Department of Health and Human Services

OFFICE OF

INSPECTOR GENERAL

HEALTH EDUCATION ASSISTANCE LOAN

(HEAL) 
-1 
ERVJCES' 
Richard P. Kusserow 
INSPECTOR GENERAL 
'0 
OEI-02-90-00980 
olq"'d  EXECUTIVE 
SUMMARY

PURPOSE 
The purpose of this inspection is to ascertain the degree of implementation, effectiveness and 
support for the recent regulatory reforms of the Health Education Assistace Loan (HAL)
program. It also assesses whether further reforms, such as performance standards and 
risk-sharng; are considered necessar and what their possible effectiveness might be. 
BACKGROUND 
This study was initiated because of high-level concerns about financial problems the HEAL 
program has been experiencing due to an increasing default rate. The Public Health Service 
(PHS) projects the Student Loan Insurance Fund (SLIP) wil not have suffcient funds to pay the 
increasing number of claims. 
The Deparent has, over the last few years, announced regulatory reforms to reduce the HEAL 
default rate and keep the SLIP solvent. These include requirng schools to conduct entrance and 
exit conferences and needs analyses, and having lenders conduct credit checks, exercise due 
diligence, including preclaim assistance, and initiate litigation where collection attempts have 
failed. 
Performance standards and risk-sharng have both been proposed as furter ways to strengthen 
HEAL. Lastly, and very significantly, the President s budget for Fiscal Year 1991 calls for the 
phasing out of the HEAL program. However, the phasing out 
wil requir Congressional action 
and may take many years due to the long-term nature of the loans. 
METHODOLOGY 
This inspection was based on: a literature review; an examination of HEAL Annual Reports; a 
stratified random sample of 120 school programs paricipating in HEAL; and information 
gathered from 120 financial aid offcers from the sample schools and from offcials of the top ten 
HEAL lending institutions. Contacts were also made with several Federal managers experienced 
in risk-sharng in other Federal programs to determine to what extent it has been effective in 
helping to reduce default rates.  FINDINGS 
Reforms Are Widely Implemented And Generally Supported; Opinions Vary About Their 
Effectiveness. 
The inspection found that both schools and lenders are fully implementing the recent feforms. 
All reforms are supported by both schools and lenders with the exception of litigation. However 
preliminar evidence suggests that litigation is successful in 25 percent of the cases. Overall 
both schools and lenders feel it is too soon to judge the long-term effectiveness of the reforms. 
Some impact has, nevertheless, already been noticed. 
Most Schools And Half The Lenders Believe Performance Standards Wil Be Effective; Almost 
All Oppose Their Use. 
Although most schools object to the implementation of performance standards, more than 
two-thirds feel that performance standards wil be either somewhat or very effective in reducing 
the default rate. Half the lenders agree that performance standards will be effective. This 
approach was successful in reducing the default rate in the Health Professions Student Loan 
(HPSL) program, also sponsored by the Deparent. 
Mixed Views Exist On The Use And Value Of Risk-Sharing. 
Both the schools and lenders believe schools should not be required to paricipate in risk-sharng 
and doubt that the schools ' paricipation would be effective. However, schools see lenders in 
that role and feel lender paricipation  effective. Nolenders support risk-sharng for 
wil be 
themselves. One-half say that they wil drop out of HEAL with risk-sharng, and some mention 
that it would cause them to be more restrctive and limit who gets the loans. In any event 
neither group feels risk-sharng is actually needed to save HEAL. 
RESPONDENT RECOMMENDATIONS 
When asked for suggestions on how to improve the HEAL program, schools and lenders most 
frequently volunteered the following innovative ideas: 
Change the terms of the loan, such as eliminating compounding interest and reducing 
the interest rate (which are now being done by a few lenders), and reducing the 
maximum loan amount and basing a tiered insurance premium on the default rate of 
each discipline. 
Impose stricter penalties for defaulters, such as garnisheeing wages, offsetting 
Medicare and Medicaid reimbursement, withholding professional licenses and 
providing no bankruptcy forgiveness.  Improve communication and coordination among schools, lenders, borrowers and the 
Federal government. 
RECOMMENDATIONS 
We recommend that performance standards be implemente without delay. Our 
recommendation is based on predictions of schools and lenders that they 
wil be effective, by the 
successful recent experience of the HPSL program with performance standards, and by our 
analysis of HEAL default experience to date which suggests substantial future savings with the 
use of performance standards. It shows that if all schools had maintained a default 
rate of no 
more than five percent it would have resulted in $20.5 million not being claimed, which 
represents almost 18 percent of all default dollars since the program began. 
These stadards 
would be a useful tool should the program be retained and would, of course, be beneficial durig
a phase-out period. 
COMMENTS 
Comments on the draft report were received from PHS and ASPE which concur with the 
recommendations of this report. The PHS believes that the final rule for performance 
standards 
wil be published by September 1991.  ".'"..''.''.''.'.''.''.''.'.''.''.''.'.''.'.'.'.'..''..'. ....................... ......... ....... .....................................  .......................... ............. .... ........................... ............................................................. ...................................................
........................................................................................................................................... ........ ....
TABLE OF CONTENTS

EXECUTIVE SUMMARY 
INTRODUCTION..................................................................................................... .

