Page 1 GAO-10-86R Higher Education Loans 

United States Government Accountability Office

Washington, DC 20548 

November 17, 2009 

Congressional Committees 

Subject: Higher Education: Factors Lenders Consider in Making Lending 

Decisions for Private Education Loans

Over the past few decades, the cost of tuition, room, and board for undergraduate 

students has increased, making it more difficult for some students and families to 

afford the cost of college. While students have historically relied on federal loans and 

grants and family contributions to pay for college, a growing number have turned to 

private education loans to help them cover the cost. In 2007-08, private loan volume, 

including private sector and state sponsored loans, totaled $19 billion, up from $3 

billion in 1997-98, according to the 2008 College Board report on student aid.1

 Unlike 

federal loans, private education loans are not guaranteed by the federal government 

and are typically more costly for students than loans offered through federal 

programs.2 Despite their generally higher cost, about 26 percent of students who 

obtained private education loans in 2007-08 did not obtain Federal Stafford loans, and 

more than one-half of these students did not apply for Federal financial aid, 

according to the Institute for College Access and Success. In 2007-08, 14 percent of 

undergraduate students obtained private education loans, according to the Institute 

for College Access and Success, and the average private loan amount was $6,533.3 

 

This letter summarizes our briefings with your staff during which we discussed our 

work under the mandated study in section 1122 of the Higher Education Opportunity 

 

1

In 2007-08, the federal government provided $66.8 billion in federal loans for postsecondary students. In the 

past several years, Congress raised limits on federal student aid, including loans. In general, the aggregate loan 

limits for an entire undergraduate education are $31,000 for dependent students and $57,500 for independent 

students. A student is classified as either financially dependent on his or her parents or independent when 

applying for financial aid. This classification is important because it affects the factors used to determine a 

student’s financial aid eligibility. 

2

The Department of Education (Education) administers the Federal Family Education Loan (FFEL) Program 

and the William D. Ford Federal Direct Loan (Direct Loan) Program, both of which consist of what are 

generally known as Stafford Loans and Parent Loans for Undergraduate Students. Under the Direct Loan 

Program, loan funds come directly from the federal government. For the FFEL Program, loans funds come 

from participating private financial institutions and are guaranteed by the federal goverment. 

3

This estimate, based on the 2007-08 National Postsecondary Student Aid Study, has a margin of error of plus 

or minus $173 at the 95 percent confidence level. 
Act of 2008 (HEOA).4

 The mandate directed GAO to assess the impact of private 

lenders’ use of nonindividual factors—factors other than the borrower’s own credit 

worthiness, such as the cohort default rate or graduation rate of the school the 

student attends— in making loan decisions.5 The mandate also directed GAO to 

assess whether lenders’ use of such factors may affect students’ access to private 

education loans and may have a disparate impact on the pricing of these loans by 

race, gender, income, and institution type. To address the issues raised in the 

mandate, we framed our study around three key questions: 

1. What are the key characteristics of private education loan borrowers and the 

types of schools they attend? 

2. How do lenders use nonindividual factors—including cohort default rate, 

graduation rate, and accreditation—in making lending decisions for private 

education loans? 

3. What is the impact of using these factors on loan products and rates students 

pay and their access to loans, by gender, race, income, and institution type? 

While we were able to obtain some information on the characteristics of borrowers, 

the types of schools they attend, and lenders’ use of nonindividual factors, we were 

not able to obtain information that allowed us to assess the impact of lenders’ use of 

these factors on students. To determine the key characteristics of private education 

loan borrowers and the schools they attend, we analyzed selected data on 

undergraduate student borrowers from Education’s 2007-08 National Postsecondary 

Student Aid Study (NPSAS) which contains information on private borrowing 

activity, as well as the characteristics of borrowers.6 We assessed the reliability of 

selected NPSAS data.7 To determine how lenders use nonindividual factors in their 

lending decisions, we interviewed several major lenders. We also reviewed the 

Securities and Exchange Commission filings of several major lenders and interviewed 

federal banking regulators who oversee private education lenders, including the 

 

4

Pub.L.No.110-315 (Aug. 14, 2008). 

5

Cohort default rate refers to the percentage of a school’s borrowers who enter repayment on certain FFEL 

Program or Direct Loan Program loans during a particular federal fiscal year. 

6

NPSAS is a comprehensive nationwide study designed to determine how students and their families pay for 

postsecondary education, and to describe some demographic and other characteristics of those enrolled. The 

study uses data from nationally representative sample surveys of students in postsecondary education 

institutions, including undergraduate, graduate, and first-professional students. Students attending all types and 

levels of institutions are represented, including public and private not-for-profit and for-profit institutions, and 

less-than-two-year institutions, community colleges, and four-year colleges and universities. 

