[ ED Homepage ] Last Updated -- March 2, 1998, (lyp)
Mr. Chairman and Members of the Subcommittee,
Good afternoon, Mr. Chairman and members of the Subcommittee. I am pleased to be here today to respond to your request for the views of the Department on three bills being considered by your Subcommittee, namely:
As a primary source of student loans, our Direct Loan and FFEL programs have enabled millions of students to enroll in postsecondary education. Through the Direct Loan Program, in which Federal loans are directly disbursed to students by the institutions of higher education they attend, we have made over $26 billion in loans since the program began in 1994. Through the FFEL program (and its predecessors), over $240 billion in loans have been made since 1965. Under the FFEL program, loans are made to eligible students by participating lenders using private loan capital, and repayment of loans is insured against loss by guaranty agencies using federal reserve funds. The guaranty agencies in turn are reinsured by, and receive other funds from, the Department.
This year, the Department of Education expects to provide about $33 billion to more than 9 million students, including over $11.2 billion in Direct Loans to nearly 3.1 million students and almost $20.5 billion in FFEL loans to nearly 5.6 million students. Of the approximately $286 billion in loans made to students and their parents through the Department's loan programs (including $20 billion in loans made through the Federal Perkins Loan Program since 1959), approximately $162 billion are outstanding. Of the outstanding amount, about $73 billion are in repayment, another $64 billion are held by students still in school, and about $25 billion are in default.
Ensuring the effective and efficient delivery of these loans is one of the Department's highest priorities. Due to the size of these programs, we know that problems of waste, fraud, and abuse occur. The $25 billion in defaults constitute about 11 percent of $222 billion in cumulative loan volume, not including loans to students still in school. We believe, however, that defaults can, and must, be further reduced. We know that many of the defaulted borrowers are earning enough money to repay their debts. Therefore, the Department is committed to reducing defaulted loans as well as improving our collection efforts.
Default Reduction
The Department is taking vigorous steps to reduce the default rate on student loans and, consequently, the amount that needs to be collected. These efforts have reduced the FFEL cohort default rate from 22.4 percent in 1990 to 10.4 percent in 1995. This dramatic decline over the past six years has been facilitated by the adoption of legislation and policies supported by both the Congress and the Department.
Many parts of the Office of Postsecondary Education have contributed to our efforts to reduce defaults. The Guarantor and Lender Oversight Service (GLOS) helps to ensure that lenders and guaranty agencies comply with due diligence requirements and provide pre-claims assistance, among other efforts. The Institutional Participation and Oversight Service (IPOS) has, through its gatekeeping initiatives, tightened financial and administrative requirements that schools must meet in order to participate in the loan programs. The Department has also used our computer records of student aid recipients to deny additional aid under Title IV of the Higher Education Act to aid applicants with unresolved defaulted student loans. Over a recent 18 month period, the Department identified more than 125,000 student aid applicants as prior defaulters, helping to prevent these ineligible students from receiving about $300 million in loans.
While the vast majority of borrowers have repaid, or are currently repaying, their student loans, some borrowers do default. The Department is determined that defaulters fulfill their obligations to repay their student loans.
Increased Collections
The Debt Collection Service (DCS) is the organizational unit within the Department that has responsibility for collecting on defaulted student loans. Over the past 20 years and more, initiatives taken by the Department and DCS have substantially improved the effectiveness of our collection efforts.
Over the past six years, the Department has collected almost $4.5 billion on defaulted loans. Our two most effective tools are the federal income tax refund offset that works through cooperation with the Department of the Treasury and the use of private collection agencies. In 1986, the Department began referring to Treasury eligible debts that we had tried unsuccessfully to collect using other available tools. Using our data, the Treasury Offset Program (TOP) has been offsetting federal income tax refunds and other payments and has collected about $3.2 billion over the past six years, including about $500 million in FY 1997. Since 1979, we have contracted with private debt collection agencies and currently have 18 debt collection contracts. Over the past six years, private collection agencies have generated $766 million in collections.
Although the Department has been successful in collecting substantial amounts of defaulted student loans, we believe that obtaining some additional collection tools would increase our effectiveness and help taxpayers. In our proposals for reauthorization of the Higher Education Act, for example, we are recommending that states be required to share information with the Department about their employees who have defaulted on student loans. The legislative proposals before this Subcommittee also have a number of promising tools.
