to
Ineligible Borrowers (GAO/IMTEC-91-7, Dec.  12, 1990). 

\7 Financial Audit:  Guaranteed Student Loan Program's Internal
Controls and Structure Need Improvement (GAO/AFMD-93-20, Mar.  16,
1993). 

\8 Financial Audit:  Federal Family Education Loan Program's
Financial Statements for Fiscal Years 1993 and 1992 (GAO/AIMD-94-131,
ACN 17-30302, June 30, 1994). 


      LOAN SERVICING ISSUES
---------------------------------------------------------- Letter :3.2

Servicing of loans has been the more contentious issue.  Section
435(m)(1)(B) of the Higher Education Act requires the Department to
".  .  .  exclude any loans which, due to improper servicing or
collection, would result in an inaccurate or incomplete calculation
of the cohort default rate"\9 (emphasis added).  In nearly all the
lawsuits filed against the Department, schools contended that the
Department failed to exclude many improperly serviced loans as
required by this provision and thus erroneously inflated the school's
default rate.  Most schools (198 of the 270 with appeals pending as
of September 30, 1994) have also based their appeals on the grounds
that the Department did not exclude loans that were improperly
serviced by lenders. 


--------------------
\9 This section of the law was subsequently amended by the Higher
Education Technical Amendments of 1993 and is discussed on pages 8-9. 


         DISAGREEMENTS ABOUT WHAT
         CONSTITUTES IMPROPER
         SERVICING
-------------------------------------------------------- Letter :3.2.1

Part of the controversy has involved the definition of what
constitutes improperly serviced loans.  The schools have generally
contended that an improperly serviced loan is one in which lenders or
loan servicing agencies have violated the Department's procedures for
servicing and collecting loans (referred to as due diligence
procedures) as specified in federal regulations (34 C.F.R. 
682.411).\10 An example of these procedures is the requirement that a
lender must send at least one written notice or collection letter to
a borrower during the first 10 days of a delinquency.  If this effort
fails, the lender must initiate a series of at least four telephone
calls and send at least four additional collection letters in an
attempt to bring the borrower back into repayment status.  Most of
the lawsuits contended that many loans were improperly serviced under
these procedures, in that lenders made insufficient attempts to
telephone borrowers or failed to use the proper series of letters. 

To support their position, schools have provided a number of examples
of studies conducted by their own consultants, the Department's OIG,
and others that have alleged significant deficiencies in loan
servicing.  For example, a consultant hired by some of the schools
examined approximately 7,000 loans from six guaranty agencies and
alleged that loan servicing errors (such as improper telephone
contact) occurred at rates ranging from 87 percent for one guaranty
agency to 42 percent for another agency. 

In rebuttal, the Department has contended that its improper loan
servicing determinations are based on additional factors beyond
violations of due diligence procedures.  It said that certain modest
violations of due diligence procedures are not significant for claims
payment purposes and loans with these types of violations should not
be construed to be improperly serviced for purposes of determining a
school's default rate.  Also, for a defaulted loan to be excluded
from its calculations, the Department believes that a clear
cause-and-effect relationship must exist between improper servicing
and a loan's default--a relationship it maintains the schools have
failed to show. 

In one court ruling on this matter, an appellate court concluded that
the law requires a link between the violation and the default.  The
judge said that because the statute did not provide any guidance on
the extent to which schools must demonstrate the causal link between
the violation and the default, the court would defer to any
reasonable interpretation of the statute by the Secretary of
Education. 


--------------------
\10 The regulations require that lenders follow the due diligence
procedures for default claims to be paid; failure to follow the
procedures may be cause for default claims to be rejected. 


         SCHOOLS' ACCESS TO LOAN
         SERVICING RECORDS
-------------------------------------------------------- Letter :3.2.2

In about one-half of the lawsuits, the schools contended that the
lack of access to loan servicing records limited their ability to
identify possible loan servicing problems.  They noted that guaranty
agencies were required to provide loan servicing records for only
those loans that the schools believed had loan servicing
deficiencies.  The Department took the position that granting schools
wider access to hundreds or thousands of guaranty agency loan records
would be administratively infeasible and that the statutory deadlines
for the appeals process were not set up to allow schools to conduct
"fishing expeditions" through the voluminous records of the guaranty
agencies. 


   1993 AMENDMENTS AND
   IMPLEMENTING REGULATIONS SHOULD
   MAKE CONFLICT RESOLUTION LESS
   CONTENTIOUS
------------------------------------------------------------ Letter :4

The Higher Education Technical Amendments of 1993 contained
provisions that, among other things, address schools' concerns about
access to default rate and loan servicing data.  Also, the
implementing regulations, which were issued in November 1994, appear
to make the adjudication of appeals more straightforward and less
time-consuming. 