7

We assessed the reliability of selected NPSAS data by (1) reviewing agency documents, (2) reviewing the 

response rates for the variables used in our analyses, and (3) computing confidence intervals. In addition, 

agency officials reviewed our analyses. The overall response rate for NPSAS was 96 percent. Missing variables 

were imputed and were replaced with valid data from donor records. All of the NPSAS percentage estimates 

used for this report have standard errors of 2.5 percentage points or less, and the standard error for the average 

total private loans was $88 based on the Balanced Repeated Replication method. The item response rates for the 

variables used in this report are above 75 percent except for the private loan variable which had a response rate 

of 67 percent. We were unable to perform an item nonresponse bias analysis for private loans because the 

restricted NPSAS 2007-08 file was not available during the time we conducted our work. 

Page 2 GAO-10-86R Higher Education Loans 
Federal Reserve System, Office of Comptroller Currency and the Federal Deposit 

Insurance Corporation.8 We also interviewed representatives from other financial 

institutions, industry researchers, experts and officials at Education and reviewed 

relevant laws and regulations. To determine whether the use of nonindividual factors 

has an impact on student access to loans and rates by student demographics and 

institution type, we interviewed officials at higher education associations and 

officials from a nonrepresentative sample of eight institutions of higher education, 

selected to include representation from Historically Black Colleges and Universities 

(HBCU), as well as public and private nonprofit, and for-profit institutions (also 

known as proprietary schools). In addition to interviewing several major lenders, we 

also requested their underwriting methodology for private education loans, borrower 

data and information on the terms and conditions associated with their loans. Citing 

the proprietary nature of the underwriting practices and the terms and conditions of 

private education loans, none of the major lenders we contacted would allow us 

access to their underwriting criteria or loan data. Consequently, we were unable to 

determine how the use of nonindividual factors impacts students’ access to private 

loans; the products and rates available to students at certain institutions; or the 

pricing of these loans by race, gender, income, and institution type. Finally, we 

provide information on how the private student loan lending landscape has changed 

since the HEOA, which mandated our study, was passed. We conducted our work 

from April 2009 to November 2009 in accordance with all sections of GAO’s Quality 

Assurance Framework that are relevant to our objectives. The framework requires 

that we plan and perform the engagement to obtain sufficient and appropriate 

evidence to meet our stated objectives and to discuss any limitations in our work. We 

believe that the information and data obtained, and the analysis conducted, provide a 

reasonable basis for any findings and conclusions in this product. 

 

Students who attended certain types of schools were more likely to take out private 

loans; and in addition, there were small differences that were statistically significant 

for private loan borrowers with respect to dependent and independent students, 

family income, gender, and greater differences between some race and ethnicity 

groups. Specifically, according to NPSAS, nearly one-third of the students at the 

highest cost institutions ($25,000 or more per year) took out private loans. In 

addition, while students attending proprietary schools accounted for approximately 

10 percent of the undergraduate population, over 40 percent of them borrowed 

private loans (see fig. 1), according to NPSAS data. The proportion of undergraduate 

students attending HBCUs who borrowed private education loans did not differ 

significantly from borrowers at all other institutions. 

 

8

In August 2009, the Federal Reserve Board published a final rule amending Regulation Z, which implements 

the Truth in Lending Act (15 U.S.C. 1601 et seq.), a consumer protection law that regulates certain credit 

practices and promotes the informed use of consumer credit by requiring uniform disclosures. The rule 

implements provisions of the HEOA, by adding disclosure requirements and prohibiting certain practices for 

creditors making private education loans. Under the rule, creditors who extend private education loans must 

provide disclosures about loan terms and features on or with the loan application and must also disclose 

information about federal student loan programs that may offer less costly alternatives. Additional disclosures 

must be provided when the loan is approved and when the loan is consummated 74 Fed. Reg. 41194 (Aug. 14, 

2009). 

Page 3 GAO-10-86R Higher Education Loans 
Figure 1: Percentage of Undergraduate Students Who Borrowed Private Education Loans 

and Enrollment by Institution Type, 2007-08 

Moreover, a slightly higher percentage of dependent undergraduate students 

borrowed private education loans (15 percent) compared to independent students (13 

percent), and a higher percentage of dependent students from middle and high 

income families (17 percent and 15 percent, respectively) borrowed private loans 

compared to dependent students from low income families (about 12 percent).9 In 

addition, a slightly higher proportion of female students borrowed private education 

loans (about 15 percent for females and 13 percent for males). While there were 

varying differences in the percentages of undergraduate students borrowing private 

education loans by race/ethnicity, Black or African American students were the 

highest percentage of borrowers (see fig. 2). 

