Direct Student Loans: Analyses of Borrowers' Use of the Income Contingent
Repayment Option (Letter Report, 08/21/97, GAO/HEHS-97-155).

Pursuant to a congressional request, GAO reviewed borrowers' use of the
William D. Ford Federal Direct Loan Program's (FDLP) income contingent
repayment (ICR) plan, focusing on: (1) the extent to which borrowers are
using ICR compared with other repayment plans available under FDLP; (2)
how loan delinquencies and defaults under ICR compare with delinquencies
and defaults under other FDLP repayment plans; (3) how loan payments
under ICR compare with payments under other FDLP repayment plans; and
(4) how the Department of Education, which administers the program,
verifies the accuracy of income reported by borrowers using ICR.

GAO noted that: (1) as of March 31, 1997, about 663,000 borrowers owing
about $5.3 billion in FDLP loans were repaying loans; (2) about 9
percent of these borrowers were using ICR; (3) GAO found that 80 percent
of borrowers using ICR either were current in their monthly payments or
had their payments suspended because they were in school or for other
reasons; (4) borrowers using ICR tended to be delinquent or in default
at higher percentages than borrowers using other repayment plans; (5)
borrowers who have been placed into the ICR plan because they have
defaulted on an Federal Family Education Loan Program (FFELP) loan are a
major factor in the higher percentage of defaults for ICR users; (6) of
the 2,832 borrowers using ICR and in default, 2,083, or 73.6 percent,
had defaulted on an FFELP loan; (7) comparing estimated total loan
payments for ICR users and borrowers who use the three other repayment
plans is complicated; (8) compared with borrowers who use the standard
repayment plan, ICR users and those using extended and graduated plans
generally face higher total payments; (9) compared with borrowers who
use the extended or graduated repayment plans, ICR users face
comparatively higher total payments if their incomes are low but
comparatively lower total payments if their incomes are high; (10) the
Department of Education checks the reported income of borrowers using
ICR in one of two ways; (11) for borrowers who are in their first year
of repayment or who may have recently lost their jobs, the Department
relies primarily on documentation submited by the borrower, such as pay
stubs, dividend statements, or cancelled checks; (12) the Department
does not verify the accuracy of this documentation when it is submitted;
rather it relies on a signed certification from the borrower that the
information is complete and accurate; (13) for borrowers who have been
out of school for a year or more, the Department obtains income
information directly from the Internal Revenue Service (IRS); (14) the
Department does not verify the accuracy of information borrowers provide
IRS but relies on IRS' verification process; (15) however, during the
transition from using borrower documentation to using IRS information,
the Department compares the income amounts from the two sources for
discrepancies; and (16) if there are significant discrepancies or if
borrowers do not cooperate in providing correct income information, they
are removed from the ICR plan and placed into another repayment plan.

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

 REPORTNUM:  HEHS-97-155
     TITLE:  Direct Student Loans: Analyses of Borrowers' Use of the 
             Income Contingent Repayment Option
      DATE:  08/21/97
   SUBJECT:  Student financial aid
             Direct loans
             Student loans
             Loan defaults
             Delinquent loans
             Debt collection
             Loan repayments
IDENTIFIER:  William D. Ford Federal Direct Loan Program
             Federal Family Education Loan Program
             
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Cover
================================================================ COVER


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

August 1997

DIRECT STUDENT LOANS - ANALYSES OF
BORROWERS' USE OF THE INCOME
CONTINGENT REPAYMENT OPTION

GAO/HEHS-97-155

Direct Student Loan Repayment

(104878)


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

  AGI - adjusted gross income
  DCS - Debt Collection Service
  FDLP - William D.  Ford Federal Direct Loan Program
  FFELP - Federal Family Education Loan Program
  ICR - income contingent repayment
  IRS - Internal Revenue Service

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


B-277321

August 21, 1997

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

Dear Mr.  Chairman: 

The William D.  Ford Federal Direct Loan Program (FDLP), established
by the Student Loan Reform Act of 1993, contains a unique repayment
option.  Called the income contingent repayment (ICR) plan, it ties
the borrowers' monthly payments to their income, family size, and
student loan amount.  Under ICR, borrowers with low incomes or high
debt loads can fit their student loan payments into their budgets
because the size of their payments can expand or contract with their
ability to pay. 

Now, 3 years after FDLP began, a sizable number of borrowers have
begun repaying their loans.  You asked us to develop information that
would help assess how borrowers have been using ICR.  As agreed with
your office, we focused our review on the following: 

  -- To what extent are borrowers using ICR compared with other
     repayment plans available under FDLP? 

  -- How do loan delinquencies and defaults under ICR compare with
     delinquencies and defaults under other FDLP repayment plans?\1

  -- How do borrowers' loan payments under ICR compare with payments
     under other FDLP repayment plans? 

  -- How does the Department of Education, which administers the
     program, verify the accuracy of income reported by borrowers
     using ICR? 

We based our review on data supplied by the Department of Education
as of March 31, 1997.  We analyzed the usage of ICR and compared it
with the usage of the three other repayment plans generally available
to FDLP borrowers--standard repayment (10 years, fixed monthly
payment), extended repayment (up to 30 years depending on amount
borrowed, fixed monthly payment), and graduated repayment (up to 30
years depending on amount borrowed, with low initial monthly payments
that increase generally every 2 years).  Appendix I describes our
scope and methodology in further detail. 


--------------------
\1 Borrowers are delinquent if they have not made a payment for 31 to
180 days and in default if they have not made a payment for more than
180 days.  However, loans in default for more than 270 days were not
part of the databases we analyzed.  After 270 days, loan records are
transferred from the FDLP loan service center to the Department of
Education's Debt Collection Service (DCS) unit. 


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

As of March 31, 1997, about 663,000 borrowers owing about $5.3
billion in FDLP loans were repaying loans.  About 9 percent, or
56,298, of these borrowers were using ICR.  As a group, they differed
from most borrowers in two key respects.  First, they were much more
likely to have direct consolidation loans, which are multiple loans
combined into a single loan for repayment purposes and are generally
much larger than other loans.  Second, about 40 percent, or 23,678,
of the 56,298 ICR users had been placed into this plan because they
were in default on loans from the Federal Family Education Loan
Program (FFELP).  We found little relationship between the type of
school attended by FDLP nonconsolidated loan borrowers and their
selection of ICR as a repayment plan.  However, nonconsolidated loan
borrowers from 2-year public schools were somewhat more inclined to
select the ICR plan than were borrowers from other kinds of schools. 

We found that about 80 percent (44,379 of 56,298) of borrowers using
ICR either were current in their monthly payments or had their
payments suspended because they were in school or for other reasons. 
However, borrowers using ICR tended to be delinquent or in default at
higher percentages than borrowers using other repayment plans.  More
specifically, about 16 percent, or 9,807, of the 56,298 borrowers
using ICR were delinquent (made no payment for 31 to 180 days), and
another 5 percent, or 2,832, were in default (made no payment for 181
to 270 days).\2 Borrowers using the other plans were delinquent at
rates ranging from 9.1 percent (1,838 of 20,139 extended plan users)
to 14.8 percent (77,923 of 527,351 standard plan users) and in
default at percentages ranging from 0.8 percent to 1.4 percent (158
and 7,534, respectively).  Borrowers who have been placed into the
ICR plan because they have defaulted on an FFELP loan are a major
factor in the higher percentage of defaults for ICR users; of the
2,832 borrowers using ICR and in default, 2,083, or 73.6 percent, had
defaulted on an FFELP loan. 

Comparing estimated total loan payments for ICR users and borrowers
who use the three other repayment plans is complicated.  Compared
with borrowers who use the standard repayment plan, ICR users and
those using extended and graduated plans generally face higher total
payments.  Compared with borrowers who use the extended or graduated
repayment plans, ICR users face comparatively higher total payments
if their incomes are low but comparatively lower total payments if
their incomes are high.  However, ICR borrowers (and their spouses)
with family incomes that remain low over a long period of time do not
have to repay all their principal and interest if the maximum payback
period of 25 years expires before the full amount is paid off.  In
contrast, ICR borrowers whose income increases substantially during
the repayment period would make increasingly higher monthly payments,
and this could result in repayment of the loan in full by the end of
the 25-year repayment period. 

The Department of Education checks the reported income of borrowers
using ICR in one of two ways.  For borrowers who are in their first
year of repayment or who may have recently lost their jobs, the
Department relies primarily on documentation submitted by the
borrower, such as pay stubs, dividend statements, or canceled checks. 
The Department does not verify the accuracy of this documentation
when it is submitted; rather, it relies on a signed certification
from the borrower that the information is complete and accurate.  For
borrowers who have been out of school for a year or more, the
Department obtains income information directly from the Internal
Revenue Service (IRS).  The Department does not verify the accuracy
of information borrowers provide IRS but relies on IRS' verification
process.  However, during the transition from using borrower
documentation to using IRS information, the Department compares the
income amounts from the two sources for discrepancies.  If there are
significant discrepancies or if borrowers do not cooperate in
providing correct income information, they are removed from the ICR
plan and placed into another repayment plan. 


--------------------
\2 This contributes to understating the percentage of loans in
default because default loans in arrears for more than 270 days are
excluded.  The percentage of FDLP loans in default discussed in this
report is different from the default rates the Department of
Education computes.  For computing school default rates, the
Department includes borrowers who have not made a payment for 270
days or more.  This is called the "cohort default rate" as explained
in app.  I. 


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

In fiscal year 1996, students and their families used federal student
loan programs to borrow approximately $30 billion to pay for
postsecondary education.  FDLP is one of two main approaches the
federal government has taken to make loans available for college. 
Under this program, students or their parents borrow money directly
from the government through the schools the students attend.  The
other major program, FFELP, provides loans through private lenders,
and the federal government guarantees repayment if borrowers default. 
According to a Department official, FDLP accounted for about 32.1
percent of student loan volume in fiscal year 1996. 

Most FDLP borrowers can select one of four repayment options, as
illustrated in figure 1.\3 These four options differ by the amount of
time allowed to repay loans and the flexibility of the payment
schedule.  The ICR option is the most flexible.  It allows borrowers
to pay relatively small or no monthly payments when their incomes are
low and to pay more when their incomes rise.  For example, a married
borrower with a loan balance of $20,000 and an annual family income
of $15,000 would initially pay about $77 a month.  If the borrower's
annual income were $45,000, the initial monthly payment would be
about $225. 

   Figure 1:  Basic
   Characteristics of FDLP
   Repayment Options

   (See figure in printed
   edition.)

For our analysis,we classified FDLP loans into three main categories. 

  -- Direct nonconsolidated loans:  These are the basic FDLP loans
     with which students or their parents can help finance
     postsecondary education.  There are three kinds:  subsidized and
     unsubsidized direct Stafford loans and direct PLUS loans. 
     Direct subsidized Stafford loans, available only to students
     with a demonstrated financial need, are subsidized in that the
     federal government does not charge interest while the student is
     in school at least half-time, during a 6-month grace period
     after the student graduates or otherwise leaves school, and
     during periods in which loan repayment is deferred (such as when
     the borrower is seeking but unable to find full-time
     employment).  In contrast, direct unsubsidized Stafford loans,
     which are available to all students regardless of financial
     need, do not include an interest subsidy.  If the borrower does
     not make interest payments while in school, the interest is
     added to the principal balance to be repaid as part of the total
     loan amount.  Direct PLUS loans are available to parents of
     dependent students to help pay for their children's education;
     they are unsubsidized because parents are responsible for paying
     all interest charges. 

  -- Direct consolidation loans:  During the course of their
     education, students can obtain loans from more than one program. 
     By obtaining a direct consolidation loan, borrowers can combine
     their loans and make only one monthly payment.  Borrowers can
     consolidate their loans while they are in school or afterward,
     and the interest on their consolidation loans can be subsidized
     or unsubsidized, depending on the kind of original loans they
     consolidated.  Borrowers in default on a student loan who have
     made satisfactory arrangements to repay the defaulted loan, or
     who agree to repay under the ICR plan, can also obtain direct
     consolidation loans.  Parents with multiple PLUS loans can
     combine them into a single direct PLUS consolidation loan. 

