A r c h i v e d  I n f o r m a t i o n

Chapter 502

I. Program Profile

Purpose: To help financially needy undergraduate and graduate students meet the costs of their education at participating postsecondary institutions by encouraging private lenders to provide federally subsidized and insured long-term loans to students and their parents.

Funding History

II. Program Information and Analysis

Population Targeting and Services

FFELs are available to help students who attend participating postsecondary institutions and meet the applicable eligibility criteria. Students receiving a subsidized Stafford Loan must demonstrate financial need based on the cost of education and the ability of the student or the student's family to pay this cost. The calculation of need is based on a Congressionally specified formula that analyzes the financial data of the student and/or the student's family. Unsubsidized SLS and PLUS loans are not need based and may be used to offset the student or parent borrower's expected contributions towards the cost of education.

Participation: In FY 1993, the amount of loans guaranteed by the FFEL programs was $6.2 billion. The total number of loans was 5.8 million. This compares with FY 1982 loan volume of $6.2 billion and 2.8 million individual loans. Table 1 shows the loan amount and number of loans for four of the individual FFEL programs.

1/ Due to rounding.

Distribution By Sector: Among undergraduate borrowers, the largest percentage of awards went to those attending four-year public institutions. Borrowers attending proprietary institutions received a somewhat lower percentage of loans as did those attending private, non-profit institutions. However, borrowers attending private institutions received the largest percentage of loan dollars because of higher costs and larger average loan amount.

Distribution By Dependency Status And Income Level: The percentage distribution of Stafford Loans by type of student and family income for the 1989-90 award year was as follows:

• Among dependent undergraduates, about 53 percent of Stafford Loan recipients had family incomes of less than $30,000 and 47 percent had family incomes greater than $30,000.

• Independent undergraduates accounted for about 56 percent of the Stafford Loans and about 64 percent of the loan dollars.

• Average Stafford Loan awards did not vary much by income level except for independent students who had an average loan amount that was roughly $1100 more than that of dependent students.

Program Administration

The program uses private loan capital supplied primarily by commercial lenders. Lenders receive interest subsidies and special allowance payments when applicable on eligible Stafford Loans to offset the below-market interest rate they charge for a Stafford Loan. Lenders do not receive interest benefits for unsubsidized Stafford or PLUS loans but may receive special allowance payments if the variable rate exceeds the applicable cap. Borrowers generally have a maximum of 10 years to repay an FFEL loan, but may receive periods of deferment or forbearance and income-sensitive or graduated-repayment options.

These loans are guaranteed by individual State or private, nonprofit guaranty agencies and are reinsured by the Federal government. Beginning with FY 1994, an administrative cost allowance (ACA) will be paid out of Direct Loan transition costs and will no longer be part of the FFEL account. Also, the reinsurance fees previously paid by guaranty agencies are eliminated.

Maximum Loan Limits: Under the Stafford Loan program, first-year undergraduate students may borrow up to $2,625 per year; second-year undergraduate students may borrow up to $3,500; third-, fourth-and fifth-year students may borrow up to $5,500; graduate or professional students may borrow up to $8,500 per year. The aggregate maximum borrowing limit for an undergraduate student in the Stafford Loan program is $23,000; graduate and professional students have an aggregate maximum borrowing limit of $65,500 which includes amounts borrowed as an undergraduate.

Under the PLUS Loan program, for loans disbursed prior to July 1, 1993, a parent may borrow an amount up to the cost of attendance. For PLUS loans in which the first disbursement is on or after July 1, 1993, the annual and aggregate loans limits have been eliminated. These loans may equal the cost of attendance less other financial aid.

For SLS loans disbursed on or after July 1, 1993, the limit is $4,000 for first or second year and $5,000 for each additional full academic year in the program. If the program remaining is less than a full year, students may borrow up to $3,325 if at least two-thirds of the year remains, and up to $1,675 if at least one third but less than two thirds of a year remains. For graduate or professional students the new limit is $10,000 per academic year with an aggregate limit of $73,000 including undergraduate SLS borrowing. This information for new loans disbursed as of July 1, 1993, is summarized in Table 2.

Source: III.1.

Student Loan Defaults: During FY 1993, the Department continued its initiative to reduce defaults. The major results of that initiative are shown below:

• historically, default costs have increased about ten fold since FY 1981, rising from $235 million to an estimated $2.6 billion in FY 1993.

• default costs represented a marked reduction from the $3.2 billion of defaults experienced in FY 1991.

• the Department of Education has increased collections on defaulted loans from $65 million in FY 1981 to an estimated $1.00 billion in FY 1993. Approximately $14.9 billion in defaulted FFELs was outstanding at the end of FY 1993.

• default rates vary by the type and control of institution attended. The FY 1993 cohort contains all borrowers who entered repayment status in FY 1992. The FY 1992 cohort default rate is the percentage of this cohort that defaulted in FY 1992 or FY 1993. The FY 1992 cