Federal Student Loans: Steps Needed to Improve Monitoring School Default Rates

What the GAO found

Under federal law, schools can lose their ability to participate in federal student aid programs if a significant percentage of their borrowers fail to repay their student loans within the first 3 years of repayment. To manage these 3-year default rates, some schools hired consultants who encouraged borrowers with late payments to suspend their loans, an option that allows borrowers to temporarily defer payments. Although forbearance may help borrowers avoid defaults in the short term, it increases their costs over time and reduces the usefulness of the 3-year default rate as a tool for holding schools accountable. At five of the nine selected defect management consultants (which served about 800 out of 1,300 schools), GAO identified examples where forbearance was encouraged over other potentially more beneficial options to help borrowers avoid default, such as repayment plans that base monthly payments on income. Based on a review of consultant communications, GAO found that four of these consultants were providing inaccurate or incomplete information to borrowers about their repayment options in some cases. 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, an increase of 17%. GAO’s analysis of Department of Education (Education) data found that 68% of borrowers who started repaying their loans in 2013 had loans forbearance for part of the first 3 years, including 20% ​​who had loans in forbearance for 18 months or more (see figure). Long-term forbearance borrowers defaulted more often in the fourth year of repayment, when schools are not responsible for defaults, suggesting they may have delayed — not prevented — default. Legislative changes to strengthen the liability of schools in the event of default could help further protect borrowers and taxpayers.

Borrowers in abstention during the first 3 years of repayment, 2009 to 2013

The ability of education to oversee the strategies that schools and their consultants use to manage their dropout rates is limited. The education strategic plan calls for protecting borrowers against unfair and deceptive practices; however, Education states that it does not have explicit statutory authority to require that information that schools or their consultants provide to borrowers after they leave school regarding loan repayment and deferral be accurate and complete. Therefore, schools and consultants do not always provide accurate and complete information to borrowers. Additionally, Education does not report the number of schools sanctioned for high default rates, which limits transparency about the usefulness of the 3-year default rate to Congress and the public.

Why GAO Did This Study

As of September 2017, $149 billion of nearly $1.4 trillion in outstanding federal student loans was in default. The GAO was asked to examine schools’ strategies to prevent students from dropping out and education monitoring of these efforts.

This report examines (1) how schools work with borrowers to manage default rates and how these strategies affect borrowers and schools’ liability in the event of default; and (2) the extent to which Education oversees the strategies that schools and their failure management consultants use to manage school failure rates. The GAO analyzed education data on student loans that entered repayment from fiscal years 2009 through 2013, the most recent data at the time of this analysis; reviewed Education documentation and a non-generalizable sample of nine default management consultants selected based on the number of schools served (approximately 1,300 schools as of March 2017); reviewed relevant federal laws and regulations; and interviewed education officials.

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