  -- Debt Collection Service (DCS) consolidation loans:  These are
     direct consolidation loans to borrowers who previously defaulted
     on their FFELP loans and whose loans were assigned to the
     Department's DCS for collection.  In fiscal year 1995, the
     Department began to increase collections on defaulted FFELP
     loans by offering direct consolidation loans to these borrowers
     so they could make more affordable payments through the ICR
     plan. 

As shown in table 1, the vast majority (83.6 percent) of FDLP
borrowers in repayment had nonconsolidated loans as of March 31,
1997.  These borrowers represented about 69 percent of the total
direct loan volume in repayment.  However, borrowers with direct
consolidation loans had average loan amounts that were much higher
than those of the two other kinds of borrowers--$21,807 compared with
$6,611 and $5,453.  Such borrowers had more than 26 percent of total
loan volume, even though they were only about 10 percent of all
borrowers. 



                                     Table 1
                     
                     FDLP Loans in Repayment, as of March 31,
                                       1997

                                                        Original loan
                                       Borrower             amount
                                  ------------------  ------------------
                                                      Millio
                                                       ns of              Averag
                                          Percentage  dollar  Percentage  e loan
Loan category                     Number    of total       s    of total  amount
--------------------------------  ------  ----------  ------  ----------  ------
Direct nonconsolidated            554,46        83.6  $3,665        69.0  $6,611
                                       1                  .3
Direct consolidation              64,430         9.7  1,405.        26.4  21,807
                                                           0
DCS consolidation                 44,407         6.7   242.1         4.6   5,453
================================================================================
Total                             663,29       100.0  $5,312       100.0
                                       8                .5\a
--------------------------------------------------------------------------------
\a Numbers do not add to total due to rounding. 


--------------------
\3 Not all repayment options are available for each kind of FDLP
loan.  For example, the ICR plan is not available for FDLP PLUS or
PLUS consolidation loans, which are made to students' parents. 


   ICR USED BY ABOUT 9 PERCENT OF
   FDLP BORROWERS
------------------------------------------------------------ Letter :3

As of March 31, 1997, slightly more than 56,000 borrowers in
repayment were using ICR--about 9 percent of the total (see fig.  2). 
Collectively, these borrowers accounted for about $831 million in
outstanding loans, or about 16 percent of the $5.3 billion of FDLP
loans in repayment.  Borrowers using the standard plan were the
largest in number and loan volume among the four plans.  However, the
average size of their loans (about $6,530) was considerably smaller. 
By comparison, loans held by ICR users averaged about $14,770.\4
Borrowers using the extended plan had the highest average balance
(about $17,000). 

   Figure 2:  Distribution of
   Borrowers and Loan Amounts for
   Each FDLP Repayment Option, as
   of March 31, 1997

   (See figure in printed
   edition.)


--------------------
\4 For details on the distribution of borrowers and loan amounts
among the various repayment plans, see app.  II. 


      MANY ICR USERS HAD DIRECT OR
      DCS CONSOLIDATION LOANS
---------------------------------------------------------- Letter :3.1

Borrowers using ICR differed from most other FDLP loan borrowers in
repayment in several important ways.  More than half (51 percent)
were borrowers with direct consolidation loans (see fig.  3).  In
contrast, only about 8.5 percent of all borrowers in FDLP had such
loans.  Borrowers with direct consolidation loans held nearly 80
percent of total dollar volume of loans being repaid under ICR. 
Another large portion (about 42 percent) of borrowers using the ICR
plan were those with DCS consolidation loans.  However, these
borrowers had relatively small average loan amounts ($6,100 compared
with $23,000 for direct consolidation loans) and held only 17 percent
of the total loan volume being repaid under ICR.  Only about 7
percent of borrowers using ICR held nonconsolidated loans. 

   Figure 3:  Distribution of
   Borrowers and Amounts in
   Repayment Under ICR, as of
   March 31, 1997

   (See figure in printed
   edition.)


      LIMITED DATA SUGGEST ICR
      USERS NOT CONCENTRATED IN
      PARTICULAR TYPES OF SCHOOLS
---------------------------------------------------------- Letter :3.2

Information on the kinds of schools that ICR users attended is
limited to borrowers who had nonconsolidated loans.  According to a
Department official, the Department does not track repayment plan
data by school for direct and DCS consolidation loans.  Because
students whose previous loans were combined into either a direct or
DCS consolidation loan sometimes have attended more than one school,
classifying loans by kind of school is difficult and not very
meaningful. 

Data on FDLP borrowers with nonconsolidated loans show little
relationship between the type of school attended and a borrower's
selection of ICR as a repayment plan.  For the most part, there was
little variation between the various repayment plans when compared by
type of school, such as public and private or 2-year and 4-year.  The
data did show that borrowers from 2-year public schools were somewhat
more inclined to select the ICR plan than were borrowers from other
kinds of schools.  However, since nonconsolidated loan recipients
represented less than 10 percent of ICR users, it is unclear whether
they represented ICR users as a whole.\5


--------------------
\5 For details on how nonconsolidated loan borrowers in FDLP were
distributed by repayment option by type of school, see app.  III. 


   DELINQUENCIES AND DEFAULTS
   UNDER ICR ARE HIGHER THAN UNDER
   OTHER REPAYMENT PLANS
------------------------------------------------------------ Letter :4

Across all four types of repayment plans, 14.4 percent of FDLP
borrowers were delinquent and 1.7 percent were in default, according
to the Department data in our analysis.  (See table 2.) About 70
percent of borrowers were current on their loan payments, and another
13.7 percent were currently not paying because their payments had
been postponed through statutorily provided deferment or forbearance
procedures.  The data we analyzed generated an understated percentage
of loans in default because only defaulted loans in arrears for 181
to 270 days are included.  According to a Department official, loans
in arrears for longer than 270 days had been transferred to the
Department's DCS and, therefore, data on these loans were not
contained in the database we used for our analysis.\6 This official
said that, as of March 31, 1997, about $34.6 million in such
defaulted loans had been transferred to DCS.  Thus, when these
defaulted loans are combined with the $71 million in loans that were
in default for 181 to 270 days, the total of defaulted direct loans
is about $105.6 million. 



