text: Background Direct Loan Program Education administers federal student financial aid programs, including the William D. Ford Federal Direct Loan (Direct Loan) program, through the Office of Federal Student Aid. Education issues several types of loans under the Direct Loan program, including subsidized and unsubsidized loans. Prospective borrowers apply and are approved for loans through Education, which then disburses the loan through the borrowers’ school. Upon disbursement of funds, Education assigns each loan to a contracted loan servicer responsible for communicating information to borrowers while they are in school and when they enter repayment. Borrowers receive additional information about their loans and related rights and responsibilities through their loan’s promissory note, Education’s website, and mandatory entrance and exit counseling provided by their school. When borrowers enter repayment, generally 6 months after leaving school, they make payments directly to the assigned servicer. Federal Student Loan Repayment and Postponement Options Education offers a variety of repayment plan options that can help Direct Loan borrowers avoid delinquency and default, including Standard, Graduated, Extended, and Income-Driven. Income-Driven Repayment plans can ease repayment by setting loan payment amounts as a percentage of a borrower’s income and extending the repayment period up to 25 years. Unlike Standard, Graduated, and Extended repayment plans, Income-Driven Repayment plans offer loan forgiveness at the end of the repayment term and monthly payments may be as low as $0 for some borrowers. Extending the repayment period may also result in some borrowers paying more interest over the life of the loan than they would under 10-year Standard repayment. In addition to making monthly payments more manageable and offering the potential for loan forgiveness, Income-Driven Repayment plans may also reduce the risk of default. For example, in 2015, we reported that borrowers in two such plans had substantially lower default rates than borrowers in the Standard repayment plan. Eligible borrowers may also temporarily postpone loan payments through deferment or forbearance. Several different types of deferment are currently available to borrowers, each with their own eligibility criteria. Under deferment, the interest generally does not accrue on subsidized loans, but it continues to accrue on unsubsidized loans. Eligible borrowers can also postpone or reduce loan payments through either a general or mandatory forbearance; however, interest on the loan continues to accrue in each type (see table 1). Most borrowers choose general forbearance, which, unlike most types of mandatory forbearance and deferment, can be issued over the phone with no supporting documentation. As of September 2017, $69.9 billion in outstanding Direct Loans was in general forbearance compared to $6.3 billion in mandatory forbearance, according to Education data. Cohort Default Rate Calculation Education computes CDRs each year for all schools that enroll students who receive funds through the Direct Loan program. To compute a school’s CDR, Education divides the number of student loan borrowers in a CDR cohort—those entering repayment in the same fiscal year—who have defaulted on their loans in the initial 3 years of repayment by the total number of a school’s student loan borrowers in that CDR cohort (see fig. 1). The CDR does not hold schools accountable for borrowers who default after the 3-year period. Borrowers in deferment and forbearance are considered to be “in repayment” and current on their loans for the purpose of calculating a school’s CDR, even though borrowers in these loan statuses are not expected to make any monthly payments. For the 2014 CDR cohort, the national 3-year CDR was 11.5 percent, meaning 11.5 percent of borrowers who first entered repayment in fiscal year 2014 had defaulted on one or more loans by the end of fiscal year 2016. The national CDR has changed over time, peaking at 22.4 percent for the 1990 CDR cohort and declining to a historic low of 4.5 percent for the 2003 CDR cohort (see fig. 2). Beginning with the 2009 CDR cohort, Education switched from a 2-year measurement to a 3-year measurement as required by the Higher Education Opportunity Act. According to Education officials, there are several possible explanations for the general decrease in the national CDR from the 1990 cohort to the 2003 cohort. They include: 1) Education’s efforts to provide schools with default prevention training; 2) the loss of eligibility to participate in federal student aid programs and subsequent closure of many schools with chronically high CDRs in the early 1990s; 3) enactment of legislation in 1998 that increased the length of time a loan can go unpaid before being considered in default, which decreased the likelihood that a borrower would default within the CDR period; and 4) an increase in borrowers consolidating their loans while in school, an option that was eliminated in 2006. Use of the Cohort Default Rate to Hold Schools Accountable Schools with high CDRs may lose eligibility to participate in federal student aid programs. Specifically, Education generally excludes schools from participation in the Direct Loan program if their CDR is above 40 percent for a single year and from participation in the Direct Loan and Federal Pell Grant programs if their CDRs are 30 percent or greater for 3 consecutive years. Schools potentially subject to these sanctions can pursue an appeal. The CDR is the only borrower outcome measure used to determine eligibility for participation in federal student aid programs for all schools. Schools with high CDRs that do not cross these thresholds may also be subject to additional oversight. For example, schools are certified for up to 6 years to maintain eligibility to participate in federal student aid, but schools with high CDRs may only be granted certification for 2 years, according to Education policy. Education policy also prioritizes selection of schools with high CDRs for program review. Further, schools whose CDRs are equal to or exceed 30 percent for any cohort are required to create a Default Prevention Taskforce that develops and submits a default prevention plan to Education to reduce defaults, among other things. Consequences of Student Loan Defaults When borrowers do not make payments on their federal student loans, and the loans are in default, the federal government and taxpayers are left with the costs. Borrowers also face severe financial burdens when their federal student loans go into default. For example, upon default the entire unpaid balance of the loan and any accrued interest is immediately due. The amount owed may increase due to late fees, additional interest, and costs associated with the collection process, including court costs, collection fees, and attorney’s fees. The federal government also has tools to collect on defaulted student loans. For example, under the Treasury Offset Program, the federal government can withhold certain federal or state payments to borrowers, including federal or state income tax refunds and some Social Security benefits, to collect on defaulted student loans. The federal government can generally also garnish up to 15 percent of a defaulted borrower’s disposable pay and apply those funds toward the defaulted loan. There is no limit on how long the government can attempt to collect on defaulted student loans, and student loans are more difficult to eliminate in bankruptcy proceedings than other types of consumer debt. Default Management Consultants Some schools hire default management consultants to help them reduce their CDRs. Education classifies default management consultants as “third-party servicers” and generally has the authority to oversee the services they provide