PURPOSE................. ........... 

BACKGROUND ........... 

METHODOLOGY.................................................................................................... .

FINDINGS ..................................................................................................................

Reforms Are Widely Implemented And Generaly Supported; 
Opinions Var About Their Effectiveness............................................................

Most Schools And Half The Lenders Believe Performance Stadards 
Wil Be Effective; Almost All Oppose Their Use ................................................

Mixed Views Exist On The Use And Value Of Risk-Sharng ............................ 
RESPONDENT RECOMMENDATIONS ............................................................. 
RECO MMEND A TIO NS ..................................... .... 
COMMENTS........................................................................................................... . 
APPENDIX A . 
A - 1 
APPENDIX B 
B - 1 
APPENDIX C  .................................................................... C - 1  INTRODUCTION

PURPOSE 
The purpose of this inspe.ction is to ascertain the degree of implementation, effectiveness and 
support for the recent regulatory reforms of the Health Education Assistace Loan (HAL)
program. It also assesses whether further reforms, such as performance standads and 
risk-sharng, are considered necessar and what their possible effectiveness might be. 
BACKGROUND 
HEAL Program 
This study was initiated because of high-level concerns about fmancial problems the HEAL 
program has been experiencing. 
The cost of financing an education in the health professions escalates every year. Rising tuition 
and living expenses make training in such fields increasingly expensive. Few students can meet 
these costs by relying solely upon their own or their parnt s income and, therefore, most depend 
on loans. In response to this need, the Federal government, States and varous private 
organizations offer loans to these students. The HEAL program, an insured-loan program 
administered by the Deparent of Health and Human Services (DHHS), is an importt source 
of such funding. 
The DHHS established the HEAL loan program in 1976. It is managed by the Public Health 
Service (PHS), in cooperation with 
parcipating schools and lenders. Schools determine the 
costs of attendance and the eligibilty of applicants. Lenders make determinations of 
the 
creditwortiness of applicants, issue loans and make collections. 
The HEAL program insures loans made by nonfederallendig institutions and was intended to 
operate without using Federal funds. It was designed to be self-sustaining by having insurce 
premiums deducted from the loan principal at the time of the award. These legislatively capped 
premiums, which have raged from 1/4 percent to a current rate of eight percent, are deposited 
into the Student Loan Insurance Fund (SLIP). The SLIP reimburses the holder of the loan 
institution) for the full amount of the principal and accrued interest in event 
(tyically a lending 
of the borrower s default, death, disabilty or bankptcy. 
The HEAL program allows students of medicine,  veteriar 
dentistr, osteopathy,  medicine, 
optometr, and podiatr to borrow up to $20,000 per year, not to exceed a total of $80,000 over 
the period of academic study. Students of pharacy, chiropractic medicine, health 
administration and clinical psychology may borrow up to $12 500 per year, not to exceed a tota 
of $50,000. The loans have a varable interest rate, which is capped at T-bil plus thee percent
and usually accrues while the student is stil in school. Repayment begins nine months after  graduation or after the completion of an accredited residency or other deferment not to exceed 
four years. The maximum repayment period is 25 years. 
The HEAL program has grown dramaticaly since its implementation in Fiscal 
Year (FY) 1978, 
in both loans disbursed and default claims paid. Disbursements totaled $85.6 milion in FY 
1979, peaked in FY 1986 to $321.4 milion, and then leveled off at $229.3 milion in FY 1988. 
In FY 1989, disbursements totalled $250.6. Claim payments increased substantially from $0.
milion in FY 1979/1981 to $35.5 milion in 1988, for an 1989 aggrgate total of approximately 
$95.8 milion. 
Emerging Financing Problem 
Although the insurance premiums have increased substantially over the years, PHS projects the 
SLIP wil not have sufficient funds to pay the incrasing number of claims. To fIl this gap, the 
SLIP received a special appropriation of $25 milion in FY 1990. The PHS feels that continuing 
deficits over the next few years wil require further appropriations. 
In response to a Congressional mandate to investigate the factors causing borrowers to default, 
PHS contracted with L.J. Colker & Associates and Applied Management Sciences, Inc. to 
conduct a study in 1988 entitled, "A Review of HEAL Defaulters: Their Causes and Corrective 
Measures - Par II. " This study found the majority of sureyed HEAL defaulters to be between 
the ages of 30 and 39; male; caucasian; non-Hispanc; mared or formerly mared; and having 
an average of 1. 16 dependents. Their leading occupation was chiropractic medicine. The study 
concluded that defaults occur not because students inappropriately select HEAL as an option
, but 
rather because of unanticipated problems when the tie came to repay the loan. These problems 
include delays in obtaining a license, the need to invest large sums of money when opening a 
practice, and not completing their professional education. 
The PHS also has contracted with the Development Assistance Corporation (DAC) to design and 
document a forecasting model which wil estimate cash flow in futu years. This work has 
recently been completed. 
Recent Changes 
The Deparment announced regulatory reforms, effective Apri 1987, which are designed to 
reduce the HEAL default rate and keep the SLIP solvent. These reforms were based priary
upon recommendations made by the Offce of Inspector Genera in a series of audits issued
durig the period 1983 to 1987. They include: 
Entrance and Exit Conferences.  Schools are requird to conduct entrance and exit confer
ences with HEAL borrowers to advise them of the terms of the loan and to educate them 
about repayment. 
HEAL borrowers must undergo a financial needs test by the school to de
Needs Analysis. 