                                     Table 2
                     
                     Status of FDLP Loans in Repayment, as of
                                  March 31, 1997

                                          Borrower        Original loan amount
                                     ------------------  -----------------------
                                                              Amount
Repayment                                    Percentage          (in  Percentage
status     Explanation               Number    of total    millions)    of total
---------  ------------------------  ------  ----------  -----------  ----------
Current    Payment on time           466,33        70.3     $3,735.1        69.9
                                          9
Default    Payment not made for      11,026         1.7         71.0         1.3
            181-270 days
           Payment not made for          \a          \a         34.6         0.6
            over 270 days
Delinquen  Payment not made for 31-  95,328        14.4        660.4        12.4
 t          180 days
Deferment  Payment postponed         90,605        13.7        846.0        15.8
 and        because borrower is in
 forbeara   school or for other
 nce        reasons
================================================================================
Total                                663,29     100.0\b     $5,347.1       100.0
                                          8
--------------------------------------------------------------------------------
\a Not available. 

\b Percentages do not add to 100 due to rounding. 


It is important to note that the percentage of FDLP loans in default
we computed in our analysis is different from the default rate the
Department computes.  There are two major differences.  First, our
computation of loans in default reflects only borrowers who have not
made a payment for 181 to 270 days, but the Department's default
rates include borrowers who have not made a payment for more than 270
days.  Second, the percentage of borrowers in default that we
computed for FDLP is a simple percentage (number of borrowers in
default divided by the total number of borrowers in repayment at a
single point in time).  In contrast, the Department's default rates
are computed for a cohort of borrowers over a period of time.  (This
is explained in app.  I.)

Compared with the three other payment plans, the overall percentage
of loans that were delinquent or in default under ICR were higher
(see fig.  4).  The delinquency rate among ICR users was 16.1
percent, and the percentage of loans in default was 5.0.  By
comparison, the next highest delinquency rate was 14.8 percent (for
borrowers using standard repayment), and the next highest percentage
of loans in default was 1.4 (also for borrowers using standard
repayment). 

   Figure 4:  Comparison of the
   Percentage of FDLP Loans That
   Were Delinquent and in Default
   for Each Repayment Plan

   (See figure in printed
   edition.)

There appear to be two possible explanations for why borrowers using
ICR, as a group, have overall higher delinquencies and defaults than
borrowers using the other repayment plans.  First, a higher
concentration of borrowers with DCS consolidation loans uses the ICR
plan than the other repayment plans (53 percent, or 23,678, of 44,407
DCS consolidation loan borrowers are using ICR), and, as we discuss
below, borrowers of these kinds of loans have the highest percentage
of loans that are delinquent and in default.  Second, the exclusion
of PLUS loan borrowers, who according to Department officials tend to
have lower delinquency and default rates than student borrowers, from
the ICR plan could tend to make delinquencies and defaults of the
other plans lower relative to the rates of the ICR plan. 


--------------------
\6 For information on the Department's use of separate data systems,
see Department of Education:  Multiple, Nonintegrated Systems Hamper
Management of Student Financial Aid Programs (GAO/T-HEHS/AIMD-97-132,
May 15, 1997). 


      CONSIDERABLE VARIANCES IN
      DELINQUENCIES AND DEFAULTS
      BY TYPE OF ICR LOAN
---------------------------------------------------------- Letter :4.1

Among borrowers using ICR, there is considerable variance in
delinquency rates, depending on the type of loan (see fig.  5).  Of
the three categories of loans in repayment (nonconsolidated, direct
consolidation, and DCS consolidation), the highest delinquency rate
was for borrowers with DCS consolidation loans (about 19 percent). 
ICR users with direct consolidation and nonconsolidated loans had
significantly lower delinquency rates (14.6 percent and 9.6 percent,
respectively).  Given that the majority (53.3 percent) of borrowers
with DCS consolidation loans are ICR users, the overall higher
delinquency rate for ICR compared with the other repayment plans
could be partly the result of considerably greater involvement of DCS
consolidation loan borrowers (borrowers who previously defaulted on
FFELP loans) in the ICR plan compared with the other repayment plans. 
(See app.  II.)

   Figure 5:  Delinquency Rates of
   Borrowers Using ICR, as of
   March 31, 1997

   (See figure in printed
   edition.)

A comparison of individual types of loans shows that ICR users do not
have higher delinquency rates than users of all other repayment plans
(see fig.  6).  For example, for nonconsolidated loans alone, the
delinquency rate among ICR users was below that among users of the
standard plan and about the same as that among users of extended and
graduated plans.  Even for DCS consolidation loans, ICR users had a
lower delinquency rate compared with those in the three other plans. 
However, with over half of DCS consolidation loans under the ICR
plan, the influence of these loans' high delinquency rate is felt
primarily by ICR.\7

   Figure 6:  Comparison of
   Delinquency Rates Across Four
   Repayment Plans by Type of FDLP
   Loan

   (See figure in printed
   edition.)

FDLP loan default patterns are similar to those for delinquencies. 
Among borrowers using ICR, the percentage of loans in default is much
higher for DCS consolidation loans than for nonconsolidated or direct
consolidated loans (see fig.  7).  ICR users who had DCS
consolidation loans defaulted at a rate of 8.8 percent, compared with
rates of 0.9 percent and 2.5 percent for ICR users with
nonconsolidated and direct consolidation loans, respectively.  Again,
given the concentration of borrowers with DCS consolidation loans in
the ICR plan, ICR's overall high percentage of loans in default is
strongly affected by this one type of loan. 

   Figure 7:  Percent of Borrowers
   Using ICR That Were in Default
   181 to 270 Days, as of March
   31, 1997

   (See figure in printed
   edition.)

As with delinquencies, a comparison of individual types of loans
shows that ICR users did not have higher percentages of loans in
default across the board than users of other repayment plans (see
fig.  8).  However, ICR users did have the highest percentage of
loans in default for two of the three loan types.\8

   Figure 8:  Comparison of
   Percentage of Borrowers in
   Default 181 to 270 Days Across
   Four Repayment Plans by Type of
   FDLP Loan

   (See figure in printed
   edition.)


