Guaranteed Student Loans: Actions to Ensure Continued Student Access to Subsidized Loans
Released: 1995-02-24T00:00:00

Letter

Background

FFELP is the largest source of federal financial assistance to students attending postsecondary institutions. In fiscal year 1994 students received about $23 billion in FFELP loan commitments, including about $14.8 billion in subsidized Stafford loans. The Department of Education pays interest to lenders on the behalf of subsidized Stafford loan borrowers while they are in school and during a subsequent 6-month grace period. This interest benefit is not available to borrowers for other FFELP loans. The private lenders that provide these loans may not discriminate on the basis of race, national origin, religion, sex, marital status, age, or handicapped status but, according to a Department policy official, may deny loans to eligible borrowers who do not meet their lending standards. Lenders may, for example, deny loans to students attending proprietary (for profit, typically trade and vocational) institutions or schools with high loan default rates. They may also withdraw from the program.

Guaranty agencies, designated state or private not-for-profit entities, help administer FFELP by, for example, reimbursing lenders if borrowers fail to repay their loans. If an eligible borrower experiences difficulty obtaining a subsidized Stafford loan, guaranty agencies are required to provide one. The agencies may do so either directly or through a lender authorized to make LLR loans. Guaranty agencies must provide subsidized Stafford LLR loans to eligible students that have been denied a loan by two or more participating lenders. This requirement does not apply to unsubsidized Stafford loans.

Several major changes to the subsidized loan program may influence the availability of loans. The 1992 amendments, for example, reduced the interest revenue lenders can receive from subsidized loans, and the 1993 Student Loan Reform Act reduced the rate at which guaranty agencies generally reimburse lenders if borrowers fail to repay their loans. In addition, the 1993 act established FDSLP to provide loans to students from the Department of Education rather than from private lenders. This program is expected to provide at least 60 percent of federal student loans by the 1998-99 academic year. Such reductions in student loan revenue and competition from the direct student loan program could reduce the profitability of student loans and reduce lenders’ willingness to offer new loans to students.

Principal Findings

In response to our questionnaire and in discussions with us, participants in the subsidized Stafford loan program expressed differing views on the risk that eligible students could be denied loans through the end of fiscal year 1995. Most but not all guaranty agencies have arrangements in place to provide loans to students that have difficulty obtaining loans. The Department has several options for ensuring access if guaranty agencies are not able to do so without assistance.

Perceived Risk of Loan Access Problems

As some lenders become selective in making Stafford loans or stop participating in the program, many lenders and guaranty agencies expect some eligible subsidized Stafford loan borrowers to be denied loans by one or more lenders.

We asked program participants to describe the risk that 5 percent or more of eligible borrowers will be refused a subsidized Stafford loan by one or more lenders through the end of fiscal year 1995. Department officials with whom we spoke foresaw little or no risk that lender refusals to make loans would be widespread. Sallie Mae officials also doubted that as many as 5 percent of eligible borrowers would be denied a loan. The President of the Consumer Bankers Association said that there is “some” risk that 5 percent or more would be denied a loan.

The guaranty agencies that responded to our questionnaire had a wide range of views on this question. (See fig. 1.) Thirteen of these agencies rated the risk “moderate,” “great,” or “very great,” while 16 agencies said that there is “little or no risk.” The remaining 13 agencies indicated “some risk.” One responded that it did not know.

Some Risk (13) 10% Moderate Risk (4) 10% Great Risk (4)

Very Great Risk (5)

Concerns that some students will have difficulty obtaining access to loans evolve from lenders’ deciding to leave the program or to become selective in making student loans. Additional departures of lenders from FFELP would represent a continuation of a trend begun in the mid-1980s. For example, during fiscal years 1984-1986, between 11,000 and 12,000 lenders participated in FFELP. The number of participating lenders has declined each year since, in part reflecting the general trend of mergers and consolidations in the financial community. By fiscal year 1993 the Department counted fewer than 7,500 active lenders. In response to our questionnaire, 28 agencies said that one or more of their lenders—lenders whose loans they guarantee—had indicated they plan to stop making subsidized Stafford loans sometime in the future. Six agencies said that this included one of their five largest loan volume lenders. Three of these agencies referred to the same lender.