termine eligibilty and the loan amount for which they qualify.  The lender must now apply more strngent 
Creditworthiness.  creditwortiness standards 
in determining an applicant's eligibilty, including reviewing an applicant 
s credit history. 
Lending institutions must prove increased due diligence in collecting the 
Due diligence. 

loan before fiing a default claim, including: employing collection practices that 
ar at 
least as extensive and as effective as those used in the collection of the lender 
s other 
loans; immediately notifying an appropriate consumer credit 
reportng agency regarding 
accounts overdue more than 60 days. 
After the lenders ' attempts at collection have failed, the lender is re
Preclaim assistance. 

quired to notify PHS and request preclaim assistance. The PHS then sends out a series of 
three letters with increasingly strong language to remind the borrower to repay his/her loan. 
Litigation.  As of November, 1988, ifthe lenders' due diligence and PHS' s pre-clais as
sistance do not result in repayment, lenders and holders are required to initiate litigation. 
They must refer the case to the local court and obtain a judgement against the borrower 
prior to submitting a default claim to PHS for payment. 
Proposed Changes 
Based on Public Law 100-607, effective November 4, 1988, which authorized the Secretar to 
establish default standards for HEAL schools, regulations 
wil soon be proposed against which 
the default rates of schools, lenders and holders of loans in the seconda 
market wil be 
measured. Schools, lenders and holders with a default rate above a certn percent would not be 
allowed to parcipate in the program. 
In recent years, the Administration has advanced several other legislative proposals for 
improving HEAL, including: . eliminating the eight-percent insurance premium limit; experience 
rating the premiums by school, lender or discipline; charging the insurce premium over the 
life of the loan; trsferrng responsibilty for the loan from the Federa Government to the 
lender in cases of a borrower s death or disabilty; and extending risk-sharng for the ftrst time to 
both lenders and schools, so that both would have to pay a specified percentage of an 
outstanding loan should one of their borrowers or students default. Pror OIG reports have 
supported these proposals. Thus far, Congress has declined to implement any such reforms. 
Lastly, and very signifcantly, the Prsident s budget for Fiscal Year 1991 calls for the phasing 
out of the HEAL program. However, the phasing out wil require Congressional action and may 
take many year due to the long-term nature of the loans. 
METHODOLOGY 
This inspection was conducted in the following manner: a literature review was conducted and 
prior studies were obtained dealing with bank paricipation in the HEAL program
, HEAL 
defaulters, the SLIP and possible new reforms. The HEAL Annual Reports published by PHS 
were reviewed. Next, a stratified random sample of 120 school programs parcipating in HEAL  was developed with 32 alopathic medical, 29 dental, 17 chiropractic, 15 osteopathic medical, 7 
podiatr and 20 other specialty programs (See Appendix A). Contacts were then made by phone 
and in person with both 120 financial aid offcers from the sample school programs and with 
officials responsible for HEAL at the top ten lending institutions, which account for 94 percent 
of loans disbursed in FY 1989. Information was obtained from schools and lenders regardig
how the new reforms have impacted on their use of the HEAL loan, and their perceptions 
regarding other possible reforms such as performance standards and risk-sharng. Statistics were 
gathered on default rates, disbursements, loan amounts and litigation. The experience with 
performance standards in the HPSL was analyzed. Finally, information was obtained about other 
Federal loan programs which have risk-sharng, and interviews were held with several 
Federal 
managers experienced in these programs to determine to what extent it has been effective in 
reducing default rates.  FINDINGS