--------------------
\7 For details on delinquency rates among ICR users and users of the
other repayment plans, see app.  IV. 

\8 For details on defaults among ICR users and users of the other
repayment plans, see app.  V. 


   TOTAL BORROWER PAYMENTS UNDER
   ICR ARE HIGHER IN SOME
   CIRCUMSTANCES, LOWER IN OTHERS
------------------------------------------------------------ Letter :5

There is no single answer to whether a borrower will pay more or less
under ICR compared with standard, extended, or graduated plans. 
Borrowers for whom ICR was primarily designed (that is, borrowers
with a limited ability to pay) could face relatively higher total
payments in the form of larger total interest costs and tax
liability--on amounts they were not able to repay within the 25-year
loan repayment limit.  In contrast, ICR may be less costly than the
extended or graduated plans for borrowers with considerably greater
ability to repay their loans. 

To provide some indication of how the type of repayment plan affects
a borrower's initial monthly payment amount and total loan payments,
we compared the four plans with two different starting
incomes--$15,000 and $45,000.\9


--------------------
\9 We selected these income amounts because data on monthly payments
and total loan payments for these income levels were readily
available from the Department's 1996 Repayment Book.  The Repayment
Book contains plan descriptions and worksheets with formulas that
borrowers can use to estimate their monthly payment amounts under the
various plans.  It also shows examples of what the monthly payment
amounts and total payments would be under the various plans for
different loan amounts, including ICR for various hypothetical
borrower income amounts. 


      LOWER INCOME SCENARIO: 
      STARTING INCOME OF $15,000
---------------------------------------------------------- Letter :5.1

This scenario assumes that (1) the borrower and spouse have an
initial annual combined income at the beginning of the repayment
period of $15,000 and receive annual income increases of 5 percent
over the repayment period, (2) the borrower is married throughout
with no children, and (3) the loan interest rate is 8.25 percent. 
Table 3 shows how the size of a loan affects the initial monthly
payment amounts under the ICR plan compared with the other repayment
plans. 



                                Table 3
                
                 Comparison of Monthly Payment Amounts
                 Under ICR and Other Repayment Options:
                       Starting Income of $15,000

                                         Monthly payment amount
                                  ------------------------------------
                                  Standa             Graduated\
Original loan amount                  rd   Extended           a    ICR
--------------------------------  ------  ---------  ----------  -----
$5,000                               $61        $55         $35    $34
10,000                               123         97          70     68
20,000                               245        170         140     77
40,000                               491        315         280     77
75,000                               920        563         526     77
100,000                            1,227        751         701     77
----------------------------------------------------------------------
\a Initial monthly payment amounts. 

The initial monthly payments for a borrower using ICR are
substantially less than the initial monthly payments for the other
repayment plans for loans of $20,000 and higher.  Although initial
payment amounts under the other plans increase for larger loan
amounts, the payments under ICR increase to a much lesser extent and
stop increasing at loans above $20,000.  Under ICR, borrowers'
payment amounts are capped at 20 percent of their discretionary
income.\10

Thus, a borrower with an income of $15,000 and $100,000 in loans
would pay no more per month under ICR than a borrower with the same
income and an initial loan amount of $20,000. 

The size of a borrower's monthly payment has a direct effect on his
or her total loan payments.  Those payments include the amounts to
repay principal and interest, and ICR users can also incur a cost for
the potential tax liability on the loan balance that remains unpaid
after 25 years.  Unpaid loan balances are forgiven at the end of the
25-year period but must be treated as taxable income.\11 Whether the
lower income borrower under ICR actually pays more or less than
borrowers using alternatives depends in part on the amount borrowed
(see table 4). 



                                     Table 4
                     
                      Comparison of Repayment Amounts Under
                         ICR and Other Repayment Options:
                            Starting Income of $15,000

                                      Total repayment amount by
                                    repayment plan (principal and
                                              interest)
                                    ------------------------------
                                                                             ICR
                                                                      borrower's
                                                                          unpaid
                                                                         balance
                                    Standa  Extend  Gradua              after 25
Original loan amount                    rd      ed     ted     ICR         years
----------------------------------  ------  ------  ------  ------  ------------
$5,000                              $7,359  $7,893  $8,655  $12,01        $1,285
                                                                 6
10,000                              14,718  17,463  19,085  23,965         2,570
20,000                              29,437  40,899  44,115  44,235        20,780
40,000                              58,873  94,614  100,56  64,918        65,605
                                                         7
75,000                              110,38  202,84  212,32  67,638       177,208
                                         7       2       4
100,000                             147,18  270,45  283,09  67,638       259,072
                                         3       6       8
--------------------------------------------------------------------------------
A borrower with an initial income of $15,000 and loans ranging from
$5,000 to $10,000 would pay more under ICR than under the other
plans.  In contrast, a borrower with $40,000 or more in loans would
repay far less under ICR than under the extended and graduated
alternatives because under these two plans the borrower pays off the
total loan; the borrower using ICR would not.  However, a borrower
using ICR has to contend with having to declare the unpaid balance of
the loans as income--and possibly incur a tax liability.  As loan
amounts increase, the potential tax liability rises substantially for
borrowers at this income level. 


--------------------
\10 The Department defines discretionary income as the portion of
adjusted gross income (AGI) that remains after deducting an allowance
for basic living costs as specified in the Department of Health and
Human Service's Poverty Guidelines.  In 1997, the allowance for a
family of two in the 48 contiguous states and Washington, D.C., was
$10,610. 

\11 Legislation introduced in the 105th Congress, if enacted, would
discharge a borrower's unpaid balance at the end of the repayment
period, excluding it from tax. 


      HIGHER INCOME SCENARIO: 
      STARTING INCOME OF $45,000
---------------------------------------------------------- Letter :5.2

This scenario makes the same assumptions as the first, except that
calculations are based on a starting income of $45,000.  ICR does not
provide the same lower monthly payment advantages over the other
plans as it does for lower income borrowers.  Initially, as table 5
illustrates, ICR has consistently lower monthly payments than the
standard plan but higher monthly payments than the extended and
graduated plans, except for loans at the $100,000 level. 



