High Risk Series: Student Financial Aid (Letter Report, 02/95,
GAO/HR-95-10).

In 1990, GAO began a special effort to identify federal programs at high
risk of waste, fraud, abuse, and mismanagement.  GAO issued a series of
reports in December 1992 on the fundamental causes of the problems in
the high-risk areas.  This report on student financial aid is part of
the second series that updates the status of this high-risk area.
Readers have the following three options in ordering the high-risk
series: (1) request any of the individual reports in the series,
including the Overview (HR-95-1), the Guide (HR-95-2), or any of the 10
issue area reports; (2) request the Overview and the Guide as a package
(HR-95-21SET); or (3) request the entire series as a package
(HR-95-20SET).

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

 REPORTNUM:  HR-95-10
     TITLE:  High Risk Series: Student Financial Aid
      DATE:  02/01/95
   SUBJECT:  Student loans
             Government guaranteed loans
             Financial aid programs
             Higher education
             Financial management systems
             Management information systems
             Loan defaults
             Strategic information systems planning
             Aid for education
             Internal controls
IDENTIFIER:  Federal Family Education Loan Program
             Guaranteed Student Loan Program
             Dept. of Education Stafford Student Loan Program
             National Direct Student Loan Program
             Dept. of Education National Student Loan Data System
             Pell Grant
             Dept. of Education Postsecondary Education Participants 
             System
             High Risk Series 1995
             
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Cover
================================================================ COVER


High-Risk Series

February 1995

STUDENT FINANCIAL AID

GAO/HR-95-10

Student Financial Aid Programs


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

  DCS -
  FFELP -
  FDSLP -
  OMB -
  SPRE -
  OPE -
  GLOS -
  NSLDS -
  IRM -

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



February 1995

The President of the Senate
The Speaker of the House of Representatives

In 1990, the General Accounting Office began a special effort to
review and report on the federal program areas we considered high
risk because they were especially vulnerable to waste, fraud, abuse,
and mismanagement.  This effort, which has been strongly supported by
the Senate Committee on Governmental Affairs and the House Committee
on Government Reform and Oversight, brought much needed focus to
problems that were costing the government billions of dollars. 

In December 1992, we issued a series of reports on the fundamental
causes of problems in designated high-risk areas.  We are updating
the status of our high-risk program in this second series.  Our
Overview report (GAO/HR-95-1) discusses progress made in many areas,
stresses the need for further action to address remaining critical
problems, and introduces newly designated high-risk areas.  This
second series also includes a Quick Reference Guide (GAO/HR-95-2)
that covers all 18 high-risk areas we have tracked over the past few
years, and separate reports that detail continuing significant
problems and resolution actions needed in 10 areas. 

This report discusses our concerns about the Department of
Education's management and oversight of postsecondary student
financial aid programs, especially the Federal Family Education Loan,
the new Federal Direct Student Loan, and the Federal Pell Grant
Programs.  We also discuss the programs' continuing problems and
their root causes, and the initiatives in place to correct them. 
Because most of the initiatives are in the planning or the initial
implementation stages, it is too early to evaluate their
effectiveness.  However, the results of our ongoing work lead us to
question the adequacy of some of the initiatives that have been
implemented. 

Copies of this report series are being sent to the President, the
Republican and Democratic leadership of the Congress, congressional
committee chairs and ranking minority members, all other members of
the Congress, the Director of the Office of Management and Budget,
and the Secretary of Education. 

Charles A.  Bowsher
Comptroller General
of the United States


OVERVIEW
=========================================================== Appendix 0

In December 1992, we reported on guaranteed student loans, one of the
program areas we considered high risk.\1 We reported that the Federal
Family Education Loan Program (FFELP), formerly known as the
Guaranteed and Stafford Student Loan Programs, succeeded in providing
eligible students access to money for postsecondary education.  But
given the number of defaulted student loans, the program was less
successful in protecting the financial interest of the federal
government and the U.S.  taxpayers. 


--------------------
\1 High-Risk Series:  Guaranteed Student Loans (GAO/HR-93-2, Dec. 
1992). 


   THE PROBLEM
--------------------------------------------------------- Appendix 0:1

In 1992, the federal government paid out over $2.6 billion to make
good its guarantee on defaulted student loans, continuing a trend of
escalating losses.  The causes of this lack of financial protection
for taxpayers were many, but, in our 1992 report, we focused on
several underlying problems with FFELP's structure and management: 

The structure was inordinately complex and participants had little or
no incentive to prevent loan defaults.

Lenders that made loans and state designated agencies that guaranteed
them against default bore little or no financial risk.  Nearly all
the risk fell to the federal government. 

The Department's management failed to establish adequate controls to
minimize its losses and to correct several long-standing management
weaknesses. 

Although the Congress and the Department had attempted to correct
these underlying problems prior to our December 1992 report, many of
them persisted.  We suggested actions to address these.  We were also
concerned that the Department's long-standing management weaknesses
could hamper its implementation of the newly authorized Federal
Direct Student Loan Program (FDSLP), which the Department expects to
replace guaranteed loans by the end of fiscal year 1999. 


   PROGRESS TO DATE
--------------------------------------------------------- Appendix 0:2

The Congress and the Department have made progress in addressing the
underlying problems we identified in our 1992 report.  Loan defaults
have declined significantly--from $3.6 billion in fiscal year 1991 to
about $2.4 billion in fiscal

The reduction in defaulted loans began, in part, from an initiative
the Department started in 1989 that required schools to develop plans
to reduce defaults. 

The Higher Education Amendments of 1992, which authorized FDSLP and
reauthorized the federal student aid programs, allowed the Department
to implement stronger enforcement tools.  For example, the 1992
legislation requires financial and compliance audits of guaranty
agencies to be conducted annually by independent auditors rather than
every 2 years as before.  Other new requirements in the amendments
made changes that were also designed, in part, to help prevent loan
defaults.  For example, borrower deferments were simplified and
repayment options added in an effort to provide borrowers
opportunities to avoid defaulting on their loans when repayment was
difficult.  Further, the Omnibus Budget Reconciliation Act of 1993,
which enacted the Student Loan Reform Act of 1993, required lenders
and guaranty agencies to share more of the risks and financial costs
of FFELP.  And, most important, the 1993 legislation provided for the
5-year phase-in of FDSLP.  With the implementation of FDSLP, some of
the problems associated with lenders and guaranty agencies will
diminish. 

The successful implementation of FDSLP will be critical to ensuring
continued loan access to eligible students as FFELP is phased-down
over the next 5 years.  As FDSLP gets under way, Department officials
believe that the loan volume and profit margins of guaranty agencies
will be reduced, causing some of the current 46 active agencies to
withdraw from FFELP.  In an effort to ensure a smooth transition to
direct lending, the Department designated the Transition Guaranty
Agency to manage insolvent guaranty agencies until another agency
could assume the agencies' guarantee portfolios.  The Department also
contracted with the Student Loan Marketing Association to be the
lender-of-last-resort to help ensure that eligible borrowers have
access to guaranteed loans. 

The Department has also reorganized its Office of Postsecondary
Education, which is responsible for administering student financial
aid programs, and is hiring and training staff to provide the
necessary skills to better implement and oversee the various student
aid programs.  Finally, the Department (1) is in the process of
developing the National Student Loan Data System, the first national
database of information, by loan, on over 40 million student loans
and (2) has prepared departmentwide strategic and tactical
information resources management plans. 


   OUTLOOK FOR THE FUTURE
--------------------------------------------------------- Appendix 0:3

We are encouraged that during the 2 years since we issued our
high-risk report, the Congress has strengthened student aid
legislation and the Department of Education has undertaken a number
of actions to address the concerns we identified.  Although it is
premature to evaluate fully most of these actions, recent work has
caused us to question the adequacy of some of them.  For example, in
1994, we reported that many of the Department's financial management
problems identified during prior audits, such as inadequate financial
information and unreliable loan data, continued.\2 We also reported
that the Department was lax in its monitoring and oversight of
foreign medical schools.\3 We found that loans were made to students
attending foreign medical schools--schools that the Department failed
to ensure met U.S.  standards.  In addition, the Department has not
developed a strategic business or transition plan for its phase-in of
FDSLP, although implementation has begun. 

Since 1992, we have reported that some of the problems in FFELP apply
to the Federal Pell Grant Program and therefore, we are revising the
definition of the FFELP high-risk area to include all student
financial aid provided under title IV of the Higher Education Act of
1965, as amended.  For example, in hearings conducted by the
Permanent Subcommittee on Investigations, Senate Committee on
Governmental Affairs, we testified on October 27, 1993, that schools
have received Pell grants for students who never applied for the
grants or never enrolled in or attended the schools.\4

We have also identified an additional concern that could have an
adverse effect on the Department's implementation of FDSLP--the
significant growth in federal student loan demand.  From fiscal year
1993 to fiscal year 1994, annual student loan volume increased from
about $18 billion to approximately $23.8 billion (32 percent).  This
large increase in loan volume, coupled with the implementation of
direct loans in July 1994, presents the Department with a challenge
as it continues to implement corrective actions. 

The legislative and administrative changes and revisions made to the
gatekeeping process,\5 the information management systems, and the
programs' themselves should, if properly implemented, reduce the
risks in federal student assistance programs.  But the advent of
FDSLP, coupled with significant growth in student loan demand, could
put a strain on the Department as it continues to address problems in
FFELP and other student aid programs. 


--------------------
\2 Financial Audit:  Federal Family Education Loan Program's
Financial Statements for Fiscal Years 1993 and 1992 (GAO/AIMD-94-131,
June 30, 1994). 

\3 Student Loans:  Millions Loaned Inappropriately to U.S.  Nationals
at Foreign Medical Schools (GAO/HEHS-94-28, Jan.  21, 1994). 

\4 Student Financial Aid Programs:  Pell Grant Program Abuse
(GAO/T-OSI-94-8, Oct.  27, 1993). 

\5 Generally refers to the Department's procedures for determining
which schools can participate--and whether they should continue
participating--in federal student aid programs. 


STUDENT LOAN PROBLEMS CAUSED BY A
COMPLICATED PROCESS, FLAWED
STRUCTURE, AND MISMANAGEMENT
=========================================================== Appendix 1

In our December 1992 high-risk report, we discussed the fundamental
causes of problems in FFELP and recommended solutions to the Congress
and Secretary of Education.  We found three root causes of these
problems:  (1) the program's complicated, cumbersome process, (2) the
program's flawed structure, and (3) the Department's mismanagement. 


   OPERATION OF THE FEDERAL FAMILY
   EDUCATION LOAN PROGRAM:  A
   COMPLICATED, CUMBERSOME PROCESS
--------------------------------------------------------- Appendix 1:1

FFELP continues to operate by a series of rules and requirements that
affect millions of students and thousands of schools, lenders, and
other entities.  The program consists of a maze of responsibilities
and encompasses the participation of five parties:  students,
schools, lenders, guaranty agencies, and the Department of Education. 

Generally, students initiate the process by applying to a lender for
a loan and arranging for repayment.  Schools verify students'
eligibility and ensure that loan amounts do not exceed students' cost
of attendance.  Lenders, following federal requirements, make the
loans, and service and collect payment on them.  If a borrower fails
to make payments, the lender files a default claim with a guaranty
agency.  The agencies carry out several tasks, including issuing
guarantees, verifying that lenders properly service and attempt to
collect loans, and remitting portions of moneys to the Department
that may subsequently be collected from defaulted borrowers.  The
Department administers and oversees the program and the participants'
activities.  It also determines which schools can participate,
establishes program requirements, pays lenders interest subsidies,
and reinsures guaranty agencies for lender claims. 


   PROGRAM STRUCTURE IS FLAWED
--------------------------------------------------------- Appendix 1:2

The structure of FFELP continues to be flawed.  FFELP was initially
targeted to middle-income students, generally a low-risk group.  But
its clientbase shifted to low-income students as the cost of
education exceeded the amount of grants available to them, generally
because of budget constraints.  As a result, low-income students
looked to FFELP to help finance their postsecondary education.  A
needs test was then established for loans.  The test resulted in more
low-income and fewer middle-income students being eligible for
subsidized loans.  It also meant that greater debt burden was placed
on many low-income students, who often had little or no means to
repay. 

In addition, FFELP was originally intended to finance a traditional
college education.  The expansion of the program to include other
education and training schools, such as proprietary (for profit)
schools, resulted in loans being made to students to attend some
schools that did not always provide a high-quality education.  Many
students attending these schools were also eligible for other kinds
of federal student aid, such as Pell grants.  Abusive practices of
some proprietary schools, along with plentiful loans, had a
disproportionate impact on loan defaults.  For example, students who
attended proprietary schools represented 23 percent of borrowers
entering repayment in fiscal year 1992, but 45 percent of those that
defaulted by the end of fiscal year 1993. 

A fundamental tension exists within FFELP between its primary
goal--providing access to a postsecondary education--and minimizing
costs to the U.S.  taxpayers.  At the program's outset, the
government expected to assume some of the financial risks for the
program.  But the government also expected that the states, as part
of their responsibilities for participating in FFELP, would establish
guaranty agencies to share the risk of defaulted loans.  Few states,
however, established such agencies.  Most of the risk was, therefore,
absorbed by the federal government and U.S.  taxpayers. 

Prior to our 1992 report, the Congress and the Department took action
to tighten the standards for school participation and to spread the
risk beyond the federal government; however, the actions were
insufficient.  Also, to encourage participation, financial incentives
were provided to lenders and guaranty agencies.  But these incentives
did not include initiatives to limit the federal government's
financial exposure.  The government was in the undesirable position
of being financially liable for the actions of schools, lenders, and
guaranty agencies, who had little incentive to control risk. 

These structural flaws have been costly.  Some students have been
reluctant or unable to repay their loans.  This is because some of
them were pressured, by the lure of plentiful financial aid, to
enroll in proprietary schools--some of which provided a poor-quality
education and a bleak employment outlook.  These students failed to
get value for their money.  Some schools, particularly proprietary
schools, have been driven by a strong profit motive, with little
concern for students' needs--completing their education or obtaining
employment--or for the frequency with which students defaulted on
their loans.  The schools lacked incentives to prevent students from
defaulting, and thereby reducing their default rates. 

Lenders and guaranty agencies, who had little financial risk, have,
in part, been a contributing factor to the default problem.  Federal
loan servicing and collection requirements, which were detailed and
prescriptive, were more form than substance.  Had sufficient or
adequate risk-sharing arrangements been in place, lenders and
guaranty agencies could have had an incentive to pay more attention
to the kinds of schools their students attended and the students'
repayment practices. 


   DEPARTMENT HAS HAD HISTORY OF
   MISMANAGEMENT
--------------------------------------------------------- Appendix 1:3

The Department of Education has had a history of mismanagement and
poor oversight of FFELP's activities.  For example, it typically (1)
used ineffective procedures for determining which schools could
participate, (2) had inadequate financial and management information
systems that contained unreliable data, (3) conducted little
oversight of lenders and guaranty agencies, (4) experienced high
turnover in key management positions and failed to employ staff with
adequate skills, and (5) had a management structure that inhibited
program improvements.  Such mismanagement has been the subject of
congressional hearings, reports by us and the Department's Office of
the Inspector General, and other studies and evaluations.  For
example, in our audits of FFELP's fiscal years 1992 and 1993
financial statements,\6 we reported that, due to unreliable loan data
(generally provided by guaranty agencies), we were unable to provide
an opinion on whether the Department's Statements of (1) Financial
Position, (2) Operations and Changes in Net Position, and (3)
Budgetary Resources and Actual Expenses were fairly stated.  However,
we were able to determine that the Statement of Cash Flows presents
fairly the cash flows of FFELP.  In addition, the Office of
Management and Budget (OMB) and the Department conducted a review
concluding that the Department's management practices contributed to
high rates of loan default, as well as fraud and abuse, in federal
student aid programs. 

This inventory of known problems in the administration of FFELP
raises questions about the Department's ability to adequately manage
the new FDSLP.  Accurate financial and management information is
needed for the Department to not only manage the existing FFELP, but
to properly implement FDSLP. 


--------------------
\6 GAO/AIMD-94-131, June 30, 1994. 


   ACTIONS INITIATED TO CORRECT
   PROBLEMS
--------------------------------------------------------- Appendix 1:4

In our 1992 report, we recognized that congressional and Department
improvements in FFELP were planned and under way, but concluded that
other reforms and changes were needed.  We provided suggestions for
both the Congress and the Department to consider in addressing the
problems and in enhancing the existing program.  To a great extent,
the Congress and the Department have been responsive to these
suggestions, and many revisions in the law and changes to federal
requirements, procedures, and practices have been or are being
implemented. 

It is too early to evaluate the effectiveness of most of these
improvements because they have not been fully implemented. 


   GUARANTY AGENCIES AND LENDERS
   TO BEAR MORE FINANCIAL RISK AND
   TAKE MORE RESPONSIBILITY
--------------------------------------------------------- Appendix 1:5

The 1992 and 1993 amendments require guaranty agencies and lenders to
assume more of the financial risks associated with the default of
guaranteed student loans.  The statutory formula for paying lenders
and guaranty agencies for defaulted loan claims was also changed. 


      INCENTIVES TO ASSUME MORE
      RISKS AUTHORIZED
------------------------------------------------------- Appendix 1:5.1

Prior to the 1993 amendments, guaranty agencies generally received
100-percent reimbursement from the Department for default claims paid
to lenders.  Guaranty agencies were paid reinsurance on the basis of
a 100/90/80 percent formula:  when a fiscal year's default claims
were (1) under 5 percent of the agency's prior year
loans-in-repayment balance, the reimbursement rate was 100 percent,
(2) between 5 and 9 percent, the reimbursement rate was 90 percent,
and (3) over 9 percent, the reimbursement rate was 80 percent.  The
amendments revised the formula to 98/88/78 percent, respectively. 
Therefore, the 1993 amendments' changes in the formula require
guaranty agencies to share in the financial risk of all defaulted
student loans. 

In addition, prior to the 1993 amendments, lenders received 100
percent insurance for the amount of loans (including principal and
interest) that were in default.  The amendments reduced the insurance
rate to 98 percent.  This change was made, in part, to require
lenders to share in the financial risks of the program and to
encourage them to work with borrowers to prevent their loans from
defaulting. 


      OPTIONS IN PLACE FOR DEFAULT
      PREVENTION
------------------------------------------------------- Appendix 1:5.2

In order to prevent loan defaults, the 1992 amendments simplified the
process for borrowers to help prevent them from defaulting.  One
change was to reduce the number of deferments available to student
loan borrowers.  Deferments are periods during which a borrower's
payments of loan principal are postponed, and interest payments are
made (subsidized) by the federal government.  Deferments are intended
to provide an opportunity to some borrowers to postpone repayment
without becoming delinquent or defaulting on their loan.  These
borrowers include those in school or who have completed their
education but are unable to begin repaying their loans.  The
amendments consolidated 13 different kinds of loan deferments into
three:  (1) in school, (2) unemployment (up to 3 years), and (3)
economic hardship (up to 3 years).  It is anticipated that this
simplification will encourage lenders to offer borrowers--and
borrowers to request from lenders--deferment options that will help
borrowers avoid default. 


   GATEKEEPING IS BEING
   STRENGTHENED
--------------------------------------------------------- Appendix 1:6

The Department's gatekeeping procedures were subject to a number of
changes to strengthen controls.  To better enforce federal
requirements and monitor schools, the 1992 amendments strengthened
responsibilities for three major gatekeepers--states agencies,
accrediting organizations, and the Department.  The Department is
also responsible for tightening its regulations and reorganizing its
school certification and oversight activities. 


      STATE POSTSECONDARY REVIEW
      ENTITIES ESTABLISHED
------------------------------------------------------- Appendix 1:6.1

Although the Department has no regulatory power over states'
licensing activities, the new legislation establishes federally
funded state postsecondary review entities (SPREs).  To establish a
SPRE, which will be responsible for conducting or coordinating
reviews of schools licensed in the state, the Department is to enter
into an agreement with each state and may also provide federal funds
to each SPRE to help pay for the reviews. 

For a school that is eligible or seeks eligibility for federal
student aid programs, the Department is responsible for conducting an
initial review of the school and determining if it meets the
statutory criteria requiring a review.  Following its review, the
Department notifies each SPRE of schools that meet one or more of the
statutory criteria.  The SPRE is then required to review the school. 
Based on its findings, or those of a federal entity (for example, the
Department), a SPRE may determine that a school is ineligible to
participate in student aid programs.  Since SPREs are just beginning
to be organized, it is too early to determine what effect they may
have on gatekeeping. 


      ACCREDITING ORGANIZATIONS'
      REQUIREMENTS MODIFIED
------------------------------------------------------- Appendix 1:6.2

The 1992 legislation strengthened existing requirements and provided
for the Department's systematic review and approval of the
organizations that accredit schools for purposes of student financial
aid eligibility.  The accrediting organizations are required to
review and approve schools before students can receive student
financial aid funds.  Accrediting organizations, in conducting their
reviews, must include among their approval criteria established
Department priorities such as minimizing loan defaults, lowering the
number of students who drop out, and increasing placement rates for
students completing their courses.  Although these organizations
assess a school's administrative capability and financial soundness,
the primary focus of their reviews is intended to be educational
quality--instructor qualifications, materials and equipment,
curriculum, and student achievement. 


      PROGRAM REVIEWS MORE FOCUSED
------------------------------------------------------- Appendix 1:6.3

The Department is strengthening its processes for initiating and
performing reviews of schools, in part, by establishing two types of
program reviews:  a standard survey review and a more comprehensive
concentrated team review.  A school is to be selected for a standard
survey based on conditions such as having (1) 10 instances or more in
which students received more than one Pell grant per payment period
or (2) a significant increase in loans (30 percent or greater) and
loan volume of at least $500,000 during a year.  In a survey review,
the reviewer examines the school's student aid policies, procedures,
and records for inadequate financial records, inappropriate use of
money advances for nonprogram purposes, or inaccurate expenditure
reports. 

If significant systemic violations are disclosed during a survey
review (such as evidence of serious, recurring, or systemic
problems), the reviewer is to recommend that a concentrated team
review be conducted.  Concentrated reviews are focused and should
take no longer than 30 days to complete.  In the past, program
reviews, undifferentiated by type, were much broader in scope and
coverage, and could take up to 2 years to complete. 


      PROGRAM REVIEWERS BEING
      HIRED AND TRAINED
------------------------------------------------------- Appendix 1:6.4

To help improve oversight over schools participating in federal
student aid programs, the Department's Institutional Participation
and Oversight Service--responsible for monitoring schools and
determining whether schools are eligible to participate in the
programs--hired 72 additional staff members to carry out reviews of
postsecondary schools.  In addition, 42 senior program reviewer
positions were defined and approved, and are to be filled by November
1995.  The Department also is increasing its training of reviewers by
providing a 23-week training program for new reviewers and
refresher-training for those on board.  This training program
includes basic administrative and personnel orientation and training
in federal procedures and structured on-the-job training in the
regional offices. 


      PROVISIONAL CERTIFICATION OF
      SCHOOLS AUTHORIZED
------------------------------------------------------- Appendix 1:6.5

The 1992 amendments allowed the Department to provisionally certify
postsecondary schools to participate in federal student aid programs. 
This allows the Department to limit the length of time under which a
school is approved to participate, and to more closely monitor and
evaluate its performance.  Provisional certification is expected to
be used for schools with no history of administrative capability or
financial responsibility for participation in federal student aid
programs.  This is generally the case for new schools or schools that
change ownership. 

According to a Department official, all new schools applying for
certification to participate in any federal student aid program will
be placed on provisional certification, allowing strict 2-year
oversight prior to receiving final approval. 


   MANAGEMENT PRACTICES BEING
   IMPROVED
--------------------------------------------------------- Appendix 1:7

The Department has been responding to recommendations of a 1991 joint
study by OMB and the Department.  This study found that management
practices were a major contributor to weaknesses in FFELP.  The
recommendations initiated a series of actions that the Department
took, or is taking, to respond to these concerns. 


      THE DEPARTMENT REORGANIZED
      ITS OFFICE OF POSTSECONDARY
      EDUCATION
------------------------------------------------------- Appendix 1:7.1

In response to the study's recommendations, the Department completed
a major reorganization of its Office of Postsecondary Education (OPE)
to permit it to better administer and oversee federal student
financial aid programs.  OPE was reorganized to strengthen monitoring
and oversight efforts and to enhance its efficiency.  All of its
offices with monitoring and gatekeeping responsibilities, which had
been scattered among various OPE units, were consolidated.  Placing
all of these functions in one unit was intended to provide better
coordination and permit more effective program management. 

A new unit, responsible for overseeing guaranty agencies, lenders,
and loan servicers was established within OPE.  Its financial and
program analysts comprise the Guarantor and Lender Oversight Staff
(GLOS); their goal is to monitor guaranty agency and lender
compliance with program requirements.  GLOS staff also monitor other
key factors affecting the financial health of guaranty agencies, some
of which were specified in the 1992 amendments and others are being
developed by the staff. 


      IMPROVED OVERSIGHT OF
      GUARANTY AGENCIES AND
      LENDERS
------------------------------------------------------- Appendix 1:7.2

In the past, lenders and guaranty agencies were the subject of little
oversight.  The Department is improving its oversight of guaranty
agencies and lenders with the creation of GLOS and by training
approximately 21 GLOS staff members.  The Department developed a task
group to analyze guaranty agency review procedures and to identify
more effective procedures for evaluating the agencies.  For example,
guaranty agencies must now arrange for independent financial and
compliance audits to be conducted at least annually instead of
biennially. 