In addition to lenders that may stop making loans, concerns about loan access may arise if lenders choose to become more selective about making loans. Twenty agencies responded that one or more of their lenders planned to stop making loans to students attending institutions with student loan default rates that they—the lenders—consider too high. Most of these agencies said that 5 or fewer lenders would stop making loans, but one agency said that more than 200 lenders would stop.

Guaranty Agency Arrangements for Providing LLR Loans

Most guaranty agencies—40 of the 43 respondents—had arrangements to provide LLR loans to eligible students. These arrangements included agreements with state secondary markets or other participating lenders to provide loans. Through September 30, 1993, the volume of loans provided through these arrangements had been small. More than half of the agencies said that they did not guarantee any LLR loans in fiscal years 1992 or 1993. The 16 agencies that provided data on LLR loans they made in fiscal year 1993 had an aggregate LLR loan volume of $32 million—about 0.3 percent of the $12.5 billion of subsidized Stafford loans made in fiscal year 1993.

Twenty-six of the responding guaranty agencies responded to our question concerning the estimated capacity of their LLR arrangements. Twenty-two agencies estimated that they could have provided about $1.8 billion in LLR loans in fiscal year 1994. This represents an amount that is more than 50 times the total LLR loan volume for fiscal year 1993, and about one-eighth of total subsidized Stafford loan volume in fiscal year 1994. Three agencies cited “unlimited” LLR capacity. The largest guaranty agency, United Student Aid Funds, Inc., said that it has no set maximum on its LLR capacity.

Nearly all of the agencies indicated they had LLR arrangements, and two-thirds had plans that the Department had approved. Department officials said that six agencies had not submitted plans for approval. Plans from the remaining agencies were either pending approval, or the plans submitted had been denied approval and the agencies had not resubmitted their plans. (See table 1.)

Thirty-one guaranty agencies responded that they had agreements with lenders to provide LLR loans, but only 20 agencies had such agreements in writing. All LLR agreements but one either allow lenders to withdraw from their LLR commitments at any time or do not specify withdrawal terms. Four agreements specified that the arrangements applied for a specific time period, ranging from 12 to 18 months.

Department’s Plans to Ensure Access to Loans

Department officials told us they have several tools to help ensure that eligible borrowers have access to guaranteed student loans. They can assist guaranty agencies in recruiting lenders to provide LLR loans, direct Sallie Mae to make the loans, provide federal advances (interest-free loans) to guaranty agencies to enable them to make LLR loans, or make loans through the direct loan program.

The Department is also developing a data reporting mechanism that, according to Department officials, will improve its monitoring of guaranty agencies’ financial posture. It has proposed requiring each agency to submit annual 5-year financial projections.

The Department recognizes that with the implementation of FDSLP, FFELP will require fewer guaranty agencies as the number of direct loans increases in relation to the number of guaranteed loans. Therefore, the Department is—and plans to continue—encouraging consolidation among guaranty agencies through mergers and takeovers in the belief that greater efficiency can be achieved through economies of scale. During the process of this consolidation, lenders could be left without guarantee services being available. In anticipation that such a condition may materialize, in 1994 the Department contracted with the private, nonprofit Transitional Guaranty Agency to provide loan guarantee functions, as the Department determines necessary.

For those guaranty agencies having difficulty getting lenders to make student loans, particularly LLR loans, Department officials told us they can assist the agencies to recruit lenders or seek commitments from current LLR lenders to make more LLR loans. As of November 1, 1994, the Department had assisted one agency. According to Department and agency officials, it helped the California Student Aid Commission identify lenders to provide LLR loans to eligible borrowers at certain schools.