to schools and their students. Schools are required to notify Education when they enter into, modify, or terminate a contract with a third-party servicer. Based on concerns that a significant number of schools had not reported information on the third-party servicers they use as required, Education issued guidance to remind schools of the requirement in January 2015. In addition, Education requires third-party servicers to submit information about the services they provide to schools. As of June 2017, Education reported that it had information on 187 third-party servicers, including 48 that reported providing default management services. Schools must ensure that their third-party servicers, including default management consultants, comply with relevant federal regulations and program requirements. Education also requires third-party servicers to submit an annual compliance audit report that covers the administration of the federal student aid related services they perform to determine compliance with applicable statutes, regulations, and policies. Some Schools’ Consultants Encourage Borrowers to Postpone Loan Payments, Which Can Lower Cohort Default Rates and Increase Borrowers’ Loan Costs Some Schools’ Consultants Encourage Borrowers to Postpone Loan Payments When Better Borrower Options May be Available To help manage their default rates, some schools hired default management consultants that encouraged borrowers with past-due student loans to postpone loan payments through forbearance, even when better borrower options may be available. The nine default management consultants we selected, which served over 1,300 schools, used various methods to contact borrowers and attempted to connect them with their loan servicer for assistance (see fig. 3). Seven of the nine participated in three-way conference calls with the borrower and the loan servicer. Further, one consultant visited past-due borrowers at their home to provide in-person loan counseling and connect them to their loan servicer. Income-Driven Repayment Plans May Be Better Options for Some Struggling Borrowers According to Education, postponing payments through forbearance may be appropriate for some borrowers who face temporary hardships. On the other hand, Income-Driven Repayment plans may be a better option for borrowers who are having difficulty repaying their loans for an extended period of time. These plans base monthly payments on income and family size, and payments may be as low as $0 for those who qualify. Income- Driven Repayment plans also feature the potential for forgiveness of remaining loan balances after 20 or 25 years of repayment. Interest generally continues to accrue on loans in both forbearance and Income-Driven Repayment. Under forbearance, accumulated interest that is not paid during the forbearance period will generally be added to the loan balance, resulting in higher monthly payments when forbearance ends. In contrast, the federal government does not charge the unpaid interest for up to 3 years for some borrowers repaying their loans on Income- Driven Repayment plans, and struggling borrowers on these plans are not generally expected to make higher monthly payments until their financial situation improves. In addition, GAO’s past work found that borrowers in Income-Driven Repayment had substantially lower rates of default than those in Standard repayment. GAO previously found that it is difficult for Education to estimate which borrowers have incomes low enough to benefit from or be eligible for Income-Driven Repayment plans because only borrowers who apply for these plans are required to submit income information to Education. Four consultants sent borrowers who were past due on their loans unsolicited emails and letters that included only a forbearance application and instructed borrowers to return the application to them instead of their loan servicer. Representatives of one consultant said that this practice was to ensure that borrowers completed the forms accurately. According to Education, the application provides an opportunity for borrowers to learn about other repayment and postponement options and the potential costs of forbearance. The application includes a statement informing borrowers about the option to request a deferment or Income-Driven Repayment plan and examples of the additional costs borrowers may incur as a result of interest that continues to accrue during forbearance. While this is correct, the application does not include details about these options; instead, it directs borrowers to Education’s website for more information. Borrowers who only receive a forbearance application may inaccurately assume that forbearance is their only or preferred option. Moreover, borrowers may miss the opportunity to learn about other, potentially more favorable repayment and postponement options from Education’s loan servicers, who are responsible for counseling borrowers and approving forbearance requests. One consultant included an inaccurate statement in letters it sent to borrowers who were past due on their loans. This consultant sent past-due borrowers forbearance applications with letters that inaccurately stated that the federal government can take away Supplemental Nutrition Assistance Program and Supplemental Security Income benefits when borrowers default on a federal student loan. Inaccurate information about the consequences of default could cause a borrower who depends on these benefits to feel undue pressure to choose forbearance, even when eligible for more favorable repayment and postponement options. Further, this consultant’s script for its representatives to use when calling borrowers who are past due on their loans referred exclusively to postponing loan payments. The script instructed representatives to tell borrowers “I am now going to conference you in with your loan servicer and they will process your forbearance over the phone.” Borrowers who hear such statements may feel undue pressure to choose forbearance. The script also instructed representatives to tell the loan servicer that the borrower they were about to speak with was requesting a forbearance. Further, representatives from this consultant were also instructed to tell borrowers to “stick to their guns” on the option they have selected before connecting the borrower with their loan servicer on a three-way call. One consultant previously offered borrowers gift cards as an incentive to put their loans in forbearance. Education has also previously identified the use of gift cards to steer borrowers toward forbearance over other available options. An internal review that Education conducted in 2012 and 2013 found that a chain of schools used gift cards to promote forbearance for purposes of lowering its CDR. According to Education’s findings, a borrower who had attended one of the schools stated that she was current in her payments but was offered a $25 gift card to apply for forbearance. Multiple borrowers included in Education’s review expressed the view that they were pressured or forced to apply for forbearance and were not made aware of other options, such as deferment or Income-Driven Repayment plans. Indeed, offering gift cards may steer borrowers toward forbearance over other available options. While the consultant that offered gift cards to borrowers to lower schools’ CDRs has discontinued this practice, and the school Education reviewed has since closed, these practices may have affected reported CDRs and could be used by other consultants and schools. Schools have a financial interest in preventing borrowers from defaulting within the first 3 years of repayment to ensure that their CDRs remain low enough to meet Education’s requirements for participating in federal student aid programs. Consultants also have a financial interest in preventing borrowers from defaulting during the 3-year CDR period. Eight of the nine consultants we selected did not have any school clients that paid them to contact borrowers who were past due on their loans outside the 3-year CDR period. In addition, four of the nine selected consultants were paid by their client schools based on the number of past-due borrowers they brought current on their loans during the CDR period, and representatives’ salaries or incentives at two of these consultants were calculated based on this as well. Some consultants have an incentive to encourage forbearance in particular as a strategy to prevent borrowers from defaulting within the 3- year CDR period in an effort to lower their client schools’ CDRs. This is because forbearance applications can be processed more quickly than other repayment or postponement options. Loan servicers can grant general forbearance based on a request from borrowers over the phone because there are no documentation requirements, whereas borrowers seeking deferment or an Income-Driven Repayment plan generally must submit a written application. According to Education officials, loan servicers are required to process Income-Driven Repayment plan applications within 15 business days. One consultant sent borrowers a letter that stated it could process a verbal forbearance in 5 minutes. The president of one school that contracted with a consultant that is paid based on the number of borrowers brought current told us that he did not care whether the consultant encouraged the use of forbearance as long as borrowers did not default within the 3-year CDR period and the consultant followed federal regulations. According to Education data, nearly 90 percent of the school’s borrowers were in forbearance during the 2013 CDR period. Consultant payment structures, as well as the difference in processing requirements between forbearance, deferment, and Income-Driven Repayment plans may create incentives for consultants to encourage forbearance over other repayment and postponement options. Postponing Loan Payments Can Increase Borrowers’ Loan Costs and Reduce the Usefulness of the Cohort Default Rate to Hold Schools Accountable While forbearance can be a useful tool for helping borrowers avoid defaulting on their loans in the short term, it increases their costs over time and reduces the usefulness of the CDR to hold schools accountable. To understand the potential financial impact of forbearance during the first 3 years of repayment (the CDR period), we calculated the cost for a borrower with $30,000 in loan debt over 10 years in the Standard repayment plan with varying lengths of time in forbearance (see fig. 4). A borrower on the 10-year Standard repayment plan who did not spend any time in forbearance would pay $39,427 over the life of the loan. Spending all 3 years of the CDR period in forbearance would cost that borrower an additional $6,742, a 17 percent increase over spending no time in forbearance. One borrower we spoke with who took out $34,700 in loans and opted for forbearance accrued about $10,000 in interest in just over 3 years, an amount that the borrower said she would be paying off “for the rest of my days.” Further, the unpaid interest that accrues while a borrower’s loans are in forbearance may result in higher future monthly payments when the forbearance period ends. Borrowers who cannot make these higher monthly payments may eventually default. If schools’ consultants continue to encourage forbearance over other options that may be more beneficial, such as Income-Driven Repayment plans, some borrowers will continue to be at risk of incurring additional costs without any long-term benefits. Education officials and student loan experts we spoke with said that forbearance is intended to be a short-term option for borrowers facing financial difficulties lasting a few months to a year, such as unexpected medical expenses. Longer periods of forbearance, while not typically advantageous to borrowers, can be an effective strategy for schools to manage their CDRs. Specifically, spending 18 months or more—at least half of the CDR period—in forbearance reduces the potential for borrowers to default within the 3-year period (see fig. 5). This is because forbearance keeps borrowers current on their loans, and borrowers would not go into default until they had made no payments for an additional 360 days after the forbearance period ended. Indeed, according to our analysis of Education’s data for the 2013 CDR period, only 1.7 percent of borrowers who were in forbearance for 18 months or more defaulted within the 3-year CDR period, compared to 8.7 percent of borrowers who were in forbearance up to 18 months during this period, and 20.3 percent of borrowers who were not in forbearance during this period. Borrowers who default outside the 3-year CDR period will not negatively affect a school’s CDR. In an online presentation, representatives from one consultant highlighted that forbearance can be a tool for reducing a school’s CDR and stated that borrowers who postponed payments defaulted less often during the CDR period than other past-due borrowers based on a case study they conducted. According to our analysis of Education’s data, the percentage of borrowers whose loans were in forbearance for 18 months or more during the 3-year CDR period increased each year during the 5 cohorts we reviewed, doubling from 10 percent in the 2009 CDR cohort to 20 percent in the 2013 CDR cohort. During the same time period, the percentage of borrowers whose loans were in forbearance for any amount of time increased from 39 percent to 68 percent (see fig. 6). Further, borrowers in forbearance for 18 months or more defaulted in the year after the 3- year CDR period more often than they did during the CDR period. Specifically, 9.4 percent of these borrowers in the 2013 CDR period defaulted in the year following the CDR period, while only 1.7 percent defaulted in the first 3 years of repayment, suggesting that long-term forbearance may have delayed, not prevented, default for these borrowers. Reducing the number of borrowers in long-term forbearance and directing them toward other repayment or postponement options could help reduce the number of borrowers that later default and save the government money. For example, Education estimates that it will not recover a certain percentage of defaulted Direct Loan dollars even if repayment resumes. Specifically, for Direct Loans issued in fiscal year 2018, Education estimates that it will not recover over 20 percent of defaulted loans. These unrecovered defaulted loan amounts total an estimated $4 billion, according to our analysis of Education’s budget data. In addition to cost savings to the government, borrowers who avoid default would not have to face severe consequences, such as damaged credit ratings that may make it difficult to obtain credit, employment, or housing. In addition, the percentage of borrowers who made progress in paying down their loans during each CDR cohort—the repayment rate— decreased from 66 percent for the 2009 cohort to 46 percent for the 2013 cohort (see sidebar). We analyzed these data for a subset of schools with the largest CDR decreases from the 2009 to 2013 cohorts and found that as these schools’ CDRs improved, other borrower outcomes worsened (see app. II for more information about these schools). Specifically, for this subset of schools, the percentage of borrowers in long-term forbearance doubled, and the percentage of borrowers who made progress in paying down their loans during the CDR period decreased by half, suggesting that these schools may be encouraging forbearance as a default management strategy (see fig. 7). Education has acknowledged that when schools encourage borrowers to postpone loan repayment until the 3-year CDR period ends, it can have a distorting effect on the CDR. Borrowers who have postponed their payments through forbearance or deferment are considered to be “in repayment” for the purpose of calculating the CDR, even though they are not expected to make any payments on their loans while in these statuses. As a result, an increased use of forbearance, particularly long- term forbearance, could result in lower CDRs, and therefore fewer schools being sanctioned due to high CDRs. In July 1999, we reported that the CDR understates the actual number of borrowers who default. We suggested that Congress may wish to consider amending the Higher Education Act of 1965 to exclude borrowers with loans in deferment or forbearance at the end of the CDR period from schools’ CDR calculation and include these borrowers in a future CDR cohort after they have resumed making payments on their loans. Education’s Office of Inspector General made a recommendation to the agency to support similar amendments to the law in December 2003. For this report, we examined the impact that removing borrowers in long- term forbearance from the CDR calculation would have on schools’ reported CDRs. For the 2013 cohort, 35 schools from our population had CDRs of 30 percent or higher. When we excluded from our population borrowers who spent 18 months or more in forbearance and did not default within the 2013 CDR period, we found 265 additional schools that would potentially have had a CDR of 30 percent or higher (see app. II for more information about these schools). Schools with CDRs at this level for 3 consecutive years may lose eligibility to offer their students Direct Loans and Pell Grants. Further, 21 of the 265 schools would potentially have had a CDR greater than 40 percent, making them potentially subject to immediately losing eligibility to offer Direct Loans. Of the 265 schools that would have potentially been subject to sanctions based on our alternative calculation, 261 received a combined $2.7 billion in Direct Loans and Pell Grants in academic year 2016-2017. The CDR is a key tool for holding schools accountable for borrower outcomes and protecting borrowers and the federal government from the costs associated with default. The substantial growth in the percentage of borrowers spending at least half of the CDR period in forbearance reduces the CDR’s usefulness to hold schools accountable. This presents risks to the federal government and taxpayers, who are responsible for the costs associated with high rates of default, and to borrowers who may benefit from other repayment or postponement options. Since the way the CDR is calculated is specified in federal law, any changes to its calculation would require legislation to be enacted amending the law. Strengthening the usefulness of the CDR in holding schools accountable, such as by revising the CDR calculation or using other accountability measures to complement or replace the CDR, could help further protect both borrowers and the billions of dollars of federal student aid funds the government distributes each year. Actions Needed to Improve Education’s Oversight of Default Management Strategies and Public Reporting of CDR Sanctions Requirements Needed to Oversee How Schools and their Consultants Communicate Loan Options to Borrowers in Repayment Education’s ability to oversee the strategies that schools and their consultants use to manage CDRs is limited because there are no requirements governing the interactions that schools and their consultants have with borrowers once they leave school. Education requires that schools provide certain information to borrowers about their student loans when they begin and finish school but does not oversee schools’ or their consultants’ communications with borrowers after they leave school. According to Education, the Higher Education Act does not contain explicit provisions that would allow it to impose requirements governing communications that schools and their consultants may have with borrowers who have left school. As noted earlier, we found that some default management consultants, in seeking to help schools lower their CDRs, provided borrowers inaccurate or incomplete information or offered gift cards to encourage forbearance over other repayment or postponement options that may be more beneficial to the borrower. According to Education officials, borrowers are protected from such practices because loan servicers are required to inform borrowers of all available repayment options upon processing a forbearance. Education officials also said that performance-based contracts provide loan servicers an incentive to keep borrowers in repayment. However, a Consumer Financial Protection Bureau report found that borrowers may not be informed about the availability of other repayment plans and instead may be encouraged by their loan servicers to postpone payments through forbearance, which may not be in borrowers’ best interests. Further, some consultant practices we identified, such as instructing borrowers to return the forbearance application to the consultant and remaining on three-way calls with the loan servicer and the borrower, may undermine the role of the loan servicer. Education officials also said that borrowers should be aware of their repayment options because schools are required to inform borrowers of these options through exit counseling when they leave school. However, in 2015 we found gaps in borrowers’ awareness of repayment options. Education’s Office of Federal Student Aid has a strategic goal to help protect borrowers and families from unfair, deceptive, or fraudulent practices in the student loan marketplace. Without clear requirements regarding the information that schools and their consultants provide to borrowers after leaving school, Education cannot effectively oversee schools’ default management strategies. Further, without such requirements, Education cannot ensure that schools and consultants are providing borrowers with the information they need to make informed decisions to manage their loan costs and avoid future default. Education’s Public Reporting of Cohort Default Rate Sanctions Lacks Transparency The limited information Education reports annually to the public about schools that face sanctions for high CDRs overstates the extent to which schools are held accountable for their default rates. Specifically, Education does not report the number of schools that successfully appealed CDR sanctions or the number of schools ultimately sanctioned. For example, with the release of the 2013 CDRs in 2016, Education publicly reported that 10 schools were subject to sanctions, but did not publicly report that 9 schools appealed their sanctions and 8 were successful in their appeals and were thereby not sanctioned (see fig. 8). Office of Management and Budget guidelines call for federal agencies to ensure and maximize the usefulness of information they disseminate to the public. Federal internal control standards call for effective communication with external stakeholders. The number of schools subject to sanction has declined over time—from a high of 1,028 schools in fiscal year 1994 to 10 schools in fiscal year 2017 (see app. III). In addition, unpublished sanction data reveal that a small fraction of borrowers who defaulted on student loans attended schools that have been sanctioned. For example, two schools were ultimately sanctioned in 2016 and accounted for 67 of the nearly 590,000 borrowers whose defaulted loans were included in schools’ 2013 CDRs. By reporting only the number of schools subject to sanction and not those actually sanctioned, Education’s data make it difficult for Congress and the public to assess the CDR’s usefulness in holding schools accountable. Conclusions Preventing student loan defaults is an important goal, given the serious financial risks default poses to borrowers, taxpayers, and the federal government. The CDR, which is specified in federal law, is intended to hold schools accountable when significant numbers of their borrowers default on their student loans during the first 3 years of repayment. However, the metric in its current form creates incentives for schools that may result in unintended consequences for some borrowers. Schools have an interest in preventing their students from defaulting during the CDR period to ensure that they can continue to participate in federal student aid programs, and some schools contract with private consultants to work with borrowers who have fallen behind on their loan payments. Although some of these consultants have recently changed their communications to borrowers, others continue to provide inaccurate or incomplete information to encourage past-due borrowers to choose forbearance over other repayment options. While postponing payments through forbearance may help struggling borrowers avoid default in the near term, it increases borrowers’ ultimate repayment costs and does not necessarily put borrowers on a path to repaying their loans. Moreover, including borrowers who spend 18 months or more in forbearance in the CDR calculation reduces the CDR’s ability to hold schools accountable for high default rates since long periods of forbearance appear to delay—not prevent—default for some borrowers. Absent a statutory change, schools and their consultants seeking to keep CDRs below allowable thresholds will continue to have an incentive to promote forbearance over other solutions that could be more beneficial to borrowers and less costly to the federal government and its taxpayers. Education plays an important role in overseeing schools and their default management consultants to ensure that they are held accountable and student loan borrowers are protected. However, because Education asserts that it lacks explicit statutory authority to establish requirements regarding the information that schools and consultants provide to borrowers after they leave school, Education does not hold them accountable for providing accurate and complete information about repayment and postponement options. In addition, public information on CDR sanctions is important for assessing the usefulness of the CDR to hold schools accountable. Yet, Education’s practice of reporting the number of schools potentially subject to sanction without reporting the number of schools ultimately sanctioned following the appeals process limits transparency about the CDR’s usefulness for Congress and the public. Matters for Congressional Consideration We are making the following two matters for congressional consideration: Congress should consider strengthening schools’ accountability for student loan defaults, for example, by 1) revising the cohort default rate (CDR) calculation to account for the effect of borrowers spending long periods of time in forbearance during the 3-year CDR period, 2) specifying additional accountability measures to complement the CDR, for example, a repayment rate, or 3) replacing the CDR with a different accountability measure. (Matter 1) Congress should consider requiring that schools and default management consultants that choose to contact borrowers about their federal student loan repayment and postponement options after they leave school present them with accurate and complete information. (Matter 2) Recommendation for Executive Action The Chief Operating Officer of the Office of Federal Student Aid should increase the transparency of the data Education publicly reports on school sanctions by adding information on the number of schools that are annually sanctioned and the frequency and success rate of appeals. (Recommendation 1) Agency Comments and Our Evaluation We provided a draft of this product to the Department of Education for review and comment. Education’s comments are reproduced in appendix IV. We also provided relevant report sections to the Consumer Financial Protection Bureau and the nine default management consultants for technical comment. The Consumer Financial Protection Bureau provided technical comments, which we incorporated as appropriate. Education agreed with our recommendation to increase transparency of school sanction data. In its response, Education stated that it makes a significant amount of CDR data publicly available on its website. For example, Education posts CDRs and underlying data for each school for which the rates are calculated and lists schools subject to sanctions as a result of their CDRs. Education also stated that beginning with the release of fiscal year 2015 CDRs, it would provide additional information on its website indicating whether schools subject to sanctions have submitted appeals and the disposition of such appeals. As we recommended in our draft report, Education should also publicly report the number of schools ultimately sanctioned each year. Our draft report included a recommendation for Education to seek legislation to strengthen schools’ accountability for student loan defaults. Education disagreed with this recommendation, asserting that from a separation of powers perspective, it has a responsibility to implement, and not draft, statutes. Education stated that if GAO believes such legislation is needed, it would be best addressed as a matter to Congress. We agree that, as an executive agency, Education is responsible for implementing laws as enacted. However, it is important to note that the President has the “undisputed authority” to recommend legislation to the Congress and the Office of Management and Budget within the Executive Office of the President has outlined procedures for executive branch agencies to submit proposed legislation. Indeed, in making this recommendation, we intended that Education seek legislation through any of the practices used by executive branch agencies in communicating with Congress. In a recent example, both the President’s Budget Request and Education’s Congressional Budget Justification for Fiscal Year 2019 seek a change in the statutory allocation formula for the Federal Work-Study program to focus funds on institutions enrolling high numbers of Pell Grant recipients. Nevertheless, in light of Education’s disagreement with our draft recommendation, and the importance of strengthening schools’ accountability for student loan defaults, we have converted the recommendation into a Matter for Congressional Consideration. Our draft report also included a recommendation for Education to require that schools and default management consultants that contact borrowers about repayment and postponement options after they leave school present accurate and complete information. Education agreed that institutions should provide accurate and complete information about all repayment options. It also stated that institutions should allow the borrower’s stated preference for any given repayment option to guide the ultimate direction of the conversation, and that the information provided should be free from financial incentive. However, Education asserted that it “cannot impose requirements on schools and their consultants without further authority.” Education clarified in a follow-up communication that the Higher Education Act does not contain “explicit provisions” under which it could require schools (and their consultants) to include specific content in the information that they choose to provide to borrowers after the borrowers leave school, but did not address whether there was any other authority under which it could take action in this area. Instead, Education noted that it could provide information to schools and their consultants on best practices in this area. We continue to believe that schools and their consultants should be required to ensure that any information they present to borrowers about repayment and postponement options after they leave school is accurate and complete. As we stated in our draft report, without clear requirements in this area, Education cannot ensure that schools and consultants provide borrowers with the information they need to make informed decisions to manage their loan costs and avoid future default. In light of this, and Education’s response to our draft recommendation, we have converted our recommendation into a Matter for Congressional Consideration. In its comments, Education inaccurately asserted that our findings should be viewed in light of a limited scope. As stated in the draft report, we analyzed trends in forbearance, repayment, and default using national data from Education for the five most recent CDR cohorts for a population of over 4,000 schools. To determine how schools work with borrowers to manage their CDRs, we reviewed the practices of a nongeneralizable sample of nine default management consultants that served over 1,300 schools. These schools accounted for over 1.5 million borrowers in the 2013 CDR cohort. The five consultants that provided inaccurate or incomplete information about forbearance or offered gift cards served about 800 schools, which accounted for over 875,000 borrowers in the 2013 CDR cohort. For each of the consultants, as stated in our draft report, we reviewed documentation including training materials, internal policies and procedures, and examples of correspondence they send to borrowers. Finally, Education inaccurately asserted that we based our findings on a small sample of interviews with 11 borrowers and officials from 3 schools and 4 consultants. We conducted these interviews to better understand borrowers’ loan experiences and the strategies that schools and their consultants use to manage the CDR, and the illustrative interview examples we include in our report do not form the basis of any of our findings or recommendations. In addition, Education commented that the report did not consider the extent to which borrowers enter Income-Driven Repayment plans during the 3-year CDR period or the substantial growth in borrowers participating in these plans over the past several years. Education suggested that such data would be important to consider in determining whether there has been an overreliance on forbearance in the past, and if so, whether any problems in this area are being remedied by the availability of Income- Driven Repayment plans. We have incorporated additional information regarding the increase in borrowers participating in Income-Driven Repayment plans in response. As Education noted in its comments, our draft report acknowledged that increased participation in these plans may have been a factor in the observed increase in overall rates of forbearance since it is common for loan servicers to place borrowers in administrative forbearance while processing applications for Income- Driven Repayment plans. However, as explained in our draft report, since administrative forbearance for this purpose should be for 60 days or less it would not explain the twofold increase in the percentage of borrowers in forbearance for 18 months or longer from CDR cohort years 2009 to 2013. Education also stated that while our report included an example of the additional interest cost incurred by a borrower using forbearance, it did not discuss the potential additional interest costs associated with other repayment options, such as Income-Driven Repayment plans. Education noted that these options could be more costly than forbearance in some instances and all options have consequences for borrowers. We acknowledged in our draft report that interest continues to accrue on loans in Income-Driven Repayment and that the monthly payments of some borrowers on these plans may not be high enough to pay down any principal during the first 3 years of repayment. However, as stated in our draft report, Income-Driven Repayment plans, unlike forbearance, offer borrowers the potential for loan forgiveness after 20 or 25 years of repayment. We have incorporated additional details about the potential costs of these and other repayment plans based on Education’s comments. The potential consequences that Education highlighted in its comments further illustrate the importance of ensuring that borrowers receive accurate and complete information to help them make informed decisions to manage their loan costs and avoid default. In response to our findings regarding communication practices of some default management consultants, Education stated that the draft report did not acknowledge that the forbearance application that selected consultants send to borrowers provides an opportunity for borrowers to learn about other repayment options and the potential costs of forbearance. We have incorporated additional information regarding the information included on the application. Although the form mentions deferment and Income-Driven Repayment, it does not describe these options; instead, it directs borrowers to Education’s website for more information. Therefore, we maintain that borrowers who only receive a forbearance application may inaccurately assume that forbearance is the only or preferred option. Further, Education commented that the draft report did not examine what effect, if any, consultants may have had in encouraging borrowers to seek consecutive forbearances since borrowers can remain in forbearance for no longer than 12 months before they have to reapply. Education also suggested that comparing the use of forbearance at schools that hired consultants that encouraged borrowers to postpone payments with those that did not would have provided a better understanding of the potential impact of such practices. While these topics were beyond the scope of our objectives for this report, Education may wish to explore them in support of its goals to protect borrowers and mitigate risks in the federal student aid programs. We are sending copies of this report to the appropriate congressional committees, the Secretary of the Department of Education, the Director of the Consumer Financial Protection Bureau, and other interested parties. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (617) 788-0534 or emreyarrasm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. Appendix I: Objectives, Scope, and Methodology This appendix discusses in detail our methodology for addressing (1) how schools work with borrowers to manage schools’ cohort default rates (CDR), and how these strategies affect borrowers and schools’ accountability for defaults; and (2) the extent to which the Department of Education (Education) oversees the strategies schools and their default management consultants use to manage schools’ CDRs and informs the public about its efforts to hold schools accountable. We conducted this performance audit from May 2016 to April 2018, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Default Management Consultants – Interviews and Document Requests To determine how schools work with borrowers to manage their cohort default rates, we examined the practices of companies that schools contract with to help them lower their CDRs. Specifically, we selected a nongeneralizable sample of 9 of the 48 default management consultants on file with Education as of December 2016. To select the 9 consultants, we obtained lists of client schools from Education and reviewed websites for each of the 48 consultants to determine the services each company offered. Some companies offered an array of services to schools, while others focused exclusively on default management. We selected our nongeneralizable sample of 9 consultants by prioritizing those with large numbers of client schools, those with a specific focus on default management, or those with unique default management practices based on our review of their websites. These 9 companies served over 1,300 schools. These schools accounted for over 1.5 million borrowers in the 2013 CDR cohort. We reviewed documentation from the 9 consultants on the strategies they use to reduce borrower defaults during the CDR period; their organizational structure; products and services offered; current client schools; internal training materials; contracts and agreements with schools; methods of compensation for employees responsible for outreach to student loan borrowers; internal policies and procedures; and examples of correspondence (e.g., emails, letters, and repayment applications) with borrowers. Based on the information received from these consultants, we cannot determine how many borrowers were contacted or received correspondence from these companies. However, the consultants we spoke to generally indicated that the materials they provided to us were used for all or most of their school clients. To learn more about the strategies schools and default management consultants use to help schools manage their CDRs, we conducted interviews with managers at 4 of the 9 consultants. We also interviewed employees responsible for working with student loan borrowers to discuss the procedures they use to contact or counsel borrowers on loan repayment options. We selected these 4 consultants by prioritizing those that provided default management services to large numbers of client schools, or had unique default management practices based on website reviews. Schools and Borrowers – Interviews and Document Requests To determine how schools work with borrowers to manage schools’ CDRs we selected a nongeneralizable sample of 12 schools for review based on data from Education that suggested that they had successfully lowered their CDRs from the 2009 through 2013 cohorts through forbearance. This sample informed our selection of borrowers. We emailed borrowers who attended these 12 schools and requested interviews with them, and selected 3 of the 12 schools for interviews with school officials and document requests. To select the 12 schools, we analyzed CDRs for the 2009-2013 cohorts from Education’s Cohort Default Rate Database; 3-year forbearance rates for fiscal years 2009-2012 from Education’s Annual Risk Assessment data; and 3-year repayment rates for fiscal years 2009-2014 from Education’s College Scorecard data. We selected the 12 schools from the population that had a CDR calculated for 2013. We excluded schools whose 2013 CDR was calculated using a different formula that Education uses for schools with fewer than 30 borrowers entering repayment in a particular cohort. To be considered for selection, schools had to have had CDRs of 25 percent or above for cohort years 2009-2013 and also be in the following: 1) top 20 percent of year-to-year decreases in CDR; 2) top 20 percent of year-to-year increases in 3-year forbearance rates; or 3) top 20 percent of 3-year forbearances that resulted in default after the 3- year CDR period ended. This analysis resulted in a list of 312 schools, which we randomized within strata based on combinations of institutional control (public, nonprofit, and for-profit), maximum length of degree programs offered (less than 4-year or 4-year and above), and school size (fewer than 1,000 borrowers entering repayment in a given fiscal year and 1,000 or more borrowers entering repayment in a given fiscal year). We removed schools that had fewer than 1,000 borrowers entering repayment in a given fiscal year to mitigate the wide variations in forbearance rates and CDRs that may occur at smaller schools. Finally, we judgmentally selected a total of 12 schools from across the remaining strata, choosing the schools from each stratum in the randomized order. We conducted interviews with officials at 3 of these schools (public, nonprofit, and for-profit) and reviewed documentation on the strategies they use to reduce borrower defaults during the CDR period. To examine how default management strategies may affect borrowers, we obtained record-level data from Education’s National Student Loan Data System (NSLDS) related to the 12 schools we focused on in our review, including data on all loans that entered repayment from fiscal years 2011-2014 and contact information for the borrowers that took out these loans. We weighted the sample toward borrowers whose loans were in deferment, forbearance, or were consolidated during the CDR period or defaulted after the CDR period. We then randomly selected about 6,500 of these borrowers and emailed them a request to discuss their student loan repayment experience with us. We received replies from 49 borrowers and interviewed 11 of them that we thought may have been contacted by their school or a default management consultant. We generally selected borrowers for interviews in the order they replied to us. We also prioritized borrowers whose email responses included student loan experiences that were relevant to our objectives, such as receiving communication from their school about student loan repayment and postponement options. We were not able to interview borrowers who did not provide phone numbers or who provided phone numbers but did not respond to our calls. Data Analysis To determine how schools’ default management strategies affect borrowers and the CDR, we analyzed school-level data from Education on borrowers with loans that were included in schools’ official CDR calculations for the 2009 through 2013 cohorts. We selected the 2009 cohort because it was the first cohort held accountable for the 3-year CDR. The 2013 cohort was the most recent CDR available at the time of our analysis. We identified the year borrowers entered repayment using the same logic that Education does for calculating the CDR. A borrower with multiple loans from the same school whose loans enter repayment during the same cohort fiscal year was included in the formula only once for that cohort fiscal year. We excluded schools whose CDR was calculated using a different formula that Education uses for schools with fewer than 30 borrowers entering repayment in a particular cohort. For the population of 4,138 schools that had a CDR calculated for 2013 and a subset of 364 schools that had CDR decreases of 10 or more percentage points from the 2009 to 2013 cohorts, we analyzed cohort default rates (cohorts 2009-2013); the percentage of borrowers who were in forbearance for any length of time during their first 3 years in repayment (cohorts 2009-2013); the percentage of borrowers who were in forbearance for 18 or more months during their first 3 years in repayment (cohorts 2009-2013); the percentage of borrowers who paid down at least $1 of the principal loan amount during the first 3 years of repayment (cohorts 2009-2013); and the percentage of borrowers who were in forbearance for varying lengths of time during their first 3 years in repayment and then defaulted in the year following the CDR period (2013 cohort). We also calculated an alternative CDR for each of these 4,138 schools, in which we excluded borrowers who spent 18 or more months in forbearance during the 2013 cohort and did not default during the CDR period from their school’s CDR calculation. We analyzed how many schools would have potentially exceeded the 30 percent and 40 percent CDR thresholds for the 2013 cohort and calculated the total amount of Direct Loans and Pell Grants that these schools received in academic year 2016-2017. We did not estimate the number of schools that could become ineligible to participate in federal loan programs under this alternative methodology because such schools would be entitled to an appeal and sanctionable thresholds may change with the advent of new methodologies of calculating the CDR. Further, schools may change their default management strategies in response to an alternative CDR. In addition, we assessed the CDR against government standards for internal control for identifying and responding to risks and goals and objectives in the Office of Federal Student Aid’s Fiscal Year 2015-2019 Strategic Plan. Additionally, we analyzed data from Education’s Integrated Postsecondary Education Data System on sector and program length for these 4,138 schools, as well as for certain subsets of these schools (for more information, see app. II). To assess the reliability of the data elements we analyzed for our study, we (1) performed electronic testing of required data elements; (2) reviewed existing information about the data and the systems that produced them; and (3) interviewed agency officials knowledgeable about the data. We determined that the data were sufficiently reliable for the purposes of this report. Review of Education Documents and Relevant Federal Laws and Regulations To determine the extent to which Education oversees the strategies schools and their default management consultants use to manage schools’ CDRs and informs the public about its efforts to hold schools accountable, we reviewed relevant federal laws, regulations, guidance, and internal documentation from Education on how it oversees schools and default management consultants practices as they relate to the CDR and how it implements and reports CDR sanctions. To better understand how CDRs are used in Education’s oversight of schools, we reviewed relevant regulations and interviewed Education officials responsible for administering program review, recertification for eligibility for federal student aid, and oversight of the CDR including default prevention. We assessed Education’s oversight activities against goals and objectives in the Office of Federal Student Aid’s Fiscal Year 2015-2019 Strategic Plan, government standards for internal control for communicating with stakeholders, and Office of Management and Budget guidelines for disseminating public information. Interviews with Experts and Consumer Advocates To help us understand how the default management strategies used by schools and default management consultants affect borrowers and reported CDRs, we interviewed individuals with expertise on federal student loans. Specifically, we interviewed experts from federal agencies including the Consumer Financial Protection Bureau and Education’s Office of Inspector General. We also interviewed experts from the Association of Community College Trustees, the Career Education Colleges and Universities, the Center for American Progress, The Institute for College Access & Success, Harvard’s Project on Predatory Student Lending, the Illinois Attorney General Office, and Young Invincibles. Appendix II: Sector and Program Length of Schools with Selected Characteristics Appendix II: Sector and Program Length of Schools with Selected Characteristics Schools whose cohort default rates (CDR) were calculated using a different formula that Education uses for schools with fewer than 30 borrowers entering repayment in a particular cohort were excluded from this analysis. Schools were included in this analysis if their CDR decreased by 10 percentage points or more from the 2009 to 2013 CDR cohorts. Foreign schools include schools that are eligible to participate in the Direct Loan program and are located outside the United States. Appendix III: Number of Schools Subject to Department of Education Cohort Default Rate Sanctions, 1991-2017 Appendix IV: Comments from the U.S. Department of Education Appendix V: GAO Contact and Staff Acknowledgments GAO Contact Staff Acknowledgments In addition to the contact named above, Kris Nguyen and Debra Prescott (Assistant Directors), Brian Schwartz (Analyst-in-Charge), Alex Galuten, Raheem Hanifa, John Karikari, Kirsten Lauber, Jeffrey G. Miller, John Mingus, Jeff Tessin, Khristi Wilkins, and Stephen Yoder made key contributions to this report. Additional assistance was provided by Susan Aschoff, Rachel Beers, James Bennett, Deborah Bland, Jason Bromberg, Alicia Cackley, Marcia Carlsen, David Chrisinger, William Colvin, Sheila McCoy, Arthur Merriam, Jessica Orr, Ellen Phelps Ranen, Phillip Reiff, Barbara Steel-Lowney, and Christopher Zbrozek.
target: As of September 2017, $149 billion of nearly $1.4 trillion in outstanding federal student loan debt was in default. GAO was asked to examine schools' strategies to prevent students from defaulting and Education's oversight of these efforts. This report examines (1) how schools work with borrowers to manage default rates and how these strategies affect borrowers and schools' accountability for defaults; and (2) the extent to which Education oversees the strategies schools and their default management consultants use to manage schools' default rates. GAO analyzed Education data on student loans that entered repayment from fiscal years 2009–2013, the most recent data at the time of this analysis; reviewed documentation from Education and a nongeneralizable sample of nine default management consultants selected based on the number of schools served (about 1,300 schools as of March 2017); reviewed relevant federal laws and regulations; and interviewed Education officials. According to federal law, schools may lose their ability to participate in federal student aid programs if a significant percentage of their borrowers default on their student loans within the first 3 years of repayment. To manage these 3-year default rates, some schools hired consultants that encouraged borrowers with past-due payments to put their loans in forbearance, an option that allows borrowers to temporarily postpone payments. While forbearance can help borrowers avoid default in the short-term, it increases their costs over time and reduces the usefulness of the 3-year default rate as a tool to hold schools accountable. At five of the nine selected default management consultants (that served about 800 of 1,300 schools), GAO identified examples when forbearance was encouraged over other potentially more beneficial options for helping borrowers avoid default, such as repayment plans that base monthly payments on income. Based on a review of consultants' communications, GAO found four of these consultants provided inaccurate or incomplete information to borrowers about their repayment options in some instances. A typical borrower with $30,000 in loans who spends the first 3 years of repayment in forbearance would pay an additional $6,742 in interest, a 17 percent increase. GAO's analysis of Department of Education (Education) data found that 68 percent of borrowers who began repaying their loans in 2013 had loans in forbearance for some portion of the first 3 years, including 20 percent that had loans in forbearance for 18 months or more (see figure). Borrowers in long-term forbearance defaulted more often in the fourth year of repayment, when schools are not accountable for defaults, suggesting it may have delayed—not prevented—default. Statutory changes to strengthen schools' accountability for defaults could help further protect borrowers and taxpayers. Education's ability to oversee the strategies that schools and their consultants use to manage their default rates is limited. Education's strategic plan calls for protecting borrowers from unfair and deceptive practices; however, Education states it does not have explicit statutory authority to require that the information schools or their consultants provide to borrowers after they leave school regarding loan repayment and postponement be accurate and complete. As a result, schools and consultants may not always provide accurate and complete information to borrowers. Further, Education does not report the number of schools sanctioned for high default rates, which limits transparency about the 3-year default rate's usefulness for Congress and the public.