REFORMS ARE WIDELY IMPLEMENTED AND GENERALLY SUPPORTED; 
OPINIONS VARY ABOUT THEIR EFFECTIVENESS. 
Schools Have Implemented Reforms and Support Them Fully. 
Entrance and Exit Conferences 
Almost all schools conduct the required entrance and exit conferences. Ninety-
thee percent 
counsel students individually or in groups on the HEAL application process, and ninety-seven 
percent meet with students before graduation to discuss repayment. Schools also employ other 
innovative counseling procedures to help lower the default rate. These include (1) computer 
software programs designed especially to educate students about debt management and (2) exit 
meetings between lenders and students to inform students about repayment. 
Virually all schools consider entrce and exit conferences and ongoing counseling as effective 
ways to lower the default rate. In fact, a few schools with low default rates specifcally attrbute 
their low rates to their counseling procedures. One respondent states, "
We consider our entrance 
and exit conferences and debt counseling as 
substatial steps in dealing with all loan programs,
not just HEAL." Many schools strss the importce of student counseling, financial planning 
and debt management in administerig HEAL. 
Thir-six percent of schools report increasing, 
or planning to increase, their counseling efforts despite the fact that over thre-quarers of these 
schools have default rates lower than five percent. Over one-fifth of the schools and lenders 
volunteered support for extensive student counseling as a means of assurng the continuation 
the HEAL program. 
When asked for suggestions as to how to improve the HEAL program, 23 percent of schools and 
20 percent of lenders volunteered increased student counseling and education, including 
maintaning contact with student borrowers after graduation. One respondent states that 
consistency amongst schools in their counseling is needed - students everywhere should be told 
the same thing. " Severa schools suggest implementing a financial management program to help 
students handle their borrowing; one respondent states, "I would recommend every school have a 
financial planning seminar to reach all students. " Other schools indicate that continual personal 
contact with students is essential to keeping them apprased of their debt and repayment 
obligations. Schools feel that counseling should also be extended to borrowers in residency 
programs. 
Needs Analysis

All schools report routinely employing a needs analysis to determine HEAL 
eligibilty and the 
amount of the loan. Almost two-thirds consider financial need as a major factor when 
recommending HEAL loans and many schools report recommending HEAL only when all other 
financial resources are exhausted. Almost an schools report that 
students consider only their  need for money when applying for a HEAL loan. One respondent reflects the view of many 
when she says, "Students used to borrow a lot but since the needs analysis and counseling they 
borrow as little as possible, sometimes even less than they are allowed.
tr to  " One lender 
reports some decrease in HEAL usage since the needs analysis. 
Lenders Have Implemented All Reforms; Some Impact Already Seen. 
Creditworthiness 
All lenders routinely check the credt history of HEAL applicants. All but one had never run 
such checks prior to the recent reform. Sixty percent of lenders indicate that more strngent 
creditwortiness standards have decreased the number of HEAL borrowers at their institution. 
While most applicants are able to resolve their credit problems and obtain a HEAL loan, a 
majority of schools and lenders report that a small number of potential student borrowers with 
bad credit are ultimately rejected. 
Most lenders and schools support the creditwortiness requirment. Lenders believe that credit 
tag 
checks prevent some high risk borrowers from  out HEAL loans. One lender says, " 
now have better customers. " Both schools and lenders mention that such checks make students 
aware that they have a credit history and a financial responsibilty to pay back HEAL loans. 
Seventy percent of schools feel credit checks 
wil be effective. A majority of lenders say that 
credit checks wil have the most impact on those students that have a credit history to assess. 
Due Dilgence

All lenders report exercising strong collection efforts to 
fulfll the due diligence requirement.
Fifty percent of lenders responsible for collection of these loans believe increased due diigence
such as contacts by phone or in persdn to secur repayment wil help reduce the HEAL default 
rate. The remaining lenders feel that 
they have always been exercising due diigence. Lenders 
report exercising due diigence with HEAL to the same extent as with their other loans. Some 
mention that because of intensified collection efforts some borrowers finaly file for deferment or 
initiate repayment. 
Seventy percent of school loan offcers believe due diligence 
wil help reduce the HEAL default 
rate. Some loan offcers who keep in contact with their borrowers feel that even stronger efforts 
than those required should be made by lenders to keep track of the borrower before he/she 
defaults. One respondent mentioned that he knew of several defaulters in his community with 
successful practices who the lender made no effort to go after. Schools feel due diligence 
increases important communication between the borrower and the lender and forces lenders to be 
more aggressive in their collection efforts. 
Twenty-three percent of schools, when asked how to ensur the continuation of the HEAL 
program, volunteered that lenders need to do the best job possible in servicing the HEAL loan. 
These respondents support greater due dilgence, stressing in parcular that collection efforts are 
key to reducing the HEAL default rate.  Preclaim Assistance 
All lenders report referrng their delinquent borrowers to PHS for preclaim assistance after 
having exercised the required due diligence. The PHS reports that preclaim assistance was 
effective in obtaning cures - that is, successfully resolving the loan either with repayment, 
forbearance or deferment - in 93 percent of the referred cases in FY 1989. This is 18 percent 
more than the FY 1988 rate of 75 percent. One lender supports preclaim assistance and says, 
We get deferments now and they ar not turned over as defaults. 
Litigation 
All lenders initiate litigation against delinquent borrowers when preclaim assistance has failed. 
Thirty percent of lenders and forty-three percent of schools feel litigation wil be effective 
reducing the default rate. 
Lenders report a wide range in the number of cases in litigation, from six to 2200. The PHS 
estimates the dollar value of cases currently in litigation to be about $73 milion. 
Although the
lenders are obtaining judgments against borrowers, the cases often do not result in successful 
collection efforts and PHS ends up paying the claims. 
Neverteless, one major lender, who 
holds 60 percent of the HEAL loans, reports that 25 percent of their cases in litigation enter 
repayment status. Another major lender agrees when he says, "Once students ar theatened with 
litigation 50 percent wil star payment, but only half of them wil probably pay. 
Despite the success of litigation, lenders still have serious reservations. Lenders consider 
litigation an expensive process which makes it 
diffcult to sell loans in the secondar market. 
One lender considers litigation "fritless" in those cases where borrwers simply can not pay. A
few lenders note that the claims paid are ultimately larger than the initial defaults because 
interest accrues while the case is being settled. Sixty percent 
of-lenders report that litigation has 
made them reconsider their paricipation in the HEAL progr. 
While many schools feel the 
threat of litigation might motivate some borrowers to repay, they also consider it a very costly 
process, to be used only as a last resort. 
Both Lenders and Schools Feel it is Too Soon to Judge Results of Recent Reforms 
Some respondents volunteered that the recent reforms have not been implemented for a long 
enough time to judge their long-term effectiveness, and it  tre 
wil be years before the  results 
wil be known. The current default rate is more reflective of the HEAL progr prior to the
implementation of the reforms. One respondent voices the concern of many when she 
says,
There needs to be some time given to see if the changes that have come into effect recently are 
workig. 
" Similarly, another respondent says, "These things take time, you can t wave a magic
wand and make the rate go down.  MOST SCHOOLS AND HALF THE LENDERS BELIEVE PERFORMANCE 
STANDARDS WILL BE EFFECTIVE; ALMOST ALL OPPOSE THEm USE. 
More than two-thirds of schools feel that performance standards, that is not allowing schools and 
lenders with a default rate above a certain percent to paricipate in HEAL, wil be either 
somewhat or very effective in reducing the default rate. Half the lenders agree that performance 
standards wil be effective. Most schools and lenders feel that performance 
stadards wil force 
some schools out of HEAL and cause some lenders, especialy the smaller ones, to leave 
voluntarly. 
Performance standards had a positive effect on the Health Professions Student Loan program 
(HPSL), also sponsored by DHHS, which provides for long-term, low-
interest loans to 
exceptionally needy students in allopathic medicine, osteopathc medicine, 
veterinar medicine, 
podiatrc medicine, optometr, dentistr and pharacy. 
Parcipating schools administer the 
program, collect repayments and are held to a performance standard of a five-percent default 
rate. The standards were ftrst proposed in 1982 and finally implemented in 1984. Upon
implementation, the PHS gave schools with default rates above five-percent six months to lower 
their rates by one-half. If they succeeded in doing so, they were given another six months to 
lower their new rate by yet another fifty percent, until they finaly reached a five-percent default 
rate. Ultimately, fewer than seven schools were actually terminated from the program. Schools 
were able to successfully lower their default rates because of the following factors: they became 
more aggressive in their collection efforts; purchased some of their outstading HPSL loans; and 
transferred some of their delinquent HPSL loans into their own institutional loan programs. 
the Fall of 1985, Congress also changed the formula used to calculate the HPSL default rate, 
thereby reducing schools' rates, on average, by one-third. 
Pror to the implementation of performance standards, HPSL had been experiencing fmancial 
diffculty. The overall HPSL default rate has decreased from 12 percent in 1981/1982, to flove 
percent by the time performance standards were implemented, to a curent rate of approximately 
two percent. The HPSL program is now fmancially sound. It is important to note that a 
difference between this program and HEAL is that schools have control over the collection 
process in HPSL. 
Most schools object to performance standards being implemented. Many schools consider them 
unfai for several reasons: they have limited control over the default rate; while they approve 
HEAL applications, they are not involved in performing credit checks or in the collection 
process; and they have little contact with the borrower after graduation. Schools also consider 
unfair the possible loss of HEAL to future students who have had nothing to do with earlier 
default rates. 
Schools voice concerns about performance standards. Many volunteer that a five-percent 
standard would be too low and too diffcult to meet. In fact, most schools suggest that the only 
steps they can tae to reach a five-percent default rate are increased counseling and a 
continuation of their current efforts. One school respondent offers, "The way to reduce default is 
not to slap schools ' and lenders ' hands if they go above the rate. The answer is education of 
schools and lenders about the program." Some schools are also concerned about how the default  rate is calculated. One respondent suggests that the government should clarfy which default rate 
is going to be used, adding, "I think it s ridiculous that if a person has six loans and defaults, it 
counts as six (defaults) instead of one." Another issue rased by schools is that other Federal 
progr 
educational loan progrms such as the Stafford Loan  run by the Deparent of 
Education have higher performance standar rates. In the Staford program when schools reach 
a 20-percent standard they must submit a compliance plan, and only if they get to a 30 percent 
standard are they out of the program. 
Lenders also have concerns about performance standards. Eighty percent feel at least some 
lenders would drop out of the program with the implementation of performance standards. Some 
feel performance standards would limit lending because lenders would screen borrowers more 
carefully. They also maintai that performance standards ar unfai because controllng defaults 
is difficult without the abilty to garnish wages or withhold licenses. One lender volunteers that 
a five-percent standard is too tough. Sixty percent of the lenders do not envisage takng any 
additional steps in the future to reach this mark, because they believe they are aleady doing 
what they can to keep their default rates down. 
Some schools wil need to reduce their default rates with the implementation of performance 
standards. Table 1 below shows the results of projectig the 
inspection sample of 120 schools to 
all 310 HEAL school parcipants (See Appendix A). One-hundred out of the 310 schools (32 
percent) have default rates which exceed five percent. Sixty-five out of 310 (21 percent) have a 
default rate above seven and one-half percent, and fifty schools (16 percent) exceed ten percent. 
Table 1 also shows the percent of 1989 dollar disbursed to these schools. An historical analysis 
of the deficits incurred by schools whose default rate exceeded five percent provides the 
following insight: If al schools had maitained a default rate of no more than five percent it 
would have resulted in $20.5 milion not being claimed, which represents almost 18 percent of 
all default dollars since the program began (See Appendi B). 
TABLE 1 
Schools With Default Rates Above performance Standards 
Performance  # of schools  % of schools  % of 1989 HEAL 
Standard  above standard  above standard  $ disturbed 
100  32%  31% 
21%  14% 
10%  16%  MIXED VIEWS EXIST ON THE USE AND VALUE OF RISK-SHARING. 
Although most schools do not think they should be required to paricipate in risk-sharng, they
are evenly divided on whether their parcipation would be an effective tool. Most lenders agree 
that schools should not be required to paricipate in  ar 
risk-sharg, but  less optimistic (30 
percent) than schools as to its effectiveness. Respondents in both groups feel that schools are 
already doing what they can in terms of counseling and have limited control over the repayment 
process. Respondents also agree that schools cannot aford to pay a share of the default claims. 
Sixty-three percent of schools and 40 percent of lenders feel 
risk-sharng wil cause some 
schools to drop out of the HEAL progr. 
All lenders and almost one half of schools think lenders should not be required to 
parcipate in
risk-sharng. Two-thirds of the schools think lender parcipation in risk-sharg would help 
lower default rates, but ninety percent of lenders 
disagre. Several lenders mention that fmancial 
risk would not change the way they service HEAL loans. In contrast, schools believe lenders 
should incur some financial risk, because lenders have the major responsibilty for the loans and
profit from HEAL. Most lenders (80 percent) and schools (58 percent) do not feel risk-sharg is
needed to maintain HEAL as a solvent program. 
All lenders and over 90 percent of schools predict that the implementation of risk-sharng wil
cause some lenders to drop out of HEAL, thereby possibly ending the program. 
Almost half of 
the lenders say they definitely would drop out of the progr if risk-sharng were to occur. 
(This is consistent with a Consumer Baners Association study of possible risk sharng in the
Staford Loan Program. That study found that if risk-sharg were to be implemented, 45
percent of their 126 respondents say they would quit student lending altogether
, and 30 percent
say they would sharly curtail it.) 
Respondents also cite other consequences to borrowers because of risk-sharng. They feel it
would cause lenders to be more restrctive and limit who gets the loans. One lender reflects this 
by saying, "We would only make loans to the cream of the crop in the cream of the crop 
schools. " This sentiment is supported by the following statement made recently by a 
Washington attorney speaking about risk-sharng with the Staford Loan Program. He said,
Risk-sharng is the worst idea ever to come forward in student lending; if you re forced to car 
10% of uncovered risk, you re also going to be forced to apply traditional credit analysis to 
student loan-making decisions. If risk-sharng becomes a reality, the only way the lender can
avoid the risk, no matter what the percentage, is by avoiding high-risk loans. In other words 
risk-sharng would defeat the whole purpose of the Staford Loan Program: to serve students and 
offer a federal guarantee so students, who otherwise would not be extended credit
, wil have the
opportnity to continue their education." Another lender of HEAL loans says, "Schools and 
lenders wil pass on costs to students. " While stil another says, "... The actual outcome would 
be the restrction of educational access to the health professions for large numbers of Americans
parcularly among the neediest and most vulnerable segments of our people. 
In attempting to gauge how effective 
risk-sharg was in lowering default rates we examined 
other Federal loan programs which include this feature. These programs are administered by: 
the Small Business Administration, the Economic Development Administration, the Veterans  Administration, the Farmers Home Administration, the Martime Administration and the Federal 
Housing Administration. With the exception of one program, all have default rates of five 
These are all non-education loans which differ significantly from HEAL in that 
percent or less. 
their borrowers usually have a credit history, collateral and other assets. All these programs have 
always had risk-sharing. One Federal manager who considers risk-sharng necessary for his 
program states, "I can understand (HAL) lenders' hesitation (in accepting risk-sharing); 
educational loans there s no track record to go on." While a few Federal managers view 
risk-sharng favorably, most feel that it does not contrbute to low default rates. Also, no 
manager cites risk-sharng as a reason for a low default rate in his or her program. 
RESPONDENT RECOMMENDATIONS 
Both schools and lenders had suggestions for improving the HEAL program. Aside from 
suggesting increasing student counseling and education and requiring continued comprehensive 
loan servicing by lenders, respondents most frequently volunteered the following innovative 
ideas: 
Lenders (50 percent) and schools (37 percent) suggest 
Change Terms of HEAL Loan. 