The Department and Sallie Mae signed an agreement through which Sallie Mae could provide up to $200 million of LLR loans through fiscal year 1995. This amount can be increased by mutual written agreement between the Department and Sallie Mae. As of December 6, 1994, Sallie Mae made 149 unsubsidized Stafford LLR loans and 62 subsidized Stafford loans that were guaranteed by the Texas guaranty agency.

Through the Higher Education Act of 1965, as amended, the Department can make federal advances to guaranty agencies to provide loan capital needed to make LLR loans. The statute also provides authority for Sallie Mae to make advances to guaranty agencies to enable them to make LLR loans. In addition, with the implementation of FDSLP, the Department has the option of making direct loans to students if guaranteed loans are unavailable.

Many uncertainties make predictions about the availability of loans in future years very difficult. For example, it is unclear whether guaranty agencies’ LLR arrangements will ensure access because many agencies’ LLR agreements allow lenders to withdraw at any time. It is also unclear to what extent postsecondary institutions will increase their participation in FDSLP. As institutions elect to participate in FDSLP, the demand for FFELP loans will decline, which may in turn encourage additional lenders to withdraw from the program or become more selective in making loans. On the other hand, the demand for LLR loans may decline if schools whose students are obtaining LLR loans switch to FDSLP. It is also uncertain how the actions of the 104th Congress, whose leadership has pledged to constrain federal spending, might affect federal student loan programs and the Department’s ability to ensure access.

Conclusions

Generally FFELP administrators foresaw little or no risk of widespread loan access problems through fiscal year 1995, the period covered by our review. However, several respondents to our questionnaire foresaw more risk. Guaranty agencies have arrangements to provide LLR loans to eligible students that encounter difficulties in obtaining a loan, although most of them allow lenders to discontinue their commitments with little or no advance notice. However, if such arrangements prove inadequate, the Department has several options to ensure students’ access to subsidized loans, which have proved adequate in the few instances in which they were used. It is too early to know with certainty if lenders will continue to provide subsidized loans to eligible borrowers, and this issue may need to be reevaluated in the future.

We did our review from March 1994 through January 1995 in accordance with generally accepted government auditing standards. As arranged with your offices, we did not obtain agency comments on this report, although we did discuss its contents with Department program officials. These officials generally agreed with the information presented in the report. They did offer some technical suggestions, which we incorporated where appropriate.

We are sending copies of this report to the Secretary of Education, appropriate congressional committees, and other interested parties.

Please call me at (202) 512-7014 if you or your staff have any questions regarding this report. Major contributors include Joseph J. Eglin, Jr., Assistant Director, (202) 512-7009; Charles M. Novak; Benjamin P. Pfeiffer; Dianne L. Whitman; and Aaron C. Chin.

Questionnaire Results

The U.S. General Accounting Office (GAO) is conducting a congressionally requested study on the availability of guaranteed student loans to borrowers. As part of this study, we are asking all guaranty agencies to complete this questionnaire. Specifically, we are asking your agency to provide information about the extent of lenders’ willingness to continue providing subsidized Stafford student loans and your agency’s lender-of-last-resort (LLR) program.

Please provide the following information about the person responsible for completing this questionnaire, so that we will know who to call to clarify information, if necessary.

This questionnaire should be completed by the person who is most knowledgeable about lender participation and lender-of-last-resort programs. If this person is unable to respond to all of the questions, he or she may wish to seek the help of others in completing this questionnaire. )

This questionnaire asks for information related to only subsidized Stafford loans and by federal fiscal year (FFY). Please include all guarantee activity for these loans by your agency, except guarantees for which your agency provides guarantee services on behalf of another agency.