      ACTIONS UNDER WAY TO MAKE
      INFORMATION SYSTEMS MORE
      RESPONSIVE
------------------------------------------------------- Appendix 1:7.3

Department information systems, the OMB study reported, were used to
support a variety of student aid and financial operations, including
ensuring the compliance of student aid recipients with federal
requirements and the monitoring of student aid programs.  But these
systems contained unreliable data. 

During the past 2 years, we have observed a clear commitment by top
Department management to identifying and correcting long-standing
problems with system development efforts.  The Department has taken
the initial steps to develop major information management systems,
such as the National Student Loan Data System (NSLDS), the
Postsecondary Education Participants System, and the Direct Loan
System.  To reduce the likelihood of awarding student financial aid
to previously defaulted borrowers, the Department implemented several
data matches.  For example, subsequent to a recommendation by its
Office of the Inspector General, the Department began matching the
names and social security numbers of financial aid applicants with
similar information on the default tape to prevent defaulters from
obtaining Pell grants or other financial aid. 

A major Department initiative is its development of NSLDS, a national
database of information, by loan, for approximately 40 million loans
awarded to borrowers who participate in student financial aid
programs.  Such information is not readily available using the
current database--the student loan data tape.  The Department
annually updates the existing database from data tapes the guaranty
agencies provide to it, as of September 30 of each year. 

NSLDS is being designed to provide the Department and the guaranty
agencies with more detailed current and useful information and to
help ensure that improved and accurate information is available on
student loan indebtedness.  The Department plans to update NSLDS
monthly, based on detailed information received from guaranty
agencies and schools.  NSLDS is being designed to interact with other
student aid systems, including the Central Processing and Pell Grant
Recipient Financial Management Systems. 

We reported in 1993 that our primary concern about NSLDS is that some
data (which are the only data available) entered in the system will
be erroneous, thereby compromising its effectiveness.\7 Subsequent to
our 1993 report, the Department undertook a number of measures to try
to protect the quality of the data initially loaded into NSLDS, and
to improve the data quality long-term.  For example, these measures
include things such as (1) screening every data field sent to NSLDS
to ensure that dates adhere to correct formats and character fields
are only filled with letters and (2) tracking errors to the data
field within individual records once a guaranty agency's corrections
are received at NSLDS.  In addition to the measures above, a number
of other activities were performed prior to NSLDS implementation to
help improve data quality.  For example, beginning in 1991, the
Department conducted data quality reviews of guaranty agency
databases, and identified and reported specific data problems and
corrections needed to the agencies for resolution. 

Further, data are being loaded into NSLDS in the following order: 
(1) closed loan data, prior to October 1, 1989, from the FFELP
database; (2) FFELP/Debt Collection Subsystem (DCS) data which
contain historic records on Higher Education Assistance Foundation
loans and loans assigned to the Department, along with data on loans
currently active in the DCS; and (3) data provided by guaranty
agencies and schools on all active loans and on any loans that
entered a closed status after September 30, 1989.  The Department
believes that these efforts should help ensure that the most current
data available on loans are loaded into NSLDS.  Because the
Department has not completed the implementation of NSLDS, it is too
early to determine the effectiveness of these efforts. 


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


   FINANCIAL MANAGEMENT
   IMPROVEMENTS UNDER WAY
--------------------------------------------------------- Appendix 1:8

Partly in recognition of problems identified in FFELP financial
audits, the Department is taking a number of corrective actions.  For
example, it is revising the auditing processes and training of staff
who carry out reviews of guaranty agencies and lenders.  It is also
(1) expanding the capability to do more in-depth financial reviews,
(2) developing and maintaining detailed financial records, and (3)
improving controls over information and financial management systems
to safeguard assets, maintain the confidentiality of student loan
data, and ensure the reliability of financial management information. 

In our fiscal year 1993 financial audit of FFELP, we reported that
many of the financial management problems identified during the prior
year's audit still existed.\8 For example, student loan data that
were generally provided by guaranty agencies and used by the
Department were not reliable.  Therefore, we were unable to express
an opinion on whether FFELP's September 30, 1993, Statements of (1)
Financial Position, (2) Operations and Changes in Net Position, and
(3) Budgetary Resources and Actual Expenses were fairly stated. 
However, we were able to determine that the Statement of Cash Flows
for this period was fairly stated. 

To address the problem of unreliable student loan data, the
Department has worked more closely with guaranty agencies in trying
to understand and resolve some of the student loan data errors.  In
addition, the Department is continuing to develop NSLDS. 

The Department is also developing guides for auditors to use in their
audits of guaranty agencies and lenders.  The guides will require
external auditors to determine whether claims that guaranty agencies
and lenders submit for payment to the Department are reasonable.  The
guaranty agency guide (which will be a revision to the previously
issued guidance) is still under development with issuance anticipated
in mid-1995; the lender guide is scheduled to be issued in February
1995. 


--------------------
\8 GAO/AIMD-94-131, June 30, 1994. 


   DEPARTMENTWIDE STRATEGIC AND
   TACTICAL INFORMATION RESOURCES
   MANAGEMENT PLANS ARE PREPARED
--------------------------------------------------------- Appendix 1:9

The Department prepares annual departmentwide 5-year strategic and
tactical information resources management (IRM) plans.  The
Department considers its plans to be blueprints that will support the
improvement and development of information systems, and provide the
capabilities employees require to carry out the Department's mission
and to achieve its near- and long-term goals. 

These plans are, in part, in response to our 1992 report\9 that found
the Department (1) had not established an effective departmentwide
IRM program, (2) had an ineffective strategic IRM plan, and (3)
lacked key management and program information with which to
effectively oversee its operations.  We were also concerned that the
Department's senior IRM officials had not been involved in strategic
IRM planning and that the Department had failed to initiate a
departmentwide information-planning process that identified the
information needs of its programs, such as its student aid programs. 
As a result, we recommended that the Department develop an IRM plan
that is linked to the Department's overall goals and objectives. 

Because the strategic and tactical plans were recently developed, it
is too soon for us to determine what effects they will have on the
Department's student financial aid programs. 


--------------------
\9 Department of Education:  Management Commitment Needed to Improve
Information Resources Management (GAO/IMTEC-92-17, Apr.  20, 1992). 


FURTHER ACTION NEEDED
=========================================================== Appendix 2

Student financial aid programs remain a high-risk area and require
continued attention.  This is so despite the Congress and Department
having taken some actions to address problems such as billions of
dollars in FFELP student loan defaults; ineffective oversight of
schools, lenders, and guaranty agencies; and the lack of qualified
staff.  In particular, the following risks continue: 

Department gatekeeping practices continue to allow unscrupulous
schools to participate in student aid programs. 

Department student loan data continue to be unreliable. 


   HIGH-RISK AREA REDEFINED
--------------------------------------------------------- Appendix 2:1

Since our 1992 high-risk report, we recognized that some problems
associated with FFELP generally also apply to the Federal Pell Grant
Program; therefore, we are revising the definition of our high-risk
area to include all student financial aid provided under title IV of
the Higher Education Act. 


      FEDERAL PELL GRANT PROGRAM
      ABUSES IDENTIFIED
------------------------------------------------------- Appendix 2:1.1

In our 1993 testimony,\10 we reported on the use of false documents
to support both schools' eligibility and students' Pell grant
applications to participate in the Pell grant program.  These schools
submitted documentation to the Department for (1) students who never
applied for grants, (2) individuals who never enrolled in or attended
the schools, and (3) students who were ineligible.  Some schools also
misrepresented their academic programs and other eligibility
criteria. 

One of the first lines of defense in dealing with such
problems--problems in schools participating in any student aid
program--is to have strong gatekeeping procedures for ensuring that
only schools that are able to provide the education they advertise
can participate in the programs.  Some of these procedures were
strengthened in the 1992 amendments, although they were not in effect
when the Department approved the schools mentioned above.  We
believe, however, that the 1992 amendments are a good start for
strengthening the Department's approval of schools. 


--------------------
\10 GAO/T-OSI-94-8, Oct.  27, 1993. 


      IMPLEMENTING THE FEDERAL
      DIRECT STUDENT LOAN PROGRAM
------------------------------------------------------- Appendix 2:1.2

In July 1994, the Department began the legislatively mandated 5-year
phase-in of FDSLP to reach goals of:  5 percent of new student loan
volume for the 1994-95 school year; 40 percent for 1995-96; at least
50 percent for 1996-97 and 1997-98; and at least 60 percent for
1998-99.  FFELP, with lenders and guaranty agencies, is expected to
be phasing down during this period. 

The Department met the goal of 5 percent of loan volume with 103
schools participating in direct lending during the first year.  The
first loans were made in July 1994, and the Department reports that
the implementation is proceeding smoothly.  Although these initial
efforts have proceeded without major problems, there is no assurance
that this success will continue as the program rapidly grows. 

Our reports, as well as reports by the Department's Office of the
Inspector General and others, have shown that inadequate planning and
program management have kept the Department from properly managing
its student aid programs.  These concerns and others discussed in our
December 1992 high-risk report, coupled with steadily increasing
student loan volume, contributed to our suggestion that a
comprehensive planning strategy is needed for the transition to
direct loans.  This strategy should address implementation issues
such as training support, income-sensitive repayment options, and
loan default features; management and oversight over implementation;
transition from guaranteed loans; and human resource and other
Department support requirements. 

The Department, in implementing direct lending, has not developed
appropriate plans such as a comprehensive strategic mission or
business plan, and a transition plan for FDSLP.  The Department,
however, has prepared individual task lists and other planning
materials which contain elements that would be included in a
comprehensive strategic plan.  Specifically, these items include (1)
training courses scheduled for Department and schools' staffs, (2)
human resources and costs needed for the phase-in of and transition
to FDSLP, (3) a transition strategy for lenders and guaranty
agencies, (4) an acquisition schedule for the FDSLP subsystem, and
(5) a FDSLP regulations schedule. 

To its credit, in order to guide the implementation of the program,
the Department addressed the management, staffing, and implementation
of direct lending by assembling the Direct Loan Task Force.  The task
force is a temporary group which is responsible for the initial
implementation of FDSLP.  It is comprised of staff from various
offices, such as policy, accounting and financial management, and
program systems.  The Department chose a staff with diverse
backgrounds, which provide the task force with the collective
experience necessary to coordinate the implementation efforts. 