changing the terms of the HEAL loan. These include some steps which are already being 
undertaken by a few lenders, such as eliminating compounding of interest or at least de
creasing the frequency of compounding interest, employing graduated repayment sched
ules and extending forbearance and grace periods for repayment. They also include basing 
a tiered insurance premium on the default rate of each discipline and reducing the maxi
mum amount of the HEAL loan. For example, one school reduced its default rate substan
tially by discouraging the use of HEAL for those students whose cumulative debt had 
reached $50 000. Schools recommend reducing the cap on the interest rate while lenders 
advocate eliminating it. 
Lenders (50 percent) and a few schools (12 per
Impose Stricter Penalties for Defaulters. 

cent) suggest strcter penalties for defaulters, such as garisheeing wages, offsetting Medi
care and Medicaid reimbursement, withholding professional licenses and providing no 
bankruptcy forgiveness. One school states, "Don t let bankrpt borrowers be discharged 
from repayment; we need to work with them to keep them in the system." Another de
clares, "Put the onus of responsibility where it should be, on the borrower... recover the 
(default) through garisheeing wages or other ways. 
Schools (41 percent) and lenders (20 per
Improve Communication and Coordination. 

cent) mention that communication and coordination among schools, lenders, borrowers 
and the Federal government needs to be improved. Several schools suggest that PHS keep 
them routinely informed about any changes to the HEAL program, such as providing a pol
icy and procedures manual. They also recommend that schools and lenders cooperate with 
each other in locating delinquent borrowers. Numerous schools suggest that coordination 
with the secondar market be improved, so that when lenders sell HEAL loans to these 
markets, borrowers know who the new holder of their loan is. They would then know 
where to file for deferment or forbearance or where to send their payments. One respon dent suggests a centr clearnghouse, accessible to all lenders, be established for all bor
rower deferment forms. One respondent recommends instituting a one-lender rule so that 
borrowers are required to go to the same lender for  educational loans. 
al of their 
RECOMMENDATIONS 
We recommend that performance standards be implemented without delay. Our 
recommendation is based on predictions of schools and lenders that they wil be effective, by the 
progr 
successful recent experience of the HPSL  with performance standads, and by our 
analysis of HEAL default experience to date which suggests substantial futur savings with the 
use of performance standards. It shows that if all schools had maintained a default rate of no 
more than five percent it would have resulted in $20.5 millon not being claimed, which 
represents almost 18 percent of all default dollars since the progr 
began. These stadards 
would be a useful tool should the progrm be retained and would, of course, be beneficial durg 
a phase-out period. 
COMMENTS 
Comments on the draft report were received from both PHS and ASPE which concur with the 
recommendations of this report. The PHS believes that the final rule for performance standards 
wil be published by September 1991.  :::\ """"'" ,.. ... ..................,"..".".",.",",",.""."..,...,.,............ .... .............................. ............. .......
APPENDIX A

METHODOLOGY FOR SELECTING SAMPLE AND PROJECTING EFFECTS 
PERFORMANCE STANDARDS ON SCHOOL PARTICIPATION 
One hundred and twenty schools were contacted for this inspection. These 120 are a stratified 
random sample of all 310 schools participating in HEAL and were selected on the basis of 
specialty and number of HEAL loans per school. To make national generalizations the figures 
from the sample were weighted. The following table gives the specialty, the total number of 
participating schools within each specialty (N), the total amount of HEAL money disbursed in 
1989 within each specialty (TA), and the number of schools selected from each of the specialties. 
In addition the table shows the estimated number of schools with a default rate above 5 percent 
5 percent and 10 percent. This estimate was projected from the weighted sample of HEAL 
schools. 
Total HEAL  Estimated Number of Schools 
Specialty  Total #  1989 (TA)  Sample  with a Default Rate Above: 
& Loans  of Schools  Disburse Schools 
10% 
ments 
Medical 
Less 
than 80  $7,989,421 
Loans 
More 
than 80  93,647,907 
Loans 
Dental 
Less 
1,462,917 
than 40 
Loans 
More 
than 40  721,537 
Loans 
Osteo athic  42,409,733 
Chiro ractic  26, 833,776 
Podiatric  21 770707 
Other  871, 807 
_,n,..,.,. 
siO  /:=\\l!lbU
.:$ZSm7b7\SbS 
schools. 
Projected within each strata of the universe of  310  APPENDIX 