      ACCESS TO DEFAULT RATE
      INFORMATION
---------------------------------------------------------- Letter :4.1

Regarding the accuracy of data used in computing default rates, the
amendments established a requirement that schools be allowed a
reasonable opportunity to verify the accuracy of data before the
Department uses them to compute default rates.  The new requirements
are effective for default rates issued in fiscal year 1995.  Also,
for use in computing fiscal year 1995 default rates, Department
officials said that they intend to begin using data collected through
the Department's National Student Loan Data System.\11 The Department
plans to update the data in this system on a monthly basis, which
should provide more current information for computing default rates. 


--------------------
\11 This system is designed to be a national database of information
on individual student loans that can be used to prescreen students'
aid applications and to support a variety of research and program
management functions, such as computing school default rates. 


      ACCESS TO LOAN SERVICING
      INFORMATION
---------------------------------------------------------- Letter :4.2

The amendments contain a provision requiring guaranty agencies to
provide loan servicing records to those schools filing appeals based
on improper loan servicing.  More specifically, the provision allows
schools with default rates above 20 percent for the most recent year
for which data are available to have access to a representative
sample of the loan servicing and collection records.  If a school
provides evidence to support its claim that improper loan servicing
resulted in an incorrect or incomplete calculation of the default
rate, the Department is to reduce the school's default rate by the
percentage of defaults caused by improperly serviced loans found in
the sample. 


      DEPARTMENT'S IMPLEMENTING
      REGULATIONS
---------------------------------------------------------- Letter :4.3

In April and November 1994, the Department issued regulations for
implementing the default rate provisions of the 1993 amendments.  The
regulations specify that, before annually computing and issuing final
default rates, the Department will provide draft default data to all
schools with rates equal to or in excess of 20 percent.  The
Department will also provide draft default data to schools with rates
lower than 20 percent upon request. 

The schools must notify the guaranty agencies within 30 calendar days
of any information that they believe is incorrect.  The guaranty
agencies, in turn, must respond to any such challenges within 30
calendar days.  The final default rates will reflect any adjustments
made as a result of this process.  If a school continues to disagree,
it can file an appeal with the Department after the final rates have
been computed and made public. 

The final regulations also establish procedures for appeals based on
allegations of improper loan servicing and define which loans the
Department considers to be improperly serviced for the purposes of
the default rate calculations.  The Department will exclude loans
from the default rate calculation based on improper loan servicing if
the school can prove that after the borrower did not make a payment
on the loan the lender failed to perform one or more of the following
loan servicing and collection procedures (if such procedures were
required for that loan): 

  send at least one letter (other than the final demand letter)
     urging the borrower or endorser to make payments on the loan,

  attempt at least one telephone call to the borrower or endorser,

  submit a request for preclaims assistance to the guaranty
     agency,\12

  send a final demand letter to the borrower, and

  submit a certification (or other evidence) that skip-tracing\13
     procedures were performed. 

These regulations will be effective July 1, 1995.  However, the
Department will apply the new procedures to schools that had appeals
pending at the time the regulations were issued.  Also, the
Department will allow schools that previously filed loan servicing
appeals but did not have access to at least a representative sample
of the relevant loan servicing records to refile their appeals under
the new procedures. 


--------------------
\12 Regulations require guaranty agencies to provide collection
assistance to lenders, such as sending letters to borrowers, if
requested by the lenders. 

\13 Skip-tracing is a term to describe the procedures used to locate
a borrower that the lender has lost contact with.  Such procedures
may include checking telephone directories, motor vehicle
registration or driver's license records, or seeking assistance from
the Internal Revenue Service. 


   GOVERNMENT'S INTERESTS ARE NOT
   FULLY PROTECTED
------------------------------------------------------------ Letter :5

The recent legislative changes should help address the concerns of
schools that believe they have become inadvertent victims in the
Department's attempt to minimize abuses in the student loan program. 
However, neither the 1993 amendments nor the Department's
implementing regulations contain measures for protecting the
government's interest against operators who may take advantage of
these additional due process provisions by using them to continue
unscrupulous operations. 

Schools have due process rights allowing them to continue
participating in FFELP during the resolution of their appeals.  Their
participation assures students attending these schools continued
access to FFELP loans and protects schools from being denied program
eligibility on the basis of erroneous default rates.  However, to
help guard against the possibility that a school may simply continue
to abuse the program until its administrative appeals are exhausted,
some additional form of accountability may be necessary. 