                                Table 5
                
                 Comparison of Monthly Payment Amounts
                 Under ICR and Other Repayment Options:
                       Starting Income of $45,000

                                         Monthly payment amount
                                  ------------------------------------
                                  Standa             Graduated\
Original loan amount                  rd   Extended           a  ICR\a
--------------------------------  ------  ---------  ----------  -----
$5,000                               $61        $55         $35    $56
10,000                               123         97          70    112
20,000                               245        170         140    225
40,000                               491        315         280    450
75,000                               920        563         526    577
100,000                            1,227        751         701    577
----------------------------------------------------------------------
\a Initial monthly payment amounts. 

Table 6 compares total loan payments that a borrower and spouse with
a starting combined income of $45,000 would pay under each of the
four repayment plans for loan amounts ranging from $5,000 to
$100,000.  As it shows, payments for principal and interest under ICR
are always higher than under standard repayment but always lower than
under the extended or graduated plans.  Unlike the borrower who
begins with a $15,000 income, the borrower with an initial income of
$45,000 has no unpaid balance after 25 years for any of the loan
amounts illustrated. 



                                Table 6
                
                 Comparison of Repayment Amounts Under
                    ICR and Other Repayment Options:
                       Starting Income of $45,000

                              Total repayment amount by
                            repayment plan (principal and
                                      interest)
                            ------------------------------
                                                                   ICR
                                                            borrower's
                                                                unpaid
                                                               balance
                            Standa  Extend  Gradua            after 25
Original loan amount            rd      ed     ted     ICR       years
--------------------------  ------  ------  ------  ------  ----------
$5,000                      $7,359  $7,893  $8,655  $7,559           0
10,000                      14,718  17,463  19,085  15,117           0
20,000                      29,437  40,899  44,115  30,235           0
40,000                      58,873  94,614  100,56  60,470           0
                                                 7
75,000                      110,38  202,84  212,32  133,08           0
                                 7       2       4       1
100,000                     147,18  270,45  283,09  229,66           0
                                 3       6       8       4
----------------------------------------------------------------------

   MEASURES TAKEN TO OBTAIN AND
   VERIFY BORROWER INCOME
   INFORMATION
------------------------------------------------------------ Letter :6

Information on borrower income for computing monthly payment amounts
for the ICR plan is obtained from either documentation provided by
the borrower or information from IRS on the borrower's AGI as
reported on his or her federal income tax return. 

The monthly payment amount for borrowers in their first year of
repayment is based on documentation and other information submitted
by borrowers to the Department's direct loan servicing center.  This
documentation, referred to as "alternative documentation of income,"
can be recent pay stubs, dividend statements, canceled checks, or a
statement signed by the borrowers explaining their source of income. 

According to a Department official, the Department uses alternative
documentation for borrowers in their first year of repayment because,
in most cases, AGI information from IRS is zero or close to zero. 
AGI reflects prior-year income when borrowers were generally in
school or not working full time and were reporting little or no
taxable income.  However, most borrowers have income, and the
alternative documentation captures it.  This kind of documentation is
also used in other situations when borrowers' AGI does not reflect
their current income, such as when a borrower becomes unemployed. 

According to Department officials, service center personnel do not
conduct credit checks or contact employers to verify the accuracy of
borrowers' information.  However, when borrowers submit this
documentation, they also certify that they are providing accurate and
complete income information. 

After ICR users have been out of school for at least 1 year, their
monthly payment amount is based on their AGI as reported on their
federal income tax returns.  To obtain this information, the service
center sends computer tapes containing borrower identification
information to IRS, which matches this information against its
records.  IRS then sends computer tapes containing borrower AGI
information directly to the service center.  After receiving the IRS
tapes, service center personnel run edit checks for quality
assurance. 

According to Department officials, the Department does not verify the
accuracy of the information the borrowers provide IRS on their tax
returns.  Rather, it relies on the IRS' own audits, edits, and
verifications to make sure borrowers' AGI is accurate.  However,
other measures are taken in certain circumstances to ensure the
accuracy and reasonableness of borrowers' income information.  For
example, if a borrower is required to provide alternative
documentation of income because his or her AGI would reflect an
in-school period, the servicer still obtains AGI information from IRS
to see how accurately borrower-reported information from the previous
year reflected IRS-reported information for that year. 

According to Department officials, borrowers falsifying their income
to reduce their monthly payments lengthen the time required to pay
off their loans, which ultimately costs them more money.  The
officials also said that borrowers who do not cooperate in providing
accurate income information are automatically removed from the ICR
plan and placed into the standard repayment plan. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

The Department of Education reviewed a draft of this report and had
no written comments, although it provided technical suggestions that
we incorporated as appropriate. 


---------------------------------------------------------- Letter :7.1

Copies of this report are being sent to the Chairman of the Senate
Committee on Labor and Human Resources, the Secretary of Education,
appropriate congressional committees and Members, and others who are
interested. 

If you have any questions about this report, please call me or Joseph
J.  Eglin, Jr., Assistant Director, at (202) 512-7014.  Major
contributors to this report include Joan A.  Denomme, Charles M. 
Novak, and Charles H.  Shervey. 

Sincerely yours,

Carlotta C.  Joyner
Director, Education and
 Employment Issues


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

To determine the extent to which borrowers are using the income
contingent repayment (ICR) plan compared with other repayment plans,
we obtained and analyzed data from the Department of Education on
Federal Direct Loan Programs (FDLP) loans being repaid as of March
31, 1997.  To determine the extent to which borrowers at the various
kinds of schools used the different types of repayment plans, we
obtained and analyzed data on nonconsolidated loans.  Data on
consolidation and DCS consolidation loans categorized by kind of
school were not available.  A Department official said that such data
are not captured in the Department databases we used for our
analysis. 

To determine the extent to which loans being repaid under ICR and
other repayment plans were delinquent or in default, we computed
simple percentages that reflect the proportion of total borrowers or
dollar amounts of loans in repayment classified as delinquent or in
default on March 31, 1997. 