METHOD FOR ESTIMATING THE DOLLAR EFFECT OF A FIVE PERCENT 
PERFORMANCE STANDARD

Examining default and claims experience data from PHS as of March 31, 1990 reveals that 124 
out of 384 schools paricipating in HEAL have a historical default rate of over 5 percent. The 
PHS defines claims losses as defaults, bankptcy, death and disability. Defaults losses are 
composed of defaults only. Based on the default rate and tota default dollars of these 124 
schools ($39,052 000), the total amount of dollars eligible for repayment was calculated for each 
school. Our calculation then showed the tota amount of default dollars would have been 
$18,529,000 had these schools always maitained a 5 percent default rate and subtracted this 
figure from the actual default dollars. This difference of $20,523,00 is the amount of HEAL 
dollars the program could have saved had a 5 percent performance 
standad always been in 
effect. It represents approximately 18 percent of $115,984 000 in defaults paid since the 
program began.  APPENDIX 

COMMENTS ON THE DRAFT REPORT

C  .-. .. ".-.
\ . :. .. :",:' , ;..  -.:. . .... -..j  . .: .".,.). -;".
'. :
DEPARTMENT OF HEATH &. HUMA SERVICES  Public Health Service 
emorandum 
'''.0 
Date  FEB - 8 1991 
From  Assistant Secretary for Health 
Subject  PHS Comments on Office , of Inspector General (DIG) Draft Report

Heal1:h Education Assistance Loan (HEAL)"

Inspector General, OS

Attached are the PHS comments i" response to the subject DIG

draft report.

initiated 
We concur with the report' s recommendation and have 
implementation. 
actions for complete 
(). /k 
Mason, M. D., Dr.

Attachment 
r -,:

?DIG 
r;.: 
DIG-AS 
DIG
DI8
AlG-IX? 
000/10 
EX SEC

!l I U1.

DATE SENT  PUBLIC HEATH SERVICE (PHS) COMMENTS ON THE OFFICE OF

INSPECTOR GENERA (OIG) DRAT REPORT " HEATH EDUCATION

(HEA)" (OEI-02-90-00980)

ASSISTANT LOAN 
OIG Recommendation

plemented without

Wde reeclomameynd .th at performance standards be

PHS Comment, 
We concur. A Notice of Proposed Rulemaking for the

HEA was published 
plementation of performance standards for 
Federal Reaister on October 1, 1990. The public comment 
pin ethre 
iod ended on Novemer 30, 1990, and the 122 responses
presently under review. 
recei ved are  Because of the complexity 
of the comments, it will take several months to complete the 
Governent response, and modify 
review, draft the appropriate 
the draft to incorporate changes that may arise from 
Departmental clearances. Accordingly, we believe that the 
Septemer 1991. In addition 
final rule should be published by 
to the above actions, HRSA' s Bureau of Health Professions 
recently 
awarded' a contract to identify and evaluate other loan 
HEA 
default prevention strategies that may be relevant for the 
program .  -- 
. - 
::-
:: 
DEPARTMENT OF HELTH II HUMAN 5ERVICE5	 Seet 
Ofce of the 
. Washingron. D.C. 20201
28mJ 
CJ
TO:	 Richard P. Kusserow

Inspector General 
G,',),  rc'1 
C"
I'J :; -n rn
FROM:	 Assistant Secretary for 
Planning and Evaluation

en
i'- -r0n
  I" 
SUBJECT:	 OIG Draft Report: II
Health Education Assistance Loa
(HE) , II OEI-02-90-00980--
CONCUENCE 
Thank you for the opportunity to review the draft report on the

OIG study of the degree of implementation
support for the recent regulatory reforms ,o fe ftfheec tHievaelntehs sE,d uacnadt
 ion

Assistance Loan 
(HEAL) program. 
This is an important study that
provides information which will be useful to the Departent

particularly now that we are examining options for legislative

changes in the Department'
s health professions student assistance

programs 
, including HEAL. 
I concur with your general recommendation that performance 
standards be implemented without delay. I also find of interest
the respondent recommendations
, particularly those of lenders and
schools regarding changing t 
e terms of the HEAL loan (e. g. 
decreasing the frequency of compounding of  , by
interest), basing a

tiered insurance rate on the default rate of each discipli

reducing the maximum amount of the  , and

HEL loan. 
These are ideas

that deserve serious consideration as we try to strengthen our

health professions student assistance programs.

Ma in 	
Gerry 
V 

PDIG 
DIG-AS 
IG-EI 
. DIG-OI 

AIG-MP 

OGC/IG 
EXSEC 
DATE SENT