 

9

Using income groups of Education’s database, GAO defined middle to high income families as those with an 

annual income of $30,000 or more. 

Page 4 GAO-10-86R Higher Education Loans 
Figure 2: Percentage of Undergraduates Who Borrowed Private Education Loans by 

Race/Ethnicity, 2007-08 

Notes: “Other” includes the following NPSAS categories: American Indian or Alaska Native, Native Hawaiian or other Pacific 

Islander, Other, and More than one race. 

There was no difference detected between “Hispanic or Latino” and “Other.” All other comparisons were significant at the 95 

percent level. 

Private lenders may use nonindividual factors to select the institutions at which they 

will lend to students and to establish loan terms and conditions, including interest 

rates, according to lenders and industry experts. Similarly, guarantors, agencies that 

insure student loans against default, of private education loans may use nonindividual 

factors to determine the institutions at which they will guarantee student loans. Some 

of the key nonindividual factors that lenders use include program length (e.g., twoyear versus four-year program), type of school, school graduation rates, and schools’ 

cohort default rates, according to lenders and industry experts. Although the 

inclusion of nonindividual factors as well as the thresholds and relative importance 

vary by lender, many of the lenders who we interviewed said that the cohort default 

rate is the most commonly used nonindividual factor. Lenders generally view longer 

programs of study, high graduation rate, and low cohort default rate as more 

favorable conditions when making lending decisions, according to experts and 

lenders we interviewed. Lenders, researchers, and industry experts confirmed that 

lenders have historically used nonindividual factors to help them make lending 

decisions, especially because students often lack sufficient credit history upon which 

to base decisions. Education also uses a school’s cohort default rate to determine 

school eligibility for participation in selected federal student aid programs, and 

lenders who participate in federally guaranteed student loan programs also use the 

cohort default rate and other nonindividual factors to select schools where they will 

lend to students, according to Education officials. 

Finally, the student loan lending landscape has changed significantly since the HEOA, 

which mandated our study, was passed. Many of the lenders offering private loans 

have exited the market in response to limited access to capital resulting from the 

credit crisis, according to researchers, lenders, and experts we interviewed. In 2008-

Page 5 GAO-10-86R Higher Education Loans 
09, the private loan volume totaled about $12 billion, according to the 2009 College 

Board report on student aid. Lenders who have continued their private student loans 

programs reportedly tightened their lending practices, which have limited some 

students’ access to these loans, according to some researchers we interviewed.10 In 

response to the tightening of credit, some school officials we interviewed reported 

that their schools are offering students more institutional funds—grants, 

scholarships, and loans—to help them finance college costs. Also, according to 

officials from credit unions and experts, credit unions are increasingly offering 

private education loans. 

We provided a draft of this letter to Education for review and comment. Education 

provided technical comments which we incorporated as appropriate. 

As agreed with your staffs, this letter satisfies the reporting requirement specified in 

the mandate. We are sending copies of this letter to the cognizant congressional 

committees and Education. This letter also will be available on the GAO Web site at 

http://www.gao.gov. Should you or your staffs have any questions, please contact me 

at (202) 512-7215 or Scottg@gao.gov. Contact points for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. Key 

contributors to this report include Sherri Doughty, Tranchau (Kris) Nguyen, Charlene 

M. Johnson, Stacy Ann Spence, Erin Preston, Susannah Compton, Cindy Gilbert, 

Doreen Feldman, Debra Johnson, Sheila McCoy, Grant Mallie, James Rebbe, and 

Karen O’Conor. 

George A. Scott 

Director, Education, Workforce 

 and Income Security Issues 

 

10Some examples of how lenders have tightened lending practices for private education loans include requiring 

higher credit scores for approval, approving lower loan amounts, charging higher interest rates, increasingly 

requiring interest payments while students are in school, and more frequently only approving borrowers who 

have a credit-worthy cosigner.

Page 6 GAO-10-86R Higher Education Loans 
Page 7 GAO-10-86R Higher Education Loans 

List of Congressional Committees 

The Honorable Christopher J. Dodd 

Chairman 

The Honorable Richard C. Shelby 

Ranking Member 

Committee on Banking, Housing, 

 and Urban Affairs 

United States Senate 

The Honorable Tom Harkin 

Chairman 

The Honorable Michael B. Enzi 

Ranking Member 

Committee on Health, Education, Labor, 

 and Pensions 

United States Senate 

The Honorable Barney Frank 

Chairman 

The Honorable Spencer Bachus 

Ranking Member 

Committee on Financial Services 

House of Representatives 

(130930) 
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