United States General Accounting Office

GAO Report to the Ranking Minority Member,

Subcommittee on Human Resources and

Intergovernmental Relations, Committee

on Government Reform and Oversight,

House of Representatives

June 1995 STUDENT LOAN

DEFAULTS

Department of

Education Limitations

in Sanctioning Problem

Schools

GAO/HEHS-95-99

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-255079 

June 19, 1995

The Honorable Edolphus Towns

Ranking Minority Member

Subcommittee on Human Resources

 and Intergovernmental Relations

Committee on Government Reform

 and Oversight

House of Representatives

Dear Mr. Towns:

Some schools, particularly proprietary for-profit trade schools whose

profits come from student tuition payments, have enrolled students whose

tuition is heavily financed by federally guaranteed student loans. Some of

these schools are not overly concerned about their students completing an

educational program or the frequency of their students defaulting on

student loans. Although annual federal costs for defaulted student loans

have begun to decline from their high of $3.6 billion in 1991, in 1994 the

federal government paid out $2.4 billion to make good its guarantee on

these defaulted loans.

In 1991, the Department of Education, under its Default Reduction

Initiative, which implemented the Student Loan Default Prevention

Initiative Act of 1990 (P.L. 101-508), began to bar postsecondary schools

from federally guaranteed student loan programs if their students had

exceptionally high loan default rates. Congressional hearings in 1990 had

shown that some for-profit trade schools with high loan default rates

received substantial proceeds from such loans while providing students

with little or no education in return. Under this new initiative, the

Department could stop a school from participating in federal loan

programs if the school’s default rate exceeded statutory thresholds in 3

consecutive fiscal years—in general, about a 25-percent default rate.

However, once the initiative was under way, many schools complained

that the Department was not using accurate information in setting default

rates. A number of schools filed administrative appeals or took court

action to block the Department’s denial of their participation in federal

loan programs.

You asked us to determine whether sufficient steps were being taken to

resolve these issues. These steps included the Department’s

implementation of certain amendments to the Higher Education Act,

Page 1 GAO/HEHS-95-99 Student Loan Default Data
B-255079 

enacted in 1993, that were designed to address the schools’ concerns. As

agreed with your office, we focused our work on the following questions:

• How many schools have contested the Department’s decisions, and what

are the main points of their contention?

• To what extent are the schools’ concerns addressed by the 1993

amendments and the Department’s efforts to implement them?

• What more, if anything, may need to be done to resolve problems with the

default reduction initiative?

We examined Department information on defaulted student loans to

determine the extent to which schools were filing administrative appeals

challenging the accuracy of the Department’s default rate data. We also

examined documents filed in the courts by the schools and the

Department to determine the nature and outcomes of the lawsuits that the

schools have filed against the Department over default rate issues.

Results in Brief As of September 30, 1994, 250 schools had administrative appeals pending

with the Department challenging the accuracy of their default rates. The

250 schools constituted about one-third of all schools identified by the

Department as being above the statutory default thresholds in fiscal years

1991 to 1994. In addition, 111 schools and their trade associations filed 22

lawsuits over default rate issues. In the appeals and lawsuits, the main

issues under contention were that the Department (1) used erroneous data

in the default rate calculations or (2) failed to follow the law by including

defaulted loans that had not been properly serviced by lenders in the

default rate calculations.

In our view, the 1993 amendments will not eliminate challenges to the

Department’s default rate determination, but should reduce the likelihood

of such challenges. The amendments require that schools be given an

opportunity to verify the accuracy of loan data and examine loan servicing

records. This access to information should help resolve misunderstandings

on matters of fact and allow a clearer focus in those areas in which

disagreements remain. Regulations issued in November 1994 to implement

these amendments should make adjudication of appeals more

straightforward and less time-consuming.

These recent changes, while addressing schools’ concerns, did not contain

measures to fully protect the government’s interest in such disputes.

Current policies and practices leave open the possibility that unscrupulous

Page 2 GAO/HEHS-95-99 Student Loan Default Data
B-255079 

schools can saddle the government with additional loan default costs by

continuing their same pattern of operation during the appeals process.