1.Consider all of your agency’s guarantee activity, except guarantees for which your agency provides guarantee services on behalf of another agency. In total, about how many lenders either originated or purchased subsidized Stafford loans guaranteed by your agency during federal fiscal year (FFY) 1993 (October 1, 1992, through September 30, 1993)? (ENTER NUMBER)

If you have any questions, please feel free to call collect either Dianne Whitman at (206) 287-4822 or Ben Pfeiffer at (206) 287-4832.

Please return your completed questionnaire within 5 days of receipt, in the enclosed preaddresssed business reply envelope or by FAX. If the envelope is misplaced, please send your questionnaire to the address shown below.

2.

About how many of these lenders, if any, have informed your agency that they will stop providing subsidized Stafford loans sometime in the future? (ENTER NUMBER; IF NONE, ENTER ’0’)

Dianne Whitman U.S. General Accounting Office Jackson Federal Building, Room 1992 915 Second Avenue Seattle, WA 98174 _____________ lenders n=42 range: 0-500 mean=19 median=2 3.

Have any lenders informed your agency that, by the end of FFY 1995 (September 30, 1995), they will no longer be providing subsidized Stafford loans to students attending post-secondary institutions with default rates that the lenders regard as too high? (CHECK ONE; IF YES, ENTER NUMBER)

5.

How many lenders? (ENTER NUMBER)

2. [] Some risk ________ lenders n=18 range: 1-200 mean=21 median=4 3. [ ] Moderate risk 4. [ ] Great risk 5. [ ] Very great risk 6. [ ] Don’t know ____________________________________________________________________________________________________________ 6.

In your opinion, is each of the following factors listed below a major reason, minor reason, or not a reason why your lenders may either stop providing or provide fewer subsidized Stafford loans? (CHECK ONE FOR EACH FACTOR)

Extent of change in the program Increased complexity of the program Dissatisfaction with the Department of Education’s management of the program Reduced interest rate and special allowance payments from the Department of Education Reduced interest rate paid by new borrowers The 0.50 percent loan fee paid by lenders Reduction in claims reimbursement rate from 100 to 98 percent (except for LLR and exceptional performance loans)

Concern about implications of the Federal Trade Commission (FTC) holder rule Expectations that lenders’ market share will decline due to direct lending Concern about "windfall" profits provision Concern about audits of lenders and resulting liabilities Other (PLEASE SPECIFY) _________________________________________________ 8.

Does your agency plan to change its arrangements for insuring access to loans? (CHECK ONE)

Regardless of whether or not the Department of Education has approved your LLR plan, what arrangements, if any, does your agency currently have in place for ensuring that eligible borrowers who have been denied a subsidized Stafford loan will receive a loan? (CHECK ALL THAT APPLY)

1. [] Yes (CONTINUE)

2. [] No (GO TO QUESTION 10) [ ] We make these loans and hold them as lender-of-last- resort.

9. [ ] We make these loans as a lender-of-last-resort and sell them to the state secondary market.

Please indicate if your agency plans to make each of the following changes to its arrangements for insuring access to loans? (CHECK YES OR NO FOR EACH) The guaranty agency plans to ... [ ] We make these loans and sell them to a secondary market other than the state secondary market.

1. [] We have or arrangement(s) with the state or a state solicit additional lenders currently not participating in the LLR program. secondary market which makes these loans.

2. [] We have arrangement(s) with lenders other than those mentioned above who make these loans. --> How many lenders? arrange for commitment by lender(s) currently participating in the LLR program to increase the amount of LLR loans it is (they are) willing to make.

3. _________ lenders n=17 range: 1-14 mean=3 median=3 increase the capacity of the guaranty agency to make LLR loans.

4. [] We refer borrowers to lenders willing to make the loans turn our LLR responsibilities over to the Department of Education or another entity. without a lender-of-last-resort designation. [ ] We have other arrangements. (PLEASE SPECIFY)

5. do something else. (PLEASE SPECIFY) [ ] We currently have no arrangements in place.

10.