The risk of loss from additional defaults accrued by schools filing
appeals could be significant if the appeal is unsuccessful.  For
example, there were 88 schools with appeals pending for 1 year or
more as of September 30, 1994.  If these schools' students continued
to receive loans and default on them at the same pace as they did
during the preceding years, we estimate that the additional defaults
through September 30, 1994, could have cost the government about $50
million.\14

Possible ways to address this concern include (1) holding schools
liable for the costs associated with defaults on loans that their
students receive during the appeal process and (2) making some
schools post a performance bond as a condition of filing an appeal. 
Both of these options have some precedence in earlier loan programs
or in rulings by the courts.  Either option would allow a school to
continue exercising its due process rights and to enroll students
with guaranteed loans as the school's appeal is being reviewed by the
Department or the courts. 


--------------------
\14 More specifically, our estimate is based on the following
assumptions:  (1) the schools continue to enroll students at the same
rate as before the appeal, (2) students continue to enter repayment
at the same rate as they did in fiscal year 1992 (the latest year for
which the related default rate data were available), (3) the schools
continue to experience the same default rate they had in fiscal year
1992 (the latest year for which the related default rate information
was available), and (4) the average loan for students at these
schools is equal to the average Stafford loan at all schools across
the country ($2,815 in fiscal year 1992). 


      MAKING SCHOOLS LIABLE FOR
      COSTS ON DEFAULTED LOANS
      MADE DURING THE APPEALS
      PROCESS
---------------------------------------------------------- Letter :5.1

One approach for reducing the government's risk of loss would be to
require that if a school is unsuccessful in its default rate appeal,
it must reimburse the government for the costs associated with
defaults on loans that the school certified during the appeals
process.  The Department had such a policy in place for SLS loans,
but without specific legislation it had to request relief from the
courts on a case-by-case basis. 

Under such an arrangement, the Department would continue to incur
costs as it does for other guaranteed loans by paying interest
subsidies on loans while students are in school and by paying claims
for loans that default.  If a school wins its appeal, the government
would bear the costs attributed to loans that may eventually go into
default.  If a school loses its appeal, it would share in the risk of
loss; it would be responsible for the cost of any loan that was made
and defaulted on after the default rate appeal was filed. 

Such an arrangement might also deter schools from filing frivolous
appeals.  A reduction in the number of appeals filed would free up
the Department's resources to more quickly adjudicate appeals that
were filed.  Department officials said that they have asked the
courts for such arrangements on occasion, and have been granted them
in a few instances.  They said that if the Department was given the
legislative authority, it could use it more uniformly and not be
required to ask the courts for it. 


      REQUIRING A PERFORMANCE BOND
---------------------------------------------------------- Letter :5.2

Another approach would be for the Department to require some schools
to post a performance bond as a condition of filing an appeal if the
school has default rates that far exceed the statutory thresholds and
in the Department's view may be unlikely to succeed in an appeal. 
For example, about one-third of the 88 schools with appeals pending
for 1 year or more had default rates of 40 percent or higher,
compared with the statutory threshold of 25 percent. 

The amount of a bond could be established on the basis of a school's
most recent default rates and loan volume experience.  For example,
in one of the lawsuits against the Department, the court ordered the
schools to post a bond each month for a percentage of the face amount
of student loans certified during that period.  The percentage was
established as the schools' average historic default experience, and
at the end of each month the schools were required to increase the
bond amount by the additional volume of loans certified during that
month.  Under such an arrangement, a school with a 3-year average
default rate of 30 percent and $100,000 in new loans each month would
have to post a $30,000 bond at the end of the first month, a $60,000
bond at the end of the second month, and so on until the appeal was
finalized.  If the school's appeal took 3 months to adjudicate and
the school was unsuccessful in its appeal, the Department could
demand a forfeiture of the bond, which would amount to $90,000 at the
end of the third month.  If, on the other hand, the school was
successful in its appeal, the bond would be cancelled and the school
would be allowed to continue participating in FFELP. 

The Department does not have statutory authority to place bonding
requirements on schools that are appealing their default rates.  A
Department official said that a bonding provision would help the
Department deal with frivolous appeals, while at the same time allow
schools that have more legitimate concerns the opportunity to appeal
the Department's actions. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

Data accuracy problems and loan servicing issues have hampered the
Department's efforts to eliminate schools with high default rates
from FFELP participation.  If designed and implemented properly, the
National Student Loan Data System and new statutory requirements
established by the 1993 amendments to allow schools to review the
quality of its loan database should contribute to the Department more
accurately determining schools' default rates.  However, the defaults
associated with new loans made by schools filing unsuccessful appeals
could be very costly to the government.  Requiring schools to pay for
the default of subsequent student loans if their appeals are
unsuccessful could help reduce the government's costs. 


   MATTERS FOR CONSIDERATION BY
   THE CONGRESS
------------------------------------------------------------ Letter :7

In those instances in which schools appeal a Department action to
eliminate their FFELP eligibility because their default rates exceed
a statutory threshold, the Congress may wish to consider giving the
Secretary of Education authority to require schools to reimburse the
government for the cost of loans that are made and that may
subsequently default, in the event that the schools' appeals are
unsuccessful. 

As a measure of further protection of the government's interests, the
Congress also may wish to consider granting the Secretary the
authority to require schools to post a performance bond as a
condition of filing an appeal as well as the discretion in
determining under which circumstances a bond would be required of
schools. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :8

We requested comments on a draft of this letter from the Secretary of
Education or his designee.  On May 19, 1995, we received verbal
comments from representatives of the Department's Offices of General
Counsel and Postsecondary Education.  They generally agreed with the
results of our findings.  They suggested several technical changes,
which we incorporated in the letter, as appropriate. 


---------------------------------------------------------- Letter :8.1

Copies of this report are being sent to the Ranking Minority Member,
Permanent Subcommittee on Investigations, Senate Committee on
Government Operations; the Chairman, Senate Labor and Human Resources
Committee; the Chairman, House Economic and Educational Opportunities
Committee; the Director, Office of Management and Budget; the
Secretary of Education; and other interested parties.  Please call me
at (202) 512-7014 if you or your staff have any questions about this
report.  Major contributors include Joseph J.  Eglin, Jr., Assistant
Director; Charles H.  Shervey; and Jonathan H.  Barker. 

Sincerely yours,

Cornelia M.  Blanchette
Associate Director, Education
 and Employment Issues


SCOPE AND METHODOLOGY
=========================================================== Appendix I

We examined the provisions of the Higher Education Act of 1965, as
amended, pertaining to the use of student loan default rates.  We
also examined federal requirements and other documentation the
Department of Education issued to implement the Student Loan Default
Prevention Initiative Act of 1990. 

We obtained and examined default rate statistical information from
the Department to identify schools with rates exceeding statutory
thresholds.  We focused our analysis on data pertaining to schools
subject to the loss of FFELP eligibility, that is, schools with
default rates exceeding statutory thresholds for three successive
years. 

To determine the extent that problems with the Department's default
rate data have been previously identified, we reviewed prior reports
and other documentation prepared by GAO and the Department's OIG and
program offices.  We discussed the data accuracy problems with OIG
staff and program offices.  We also discussed with Department
officials the National Student Loan Data System--the first of its
three phases became operational in November 1994--to determine
whether it will address data accuracy problems associated with
existing data bases. 

To determine the nature and status of court cases relating to the
accuracy of default rates, we reviewed and analyzed various documents
filed in the courts by schools filing the lawsuits and the
Department.  We also discussed the issues and status of each case
with officials of the Department's Office of General Counsel (OGC). 

We reviewed the Higher Education Technical Amendments of 1993 and the
Department's regulations implementing these amendments to determine
the extent to which the amendments and regulations address the data
accuracy and other issues being litigated by the schools and the
Department.  We discussed the amendments and regulations with
attorneys from the Department's OGC and officials from the Default
Management Section. 

Our work was conducted from September 1993 through March 1995 in
accordance with generally accepted government auditing standards. 


FFELP ELIGIBILITY STATUS OF
SCHOOLS WITH DEFAULT RATES OVER
THE STATUTORY THRESHOLDS (FISCAL
YEARS 1991-94)\A
========================================================== Appendix II

----------------------------------------------------  ------
Schools with default rates over thresholds               890
Schools losing eligibility\b                             601
Schools retaining eligibility                            289
Schools filing successful appeals                       19\c
Schools with pending appeals
Erroneous data and/or loan servicing appeals           250\d
Mitigating circumstances appeals                        20\e
------------------------------------------------------------
\a Includes schools with default rates exceeding thresholds for 3
successive years.  Excludes schools subject to limitation,
suspension, and termination action with a single-year default rate
over statutory thresholds. 

\b These schools lost eligibility because they did not file appeals,
filed unsuccessful appeals, or closed and went out of business. 

\c An additional 26 schools filed successful appeals.  However, they
had default rates over the thresholds in a subsequent year and either
(1) had appeals pending for default rates over the thresholds in
subsequent years (8 schools), (2) lost eligibility because they
failed to file a successful appeal in a subsequent year (15 schools),
or (3) closed and went out of business after filing their successful
appeals (3 schools). 

\d Includes 25 schools that also filed mitigating circumstances
appeals. 

\e These schools' appeals did not challenge the accuracy of the
Department's default rates through erroneous data and/or loan
servicing appeals. 