Some of the problems associated with lenders and guaranty agencies
also diminish with the Department's implementation of FDSLP.  Under
direct lending, the federal government is the lender and no
intermediary provides a guarantee; therefore, lenders and guaranty
agencies would no longer maintain their present role.  However,
lenders and guaranty agencies could operate as loan servicers (firms
that perform loan servicing and collection) under contract with the
Department. 

For the first year (school year 1994-95), 103 schools were approved
to participate in FDSLP.  It is anticipated that about 1,400 schools
may be added to the program in the second year.  Without a viable
strategy to guide the Department during the rapid increase in
schools, the increases in loan origination and servicing, and the
transition of schools leaving FFELP, the Department risks not
achieving its FDSLP mission and objectives efficiently and
effectively.  History has shown that the Department has experienced
problems in operating its student loan programs, and it needs to
continue to develop and formalize planning strategies and procedures
to ensure that FDSLP does not meet with the same fate. 


   THE NEED TO CORRECT PROBLEMS IS
   CRITICAL
--------------------------------------------------------- Appendix 2:2

The need to correct the long-standing problems in FFELP becomes even
more critical as (1) the volume of student loans continues to
increase and (2) the Department, under FDSLP, increases the
percentage of loans made directly to students.  Otherwise, some of
the same problems that are affecting FFELP could also pervade the new
program and, with increasing loan volume, could continue to keep the
government and the U.S.  taxpayers at financial risk level.  The
Department must not allow direct lending to become a distraction as
it continues the initiatives to correct the known problems in FFELP. 

To help gain control over this high-risk area, the Department needs
to ensure that the legislative and regulatory changes made to the
gatekeeping process, information and financial management systems,
and to the programs themselves are effectively implemented.  It also
needs to continue to expeditiously improve the quality of its student
aid data systems, especially NSLDS, as these systems are being
implemented. 

In an effort to ensure continued loan access under the FFELP and a
smooth transition to direct lending, the Department designated the
Transition Guaranty Agency to manage or take over insolvent guaranty
agencies until another guaranty agency could assume the agencies'
guarantee portfolio.  The Department also contracted with the Student
Loan Marketing Association to be the lender-of-last-resort to help
ensure that eligible borrowers have access to a guaranteed loan.  The
Department not only must closely monitor its implementation of FDSLP
and the transition from FFELP, it must also pay particular attention
to ensuring that the Transitional Guaranty Agency and the
lender-of-last-resort agreements are viable, thus ensuring that
eligible students continue to have access to loans. 

We recognize that the legislative changes and the Department's
initiatives are steps in the right direction and, if they are
implemented correctly, could improve the integrity of FFELP and all
federal student aid programs.  However, because many of the
initiatives are in the planning or initial implementation stages, it
is too early to determine whether they will greatly reduce or
eliminate the financial risks and other problems associated with the
student aid programs. 


RELATED GAO PRODUCTS
=========================================================== Appendix 3

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

Student Loans:  Millions Loaned Inappropriately to U.S.  Nationals at
Foreign Medical Schools (GAO/HEHS-94-28, Jan.  21, 1994). 

Student Financial Aid Programs:  Pell Grant Program Abuse
(GAO/T-OSI-94-8, Oct.  27, 1993). 

Financial Management:  Education's Student Loan Program Controls Over
Lenders Need Improvement (GAO/AIMD-93-33, Sept.  9, 1993). 

Direct Student Loans:  The Department of Education's Implementation
of Direct Lending (GAO/HRD-93-26, June 10, 1993). 

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

Department of Education:  Long-Standing Management Problems Hamper
Reforms (GAO/HRD-93-47, May 28, 1993). 

Department of Education:  Management Commitment Needed to Improve
Information Resources Management (GAO/IMTEC-92-17, Apr.  20, 1992). 

Student Loans:  Direct Loans Could Save Billions in First 5 Years
With Proper Implementation (GAO/HRD-93-27, Nov.  25, 1992). 

High-Risk Series:  Guaranteed Student Loans (GAO/HR-93-2, Dec.  92). 

Student Loans:  Direct Loans Could Save Money and Simplify Program
Administration (GAO/HRD-91-144BR, Sept.  27, 1991). 

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


1995 HIGH-RISK SERIES
=========================================================== Appendix 4

An Overview (GAO/HR-95-1)

Quick Reference Guide (GAO/HR-95-2)

Defense Contract Management (GAO/HR-95-3)

Defense Weapons Systems Acquisition (GAO/HR-95-4)

Defense Inventory Management (GAO/HR-95-5)

Internal Revenue Service Receivables (GAO/HR-95-6)

Asset Forfeiture Programs (GAO/HR-95-7)

Medicare Claims (GAO/HR-95-8)

Farm Loan Programs (GAO/HR-95-9)

Student Financial Aid (GAO/HR-95-10)

Department of Housing and Urban Development (GAO/HR-95-11)

Superfund Program Management (GAO/HR-95-12)

The entire series of 12 high-risk reports can be ordered by using the
order number GAO/HR-95-20SET. 