Did your agency provide guarantees for any lender-of-last-resort loans originated during either FFY 1992 or FFY 1993? (CHECK ONE) 1. [] Both FFY 1992 and 2. (CONTINUE)

3. 4. [] Neither FFY 1992 nor FFY 1993 (GO TO QUESTION 12) 11. What was the original gross principal dollar amount of lender-of-last resort loans that your agency guaranteed during FFY 1992 and during FFY 1993? If you cannot provide the data by federal fiscal year, please enter the dollar amount and the annual time period for which you do have information. (ENTER DOLLAR AMOUNT; IF NONE, ENTER ’O’)

FFY 1993 $ ___________ n=16 range: $0-$14,026,992 mean=$1,763,254 median=$172,847 sum=31,738,576 [ ] Can only provide for different time period, which is_____________________ [ ] Data not available for any time period 12. What is the projected gross dollar amount of your agency’s 13.

Consider your agency’s projected FFY 1994 dollar amount for subsidized Stafford loans. What is the maximum amount that could be handled through your agency’s current LLR loan arrangements? (ENTER DOLLAR AMOUNT; IF NONE, ENTER ’0’) $ ______________ n=26 range: $120,000-$1,200,000,000 mean=$83,260,670 median=$20,500,000 sum=$1,831,734,729 Also 3 agencies indicated "unlimited" and one indicated "no set maximum" [] Don’t know If the dollar amount of LLR loans were to become greater than could be handled through your agency’s current arrangements, please indicate if your agency would take each of the actions below and if yes, how likely it is, or not, that this action would succeed in increasing access to loans. (IF YES, CHECK ONE FOR EACH ACTION)

FOR EACH) Take Action?

Solicit additional lenders not currently in LLR program to provide loans Seek additional guaranty agency funding from non-federal sources to make loans directly Request that the state secondary market seek additional funding to enable it to either make LLR loans or purchase them from the guaranty agency Ask the Department of Education to advance funds to enable the guaranty agency to make these loans Ask the Department of Education to request that Sallie Mae make these loans Ask the Department of Education to make the loans directly Ask the Department of Education for other forms of assistance (PLEASE SPECIFY) _______________________ Make other arrangement(s): (PLEASE SPECIFY) ________________________ Does your agency currently have any verbal (informal) or written (either informal or formal) agreements for LLR loans with participating lenders? (CHECK ONE)

20.

In any of these written agreements, can your lenders refuse to make a lender-of-last-resort loan to an eligible borrower: (CHECK ONE FOR EACH; IF NOT SPECIFIED, CHECK ’N/S’) [] Verbal only (GO TO QUESTION 21) [ ] Written only (CONTINUE) [] Written and verbal (CONTINUE)

1. ... when the loan amount is below a minimum level? [] Neither (GO TO QUESTION 21)

2.

16. With how many participating lenders does your agency have written agreements for lender-of-last-resort loans? (ENTER NUMBER) ... when the loan would cause the lender to exceed a limit on the maximum number of loans? _____________ lenders n=19 range: 1-14 mean=2 median=1 [ ] Check here if this is an estimate [ ] Data not available 3. ... when the loan would cause the lender to exceed maximum amount of lender-of- last-resort loans it will make?

Do the terms of any of these written agreements allow the lenders to withdraw from the agreements at any time? (CHECK ONE)

4. ... under an other condition? (PLEASE SPECIFY) [] Yes, in all cases [ ] Yes, in some cases [ ] No, may not withdraw [ ] Withdrawal terms not specified 21.

Do any of these written agreements specify a length of time to which the terms apply? (CHECK ONE)

Please provide below any comments that you have about this study, this questionnaire, or the LLR program.

What proportion specify a length of time? (ENTER PERCENTAGE) [] No (GO TO QUESTION 20)

For what length of time do most of these written agreements apply? (ENTER NUMBER OF YEARS)

THANK YOU FOR YOUR HELP!

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