The percentages we computed are not comparable to the annual cohort
default rates the Department computes in accordance with the Higher
Education Act of 1965, as amended, and its Default Reduction
Initiative.  The cohort default rate is computed to determine whether
to allow schools to participate in federal student loan
programs--schools with cohort default rates above certain statutory
thresholds can be dropped or prevented from participating in these
programs.  In general, cohort default rates reflect the percentage of
a school's borrowers who enter repayment in one fiscal year and
default by the end of the next fiscal year. 

To compare borrowers' total payments under ICR and other repayment
plans, we used information from selected hypothetical examples
contained in the Department's 1996 Repayment Book.  Data on unpaid
loan balances remaining at the end of the repayment period for loans
being repaid under the ICR plan--for the various hypothetical
scenarios we used--were not contained in the Repayment Book. 
Therefore, we asked the Department to compute these figures, and we
used them in our analyses. 

To determine the extent to which the Department or its FDLP service
center verifies the accuracy of borrowers' income information, we
reviewed Department regulations and guidelines.  We also interviewed
Department officials to obtain additional information on these
procedures. 

Our work was conducted from February to June 1997 in accordance with
generally accepted government auditing standards. 


DATA ON FDLP LOANS IN REPAYMENT
========================================================== Appendix II



                                    Table II.1
                     
                     Repayment Plans Selected by Borrowers of
                     All Kinds of FDLP Loans, as of March 31,
                                       1997

                             Borrower        Original loan amount
                        ------------------  -----------------------
                                                 Amount                  Average
                                Percentage          (in  Percentage         loan
Repayment plan          Number    of total    millions)    of total      amounts
----------------------  ------  ----------  -----------  ----------  -----------
Standard                527,35        79.5     $3,442.4        64.8       $6,528
                             1
Extended                20,139         3.0        342.4         6.4       17,000
Graduated               59,510         9.0        696.4        13.1       11,703
ICR                     56,298         8.5        831.3        15.7       14,767
================================================================================
Total                   663,29       100.0     $5,312.5       100.0       $8,009
                             8
--------------------------------------------------------------------------------


                                    Table II.2
                     
                      Repayment Plans Selected by Borrowers
                     With Nonconsolidated Loans, as of March
                                     31, 1997

                             Borrower        Original loan amount
                        ------------------  -----------------------
                                                 Amount                  Average
                                Percentage          (in  Percentage         loan
Repayment plan          Number    of total    millions)    of total      amounts
----------------------  ------  ----------  -----------  ----------  -----------
Standard                496,22        89.5     $3,130.8        85.4       $6,309
                             2
Extended                11,859         2.1        120.6         3.3       10,172
Graduated               42,648         7.7        383.6        10.5        8,994
ICR                      3,732         0.7         30.3         0.8        8,118
================================================================================
Total                   554,46       100.0     $3,665.3       100.0       $6,611
                             1
--------------------------------------------------------------------------------


                                    Table II.3
                     
                      Repayment Plans Selected by Borrowers
                      With Direct Consolidation Loans, as of
                                  March 31, 1997

                             Borrower        Original loan amount
                        ------------------  -----------------------
                                                 Amount                  Average
                                Percentage          (in  Percentage         loan
Repayment plan          Number    of total    millions)    of total      amounts
----------------------  ------  ----------  -----------  ----------  -----------
Standard                16,538        25.7       $250.1        17.8      $15,122
Extended                 7,005        10.9        212.9        15.2       30,388
Graduated               11,999        18.6        286.0        20.4       23,833
ICR                     28,888        44.8        656.1        46.7       22,712
================================================================================
Total                   64,430       100.0     $1,405.0       100.0      $21,807
--------------------------------------------------------------------------------
Note:  Numbers do not add to total due to rounding. 



                                    Table II.4
                     
                      Repayment Plans Selected by Borrowers
                       With DCS Consolidation Loans, as of
                                  March 31, 1997

                             Borrower        Original loan amount
                        ------------------  -----------------------
                                                 Amount                  Average
                                Percentage          (in  Percentage         loan
Repayment plan          Number    of total    millions)    of total      amounts
----------------------  ------  ----------  -----------  ----------  -----------
Standard                14,591        32.9        $61.5        25.4       $4,212
Extended                 1,275         2.9          8.9         3.7        6,964
Graduated                4,863        11.0         26.9        11.1        5,526
ICR                     23,678        53.3        144.9        59.9        6,121
================================================================================
Total                   44,407       100.0       $242.1       100.0       $5,453
--------------------------------------------------------------------------------
Note:  Numbers do not add to total due to rounding. 


KINDS OF SCHOOLS ATTENDED BY
NONCONSOLIDATED LOAN BORROWERS
========================================================= Appendix III



                                                                     Table III.1
                                                       
                                                          Nonconsolidated Loan Borrowers in
                                                        Repayment by Payment Plan and Kind of
                                                             School, as of March 31, 1997

                                           Standard               Extended             Graduated                ICR                    Total
                                    ----------------------  --------------------  --------------------  --------------------  -----------------------
                                                Percentage            Percentage            Percentage            Percentage
                                                 of school             of school             of school             of school            Percentage of
Kind of school                        Number         total  Number         total  Number         total  Number         total    Number   school total
----------------------------------  --------  ------------  ------  ------------  ------  ------------  ------  ------------  --------  -------------
2-year private                         6,418         92.36     126          1.81     374          5.38      31          0.45     6,949         100.00
2-year public                         25,402         92.88     274          1.00   1,396          5.10     276          1.01    27,348         100.00
4-year private                        93,756         86.91   3,425          3.17   9,897          9.17     797          0.74   107,875         100.00
4-year public                        319,370         89.62   7,244          2.03  27,485          7.71   2,261          0.63   356,360         100.00
Proprietary                           51,276         91.68     790          1.41   3,496          6.25     367          0.66    55,929         100.00
=====================================================================================================================================================
Total                                496,222         89.50  11,859          2.14  42,648          7.69   3,732          0.67   554,461         100.00
-----------------------------------------------------------------------------------------------------------------------------------------------------


                                                                     Table III.2
                                                       
                                                        Dollar Volume of Nonconsolidated Loans
                                                       in Repayment by Payment Plan and Kind of
                                                             School, as of March 31, 1997

                                                                (Dollars in millions)