Possible ways to address this concern include (1) holding a school liable

for costs associated with defaults on loans made to its students during the

appeals process and (2) requiring that a school post a performance bond

as a condition of filing an appeal. The first alternative was used in an

earlier federal student loan program; the second alternative has been

ordered by a court in one of the lawsuits against the Department.

Background In 1990, the Senate Permanent Subcommittee on Investigations conducted

a series of hearings on fraud and abuse in the Federal Family Education

Loan Program (FFELP).1

 Evidence provided to the Subcommittee showed

that operators of some for-profit trade schools made substantial amounts

of money by taking payments from students in the form of federally

guaranteed student loans while providing little or no education in return.

Faced with large debts and no marketable training, these students often

defaulted on their loans. Based on this and other evidence, the

Subcommittee concluded that high default rates were both a warning sign

of potential abuse and a common thread of actual abuse in problem

schools.

In response to this information and to loan defaults that increased from

$1.4 billion in fiscal year 1988 to over $2.6 billion in fiscal year 1990, the

Congress enacted the Student Loan Default Prevention Initiative Act of

1990. This legislation, together with the Department’s Default Reduction

Initiative, established a process for discontinuing participation in FFELP for

postsecondary institutions with default rates over certain statutory

thresholds.

Under this process, the Department annually computes a default rate

(known as the cohort default rate) for all participating schools. In general,

the default rate is the percentage of a school’s borrowers who enter

repayment in one fiscal year and default by the end of the next fiscal year.

For example, if 100 former students from a school were scheduled to

begin repaying their loans in fiscal year 1990 and 25 defaulted on their

loans by the end of fiscal year 1991, the school’s fiscal year 1990 default

rate would be 25 percent.

1

FFELP comprises several types of federally guaranteed student loans: Stafford loans, Parent Loans for

Undergraduate Students, and consolidated loans. These loans are made by private lenders, but the

federal government—through a network of guaranty agencies—repays the loan in the event of a

default.

Page 3 GAO/HEHS-95-99 Student Loan Default Data
B-255079 

To compute default rates, the Department uses data submitted annually on

computer tapes by guaranty agencies that administer FFELP at the state

level. This database, commonly called the tape dump, contains

information showing the status of the program at the end of each federal

fiscal year (September 30). Guaranty agencies, which use information

provided by lenders, schools, and borrowers, are required to certify that

the annual data tapes are complete and accurate. The Department checks

the data tapes for missing or erroneous entries and returns tapes to the

agencies for correction if it finds what it considers to be a significant

number of errors.

To remain eligible for participation in FFELP, schools must have default

rates that are lower than the statutory thresholds, which vary depending

on the fiscal year or years covered. For example, if a school’s annual

default rate was 25 percent or greater for fiscal years 1990, 1991, and 1992,

it was subject to the loss of its eligibility in FFELP beginning in fiscal year

1994.2

 According to federal requirements, schools with default rates over

statutory thresholds can file an appeal with the Department (or seek relief

through litigation) if they believe that

• their default rates were calculated using erroneous data,

• their default rates were calculated using loans that fell into default as a

result of improper loan servicing or collection procedures, or

• exceptional mitigating circumstances exist.3

Department’s Default

Rates Have Been

Challenged

During fiscal years 1991 to 1994, 890 schools became subject to the loss of

FFELP eligibility because their default rates were over the statutory

thresholds for at least 3 successive years. As of September 30, 1994, 601 of

these schools were no longer eligible for FFELP participation. However,

another 250 schools had appealed the Department’s calculation of their

default rates and their appeals were still pending. Appendix II provides

2

Schools with a single year default rate of 40 percent or higher (for fiscal year 1992 or later) are also

subject to limitation, suspension, or termination actions that can result in the schools’ loss of eligibility

for all federal student aid programs authorized under title IV of the Higher Education Act of 1965, as

amended.

3

A school is considered to have exceptional mitigating circumstances if it can demonstrate that

(1) either 15 percent or fewer of its at least half-time students received Stafford or Supplemental Loans

for Students (SLS) in a recent 24-month period or two-thirds or more of its at least half-time students

in a recent 24-month period were economically disadvantaged; and (2) two-thirds of its full-time

students complete their course of study and two-thirds or more of its graduating students find jobs or

were transferred to higher levels of education for which the school’s program provided substantial

preparation.