H.R. 2063, The Debt Collection Wage Information Act
One of the biggest obstacles to collecting defaulted student loans is the problem of locating defaulters. After leaving school, many borrowers relocate, often to increase their opportunities for employment.
The Debt Collection Wage Information Act offers an innovative approach to locating
defaulters. This legislation would allow the Department to use the National Directory of New Hires, under development by the Department of Health and Human Services, to identify and locate their employers. The National Directory of New Hires is a database of all new hires and will also include quarterly wage data from state employment security agencies and other entities such as the federal government. Once defaulters are identified through their employers, the Department could use existing authority to garnish their wages, following the appropriate due process requirements.
The Department has found wage garnishment to be an effective tool in collecting defaulted student loans. Over 53,000 defaulted loans are now in garnishment status, and we have collected about $34 million through garnishment since 1992.
The Department supports H.R. 2063, with some technical and timing modifications to prevent disruption to the development of the National Directory of New Hires, and believes it would increase collections on defaulted student debt. This legislation could allow administrative wage garnishment to surpass TOP as the most effective Federal debt collection tool.
H.R. 2347, The Federal Benefits Verification and Integrity Act
Although most applicants for student aid accurately report data needed to determine their eligibility, some provide incorrect information, intentionally or unintentionally. According to the Department's Inspector General (IG), the accuracy of financial aid awards, including both grants and loans, could be improved if the Department had access to correct income data. A recent IG report found that 102,000 students were over-awarded $109 million in Federal Pell Grants for award year 1995-96 simply because students failed to report or underreported their income on the Free Application for Federal Student Aid. This type of error results because institutions of higher education cannot verify data reported by applicants without requesting copies of their or their parents' tax forms.
H.R. 2347, the Federal Benefit Verification and Integrity Act, could help reduce data errors and allocate resources more fairly. All applicants for Federal student financial assistance should be informed that their data may be shared with other Federal agencies to verify their eligibility, with appropriate attention to protecting the privacy of their data. Under current law, schools must require at least 30 percent of their students who receive federal student aid to verify the information reported on their financial aid application by providing copies of the student's and parents' federal tax returns. Several studies have shown that the cost effectiveness of this approach is questionable, and the burden upon the schools is substantial. A bill that requires up front verification would save government resources before the aid funds are disbursed. It would be an improvement over the current approach that identifies problems afterwards and then tries to collect funds that should never have been disbursed. The Department supports the goal of this bill and hopes to work with the Subcommittee to clarify some of the bill's provisions.
The Government Waste, Fraud, and Error Reduction Act
The Department received Mr. Horn's unnumbered draft bill, the Government Waste, Fraud, and Error Reduction Act, this past Monday and has begun a careful review of it. We believe many of its provisions are useful, and in some cases, overdue.
The Department, however, has a number of concerns with this draft bill, mainly regarding loan sales. We believe the bill must give the Secretary of Education flexibility to conduct loan sales only if they are in the best financial interest of the government and can be done in a way that does not undermine our program mission.
The Department has found that uncollected defaulted loans become more valuable assets over time because defaulters' ability to pay increases. The Department, by virtue of being a Federal agency, also has debt collection tools such as the IRS offset and wage garnishment that are not available to the private sector. If the price the market would offer for loans is well below the level we know--from experience--that the Department can collect by holding them, these assets should not be sold. We would need to conduct an asset valuation to make this determination.
Mandatory loan sales after one year of delinquency could also interfere with our program objective of enabling borrowers to manage their debt burden through loan consolidation and income-contingent repayment. These options, available to borrowers under the Higher Education Act, are key ways in which the government avoids penalizing students who have taken the financial risk of gain from a college education, but for whom it may not materialize. Income-contingent repayment and loan consolidation have helped many thousands of delinquent borrowers over the past several years to come back into repayment status. We are currently reviewing with the Office of Management and Budget whether selling delinquent student loan debt can be accomplished without undermining this important Administration priority.
Conclusion
Since the Department finds much merit in legislative proposals such as these, we hope to work with this Subcommittee in refining them. The Department of Education strongly supported The Debt Collection Improvement Act of 1996, and today offer our support for the goals of the two bills introduced by Representative Maloney and to many of the valuable ideas reflected in Representative Horn's proposal. I thank you for the opportunity to share our views with you on these most important matters and would be happy to answer any questions you may have.
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