                                           Standard               Extended             Graduated                ICR                    Total
                                    ----------------------  --------------------  --------------------  --------------------  -----------------------
                                                Percentage            Percentage            Percentage            Percentage
                                        Loan     of school    Loan     of school    Loan     of school    Loan     of school      Loan  Percentage of
Kind of school                        volume         total  volume         total  volume         total  volume         total    volume   school total
----------------------------------  --------  ------------  ------  ------------  ------  ------------  ------  ------------  --------  -------------
2-year private                         $28.4         88.92    $1.0          3.03    $2.5          7.73    $0.1          0.32     $31.9         100.00
2-year public                           81.3         91.38     1.2          1.34     5.5          6.24      .9          1.04      89.0         100.00
4-year private                         734.6         81.60    44.1          4.89   111.8         12.43     9.7          1.08     900.2         100.00
4-year public                        2,059.4         86.23    69.2          2.90   241.9         10.13    17.8          0.75   2,388.3         100.00
Proprietary                            227.2         88.74     5.2          2.04    21.8          8.51     1.8          0.70     256.0         100.00
=====================================================================================================================================================
Total                               $3,130.8         85.42  $120.6          3.29  $383.6         10.47   $30.3          0.83  $3,665.3         100.00
-----------------------------------------------------------------------------------------------------------------------------------------------------
Note:  Numbers do not add to total due to rounding. 


DELINQUENCY RATES OF FDLP
BORROWERS
========================================================== Appendix IV



                               Table IV.1
                
                Delinquency Rates of Borrowers Repaying
                    Under ICR, as of March 31, 1997

                                             Borrower
                                        ------------------
                                                            Percentage
Loan category                           Delinquent   Total  delinquent
--------------------------------------  ----------  ------  ==========
Direct nonconsolidated                         358   3,732         9.6
Direct consolidation                         4,230  28,888        14.6
DCS consolidation                            4,499  23,678        19.0
Total                                        9,087  56,298        16.1
----------------------------------------------------------------------


                               Table IV.2
                
                  Delinquency Rates of Nonconsolidated
                  Loan Borrowers by Kind of Repayment
                       Plan, as of March 31, 1997

                                             Borrower
                                        ------------------
                                                            Percentage
Repayment plan                          Delinquent   Total  delinquent
--------------------------------------  ----------  ------  ==========
Standard                                    72,424  496,22        14.6
                                                         2
Extended                                       984  11,859         8.3
Graduated                                    4,096  42,648         9.6
ICR                                            358   3,732         9.6
Total                                       77,862  554,46        14.0
                                                         1
----------------------------------------------------------------------


                               Table IV.3
                
                      Delinquency Rates of Direct
                Consolidation Loan Borrowers by Kind of
                  Repayment Plan, as of March 31, 1997

                                             Borrower
                                        ------------------
                                                            Percentage
Repayment plan                          Delinquent   Total  delinquent
--------------------------------------  ----------  ------  ==========
Standard                                     1,707  16,538        10.3
Extended                                       558   7,005         8.0
Graduated                                    1,316  11,999        11.0
ICR                                          4,230  28,888        14.6
Total                                        7,811  64,430        12.1
----------------------------------------------------------------------


                               Table IV.4
                
                 Delinquency Rates of DCS Consolidation
                  Loan Borrowers by Kind of Repayment
                       Plan, as of March 31, 1997

                                             Borrower
                                        ------------------
                                                            Percentage
Repayment plan                          Delinquent   Total  delinquent
--------------------------------------  ----------  ------  ==========
Standard                                     3,792  14,591        26.0
Extended                                       296   1,275        23.2
Graduated                                    1,068   4,863        22.0
ICR                                          4,499  23,678        19.0
Total                                        9,655  44,407        21.7
----------------------------------------------------------------------

DEFAULTS OF FDLP BORROWERS
=========================================================== Appendix V



                               Table V.1
                
                   Percentage of Loans in Default for
                  Borrowers Repaying Under ICR, as of
                             March 31, 1997

                                               Borrower
                                            --------------
                                                In
                                            defaul          Percentage
Loan category                                    t   Total  in default
------------------------------------------  ------  ------  ==========
Direct nonconsolidated                          34   3,732         0.9
Direct consolidation                           715  28,888         2.5
DCS consolidation                            2,083  23,678         8.8
Total                                        2,832  56,298         5.0
----------------------------------------------------------------------


                               Table V.2
                
                   Percentage of Loans in Default for
                Direct Nonconsolidated Loan Borrowers by
                Kind of Repayment Plan, as of March 31,
                                  1997

                                               Borrower
                                            --------------
                                                In
                                            defaul          Percentage
Repayment plan                                   t   Total  in dafault
------------------------------------------  ------  ------  ==========
Standard                                     6,823  496,22         1.4
                                                         2
Extended                                        51  11,859         0.4
Graduated                                      233  42,648         0.6
ICR                                              4   3,732         0.9
Total                                        7,141  554,46         1.3
                                                         1
----------------------------------------------------------------------


                               Table V.3
                
                   Percentage of Loans in Default for
                 Direct Consolidation Loan Borrowers by
                Kind of Repayment Plan, as of March 31,
                                  1997

                                               Borrower
                                            --------------
                                                In
                                            defaul          Percentage
Repayment plan                                   t   Total  in dafault
------------------------------------------  ------  ------  ==========
Standard                                       216  16,538         1.3
Extended                                        54   7,005         0.8
Graduated                                      123  11,999         1.0
ICR                                            715  28,888         2.5
Total                                        1,108  64,430         1.7
----------------------------------------------------------------------


                               Table V.4
                
                 Percentage of Loans in Default for DCS
                Consolidation Loan Borrowers by Kind of
                  Repayment Plan, as of March 31, 1997

                                               Borrower
                                            --------------
                                                In
                                            defaul          Percentage
Repayment plan                                   t   Total  in dafault
------------------------------------------  ------  ------  ==========
Standard                                       495  14,591         3.4
Extended                                        53   1,275         4.2
Graduated                                      146   4,863         3.0
ICR                                          2,083  23,678         8.8
Total                                        2,777  44,407         6.3
----------------------------------------------------------------------

*** End of document. ***