Page 4 GAO/HEHS-95-99 Student Loan Default Data
B-255079 

more details on the results of the Department’s Default Reduction

Initiative.

In addition to filing administrative appeals, some schools and their trade

associations have filed suit over the default rate issue. In total, 22 lawsuits

have been filed, with 111 schools as parties to one or more of them. As of

September 30, 1994, 10 of the lawsuits (involving 17 of the schools) had

been either dismissed by the courts or had been terminated by agreements

between the schools and the Department. The 12 other cases were

pending, and the 94 schools involved were continuing to participate in the

program.4

The appeals and lawsuits have centered on two allegations: that the

Department used erroneous data in its computations and that it failed to

follow the law’s requirement to exclude improperly serviced loans when

making its calculations. The schools filing lawsuits have also alleged that

the loan servicing problems were aggravated by the schools’ lack of access

to information.

Data Accuracy Issues The accuracy of the Department’s data has been an issue raised in at least

236 of the schools’ administrative appeals and 17 of the 22 lawsuits. In

general, the schools’ concerns have been based in part on

well-documented inaccuracies in the Department’s loan database. For

example, after releasing school default rates for fiscal year 1988, the

Department learned that guaranty agencies for California, Florida, and

Washington had reported erroneous date-entered-repayment dates to the

Department.5

 This mistake contributed to the Department’s having to

recompute rates for about 5,000 schools. Similar mistakes were

subsequently found in the data of three other guaranty agencies, leading to

recomputations of default rates for affected schools for fiscal years 1989

to 1991.

Problems were also discovered in Department reviews of guaranty

agencies’ data tapes for the period from March 1992 to January 1993.

These reviews were undertaken to address problems like those described

above, and they disclosed inaccuracies in data supplied by several

guaranty agencies for such matters as the date-entered-repayment, student

4

One of these cases also involved an association representing proprietary schools. This lawsuit was

subsequently withdrawn.

5

The date-entered-repayment data element is significant because that date determines the year that a

borrower’s loan is included in the default rate calculation.

Page 5 GAO/HEHS-95-99 Student Loan Default Data
B-255079 

enrollment status, and defaulted loan amount. The Department found that

inaccuracies occurred in part because guaranty agencies were estimating

certain data elements instead of using the most current information

received from lenders or schools.

We have reported before on problems with the accuracy of the

Department’s student loan data. For example, in 1990 we reported that the

loan database often contained information that was suspect or

incomplete.6

 In an audit of the internal controls of FFELP, we reported that

none of the 10 guaranty agencies included in our review routinely

researched and corrected erroneous data before submitting data tapes to

the Department.7

 Most recently, in a joint financial audit conducted with

the Department’s Office of Inspector General (OIG), we found that some of

the tape data were clearly wrong; for example, data showing that

borrowers defaulted before the date that a loan was made.8

Loan Servicing Issues Servicing of loans has been the more contentious issue. Section

435(m)(1)(B) of the Higher Education Act requires the Department to

“. . . exclude any loans which, due to improper servicing or collection,

would result in an inaccurate or incomplete calculation of the cohort

default rate”9

 (emphasis added). In nearly all the lawsuits filed against the

Department, schools contended that the Department failed to exclude

many improperly serviced loans as required by this provision and thus

erroneously inflated the school’s default rate. Most schools (198 of the 270

with appeals pending as of September 30, 1994) have also based their

appeals on the grounds that the Department did not exclude loans that

were improperly serviced by lenders.

Disagreements About What

Constitutes Improper Servicing

Part of the controversy has involved the definition of what constitutes

improperly serviced loans. The schools have generally contended that an

improperly serviced loan is one in which lenders or loan servicing

agencies have violated the Department’s procedures for servicing and

collecting loans (referred to as due diligence procedures) as specified in

6

Stafford Student Loans: Millions of Dollars in Loans Awarded to Ineligible Borrowers

(GAO/IMTEC-91-7, Dec. 12, 1990).

7

Financial Audit: Guaranteed Student Loan Program’s Internal Controls and Structure Need

Improvement (GAO/AFMD-93-20, Mar. 16, 1993).

8

Financial Audit: Federal Family Education Loan Program’s Financial Statements for Fiscal Years 1993

and 1992 (GAO/AIMD-94-131, ACN 17-30302, June 30, 1994).

9

This section of the law was subsequently amended by the Higher Education Technical Amendments of

1993 and is discussed on pages 8-9.

Page 6 GAO/HEHS-95-99 Student Loan Default Data
B-255079 

federal regulations (34 C.F.R. 682.411).10 An example of these procedures

is the requirement that a lender must send at least one written notice or

collection letter to a borrower during the first 10 days of a delinquency. If

this effort fails, the lender must initiate a series of at least four telephone

calls and send at least four additional collection letters in an attempt to

bring the borrower back into repayment status. Most of the lawsuits

contended that many loans were improperly serviced under these

procedures, in that lenders made insufficient attempts to telephone

borrowers or failed to use the proper series of letters.

To support their position, schools have provided a number of examples of

studies conducted by their own consultants, the Department’s OIG, and

others that have alleged significant deficiencies in loan servicing. For

example, a consultant hired by some of the schools examined

approximately 7,000 loans from six guaranty agencies and alleged that

loan servicing errors (such as improper telephone contact) occurred at

rates ranging from 87 percent for one guaranty agency to 42 percent for

another agency.

In rebuttal, the Department has contended that its improper loan servicing

determinations are based on additional factors beyond violations of due

diligence procedures. It said that certain modest violations of due

diligence procedures are not significant for claims payment purposes and

loans with these types of violations should not be construed to be

improperly serviced for purposes of determining a school’s default rate.

Also, for a defaulted loan to be excluded from its calculations, the

Department believes that a clear cause-and-effect relationship must exist

between improper servicing and a loan’s default—a relationship it

maintains the schools have failed to show.

In one court ruling on this matter, an appellate court concluded that the

law requires a link between the violation and the default. The judge said

that because the statute did not provide any guidance on the extent to

which schools must demonstrate the causal link between the violation and

the default, the court would defer to any reasonable interpretation of the

statute by the Secretary of Education.

Schools’ Access to Loan

Servicing Records

In about one-half of the lawsuits, the schools contended that the lack of

access to loan servicing records limited their ability to identify possible

loan servicing problems. They noted that guaranty agencies were required

10The regulations require that lenders follow the due diligence procedures for default claims to be paid;

failure to follow the procedures may be cause for default claims to be rejected.

Page 7 GAO/HEHS-95-99 Student Loan Default Data
B-255079 

to provide loan servicing records for only those loans that the schools

believed had loan servicing deficiencies. The Department took the position

that granting schools wider access to hundreds or thousands of guaranty

agency loan records would be administratively infeasible and that the

statutory deadlines for the appeals process were not set up to allow

schools to conduct “fishing expeditions” through the voluminous records

of the guaranty agencies.

1993 Amendments

and Implementing

Regulations Should

Make Conflict

Resolution Less

Contentious

The Higher Education Technical Amendments of 1993 contained

provisions that, among other things, address schools’ concerns about

access to default rate and loan servicing data. Also, the implementing

regulations, which were issued in November 1994, appear to make the

adjudication of appeals more straightforward and less time-consuming.

Access to Default Rate

Information

Regarding the accuracy of data used in computing default rates, the

amendments established a requirement that schools be allowed a

reasonable opportunity to verify the accuracy of data before the

Department uses them to compute default rates. The new requirements

are effective for default rates issued in fiscal year 1995. Also, for use in

computing fiscal year 1995 default rates, Department officials said that

they intend to begin using data collected through the Department’s

National Student Loan Data System.11 The Department plans to update the

data in this system on a monthly basis, which should provide more current

information for computing default rates.

Access to Loan Servicing

Information

The amendments contain a provision requiring guaranty agencies to

provide loan servicing records to those schools filing appeals based on

improper loan servicing. More specifically, the provision allows schools

with default rates above 20 percent for the most recent year for which data

are available to have access to a representative sample of the loan

servicing and collection records. If a school provides evidence to support

its claim that improper loan servicing resulted in an incorrect or

incomplete calculation of the default rate, the Department is to reduce the

11This system is designed to be a national database of information on individual student loans that can

be used to prescreen students’ aid applications and to support a variety of research and program

management functions, such as computing school default rates.

Page 8 GAO/HEHS-95-99 Student Loan Default Data
B-255079 

school’s default rate by the percentage of defaults caused by improperly

serviced loans found in the sample.

Department’s

Implementing Regulations

In April and November 1994, the Department issued regulations for

implementing the default rate provisions of the 1993 amendments. The

regulations specify that, before annually computing and issuing final

default rates, the Department will provide draft default data to all schools

with rates equal to or in excess of 20 percent. The Department will also

provide draft default data to schools with rates lower than 20 percent

upon request.

The schools must notify the guaranty agencies within 30 calendar days of

any information that they believe is incorrect. The guaranty agencies, in

turn, must respond to any such challenges within 30 calendar days. The

final default rates will reflect any adjustments made as a result of this

process. If a school continues to disagree, it can file an appeal with the

Department after the final rates have been computed and made public.

The final regulations also establish procedures for appeals based on

allegations of improper loan servicing and define which loans the

Department considers to be improperly serviced for the purposes of the

default rate calculations. The Department will exclude loans from the

default rate calculation based on improper loan servicing if the school can

prove that after the borrower did not make a payment on the loan the

lender failed to perform one or more of the following loan servicing and

collection procedures (if such procedures were required for that loan):

• send at least one letter (other than the final demand letter) urging the

borrower or endorser to make payments on the loan,

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

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

• send a final demand letter to the borrower, and

• submit a certification (or other evidence) that skip-tracing13 procedures

were performed.

12Regulations require guaranty agencies to provide collection assistance to lenders, such as sending

letters to borrowers, if requested by the lenders.

13Skip-tracing is a term to describe the procedures used to locate a borrower that the lender has lost

contact with. Such procedures may include checking telephone directories, motor vehicle registration

or driver’s license records, or seeking assistance from the Internal Revenue Service.

Page 9 GAO/HEHS-95-99 Student Loan Default Data
B-255079 

These regulations will be effective July 1, 1995. However, the Department

will apply the new procedures to schools that had appeals pending at the

time the regulations were issued. Also, the Department will allow schools

that previously filed loan servicing appeals but did not have access to at

least a representative sample of the relevant loan servicing records to

refile their appeals under the new procedures.

Government’s

Interests Are Not

Fully Protected

The recent legislative changes should help address the concerns of

schools that believe they have become inadvertent victims in the

Department’s attempt to minimize abuses in the student loan program.

However, neither the 1993 amendments nor the Department’s

implementing regulations contain measures for protecting the

government’s interest against operators who may take advantage of these

additional due process provisions by using them to continue unscrupulous

operations.

Schools have due process rights allowing them to continue participating in

FFELP during the resolution of their appeals. Their participation assures

students attending these schools continued access to FFELP loans and

protects schools from being denied program eligibility on the basis of

erroneous default rates. However, to help guard against the possibility that

a school may simply continue to abuse the program until its administrative

appeals are exhausted, some additional form of accountability may be

necessary.

The risk of loss from additional defaults accrued by schools filing appeals

could be significant if the appeal is unsuccessful. For example, there were

88 schools with appeals pending for 1 year or more as of September 30,

1994. If these schools’ students continued to receive loans and default on

them at the same pace as they did during the preceding years, we estimate

that the additional defaults through September 30, 1994, could have cost

the government about $50 million.14

Possible ways to address this concern include (1) holding schools liable

for the costs associated with defaults on loans that their students receive

14More specifically, our estimate is based on the following assumptions: (1) the schools continue to

enroll students at the same rate as before the appeal, (2) students continue to enter repayment at the

same rate as they did in fiscal year 1992 (the latest year for which the related default rate data were

available), (3) the schools continue to experience the same default rate they had in fiscal year 1992

(the latest year for which the related default rate information was available), and (4) the average loan

for students at these schools is equal to the average Stafford loan at all schools across the country

($2,815 in fiscal year 1992).

Page 10 GAO/HEHS-95-99 Student Loan Default Data
B-255079 

during the appeal process and (2) making some schools post a

performance bond as a condition of filing an appeal. Both of these options

have some precedence in earlier loan programs or in rulings by the courts.

Either option would allow a school to continue exercising its due process

rights and to enroll students with guaranteed loans as the school’s appeal

is being reviewed by the Department or the courts.

Making Schools Liable for

Costs on Defaulted Loans

Made During the Appeals

Process

One approach for reducing the government’s risk of loss would be to

require that if a school is unsuccessful in its default rate appeal, it must

reimburse the government for the costs associated with defaults on loans

that the school certified during the appeals process. The Department had

such a policy in place for SLS loans, but without specific legislation it had

to request relief from the courts on a case-by-case basis.

Under such an arrangement, the Department would continue to incur

costs as it does for other guaranteed loans by paying interest subsidies on

loans while students are in school and by paying claims for loans that

default. If a school wins its appeal, the government would bear the costs

attributed to loans that may eventually go into default. If a school loses its

appeal, it would share in the risk of loss; it would be responsible for the

cost of any loan that was made and defaulted on after the default rate

appeal was filed.

Such an arrangement might also deter schools from filing frivolous

appeals. A reduction in the number of appeals filed would free up the

Department’s resources to more quickly adjudicate appeals that were filed.

Department officials said that they have asked the courts for such

arrangements on occasion, and have been granted them in a few instances.

They said that if the Department was given the legislative authority, it

could use it more uniformly and not be required to ask the courts for it.

Requiring a Performance

Bond

Another approach would be for the Department to require some schools to

post a performance bond as a condition of filing an appeal if the school

has default rates that far exceed the statutory thresholds and in the

Department’s view may be unlikely to succeed in an appeal. For example,

about one-third of the 88 schools with appeals pending for 1 year or more

had default rates of 40 percent or higher, compared with the statutory

threshold of 25 percent.

Page 11 GAO/HEHS-95-99 Student Loan Default Data
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The amount of a bond could be established on the basis of a school’s most

recent default rates and loan volume experience. For example, in one of

the lawsuits against the Department, the court ordered the schools to post

a bond each month for a percentage of the face amount of student loans

certified during that period. The percentage was established as the

schools’ average historic default experience, and at the end of each month

the schools were required to increase the bond amount by the additional

volume of loans certified during that month. Under such an arrangement, a

school with a 3-year average default rate of 30 percent and $100,000 in new

loans each month would have to post a $30,000 bond at the end of the first

month, a $60,000 bond at the end of the second month, and so on until the

appeal was finalized. If the school’s appeal took 3 months to adjudicate

and the school was unsuccessful in its appeal, the Department could

demand a forfeiture of the bond, which would amount to $90,000 at the

end of the third month. If, on the other hand, the school was successful in

its appeal, the bond would be cancelled and the school would be allowed

to continue participating in FFELP.

The Department does not have statutory authority to place bonding

requirements on schools that are appealing their default rates. A

Department official said that a bonding provision would help the

Department deal with frivolous appeals, while at the same time allow

schools that have more legitimate concerns the opportunity to appeal the

Department’s actions.

Conclusions Data accuracy problems and loan servicing issues have hampered the

Department’s efforts to eliminate schools with high default rates from

FFELP participation. If designed and implemented properly, the National

Student Loan Data System and new statutory requirements established by

the 1993 amendments to allow schools to review the quality of its loan

database should contribute to the Department more accurately

determining schools’ default rates. However, the defaults associated with

new loans made by schools filing unsuccessful appeals could be very

costly to the government. Requiring schools to pay for the default of

subsequent student loans if their appeals are unsuccessful could help

reduce the government’s costs.

Matters for

Consideration by the

Congress

In those instances in which schools appeal a Department action to

eliminate their FFELP eligibility because their default rates exceed a

statutory threshold, the Congress may wish to consider giving the

Secretary of Education authority to require schools to reimburse the

Page 12 GAO/HEHS-95-99 Student Loan Default Data
B-255079 

government for the cost of loans that are made and that may subsequently

default, in the event that the schools’ appeals are unsuccessful.

As a measure of further protection of the government’s interests, the

Congress also may wish to consider granting the Secretary the authority to

require schools to post a performance bond as a condition of filing an

appeal as well as the discretion in determining under which circumstances

a bond would be required of schools.

Agency Comments

and Our Evaluation

We requested comments on a draft of this letter from the Secretary of

Education or his designee. On May 19, 1995, we received verbal comments

from representatives of the Department’s Offices of General Counsel and

Postsecondary Education. They generally agreed with the results of our

findings. They suggested several technical changes, which we

incorporated in the letter, as appropriate.

Copies of this report are being sent to the Ranking Minority Member,

Permanent Subcommittee on Investigations, Senate Committee on

Government Operations; the Chairman, Senate Labor and Human

Resources Committee; the Chairman, House Economic and Educational

Opportunities Committee; the Director, Office of Management and Budget;

the Secretary of Education; and other interested parties. Please call me at

(202) 512-7014 if you or your staff have any questions about this report.

Major contributors include Joseph J. Eglin, Jr., Assistant Director; Charles

H. Shervey; and Jonathan H. Barker.

Sincerely yours,

Cornelia M. Blanchette

Associate Director, Education

 and Employment Issues

Page 13 GAO/HEHS-95-99 Student Loan Default Data
Contents

Letter 1

Appendix I 

Scope and

Methodology

16

Appendix II 

FFELP Eligibility

Status of Schools With

Default Rates Over

the Statutory

Thresholds (Fiscal

Years 1991-94)

17

Abbreviations

FFELP Federal Family Education Loan Program

OGC Office of General Counsel

OIG Office of Inspector General

SLS Supplemental Loans for Students

Page 14 GAO/HEHS-95-99 Student Loan Default Data
Page 15 GAO/HEHS-95-99 Student Loan Default Data
Appendix I 

Scope and Methodology

We examined the provisions of the Higher Education Act of 1965, as

amended, pertaining to the use of student loan default rates. We also

examined federal requirements and other documentation the Department

of Education issued to implement the Student Loan Default Prevention

Initiative Act of 1990.

We obtained and examined default rate statistical information from the

Department to identify schools with rates exceeding statutory thresholds.

We focused our analysis on data pertaining to schools subject to the loss

of FFELP eligibility, that is, schools with default rates exceeding statutory

thresholds for three successive years.

To determine the extent that problems with the Department’s default rate

data have been previously identified, we reviewed prior reports and other

documentation prepared by GAO and the Department’s OIG and program

offices. We discussed the data accuracy problems with OIG staff and

program offices. We also discussed with Department officials the National

Student Loan Data System—the first of its three phases became

operational in November 1994—to determine whether it will address data

accuracy problems associated with existing data bases.

To determine the nature and status of court cases relating to the accuracy

of default rates, we reviewed and analyzed various documents filed in the

courts by schools filing the lawsuits and the Department. We also

discussed the issues and status of each case with officials of the

Department’s Office of General Counsel (OGC).

We reviewed the Higher Education Technical Amendments of 1993 and the

Department’s regulations implementing these amendments to determine

the extent to which the amendments and regulations address the data

accuracy and other issues being litigated by the schools and the

Department. We discussed the amendments and regulations with attorneys

from the Department’s OGC and officials from the Default Management

Section.

Our work was conducted from September 1993 through March 1995 in

accordance with generally accepted government auditing standards.

Page 16 GAO/HEHS-95-99 Student Loan Default Data
Appendix II 

FFELP Eligibility Status of Schools With

Default Rates Over the Statutory Thresholds

(Fiscal Years 1991-94)a

Schools with default rates over thresholds 890

Schools losing eligibilityb 601

Schools retaining eligibility 289

Schools filing successful appeals 19c

Schools with pending appeals

Erroneous data and/or loan servicing appeals 250d

Mitigating circumstances appeals 20e

aIncludes schools with default rates exceeding thresholds for 3 successive years. Excludes

schools subject to limitation, suspension, and termination action with a single-year default rate

over statutory thresholds.

bThese schools lost eligibility because they did not file appeals, filed unsuccessful appeals, or

closed and went out of business.

cAn additional 26 schools filed successful appeals. However, they had default rates over the

thresholds in a subsequent year and either (1) had appeals pending for default rates over the

thresholds in subsequent years (8 schools), (2) lost eligibility because they failed to file a

successful appeal in a subsequent year (15 schools), or (3) closed and went out of business after

filing their successful appeals (3 schools).

dIncludes 25 schools that also filed mitigating circumstances appeals.

eThese schools’ appeals did not challenge the accuracy of the Department’s default rates through

erroneous data and/or loan servicing appeals.

(104760) Page 17 GAO/HEHS-95-99 Student Loan Default Data
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GAO/HEHS-95-99 Student Loan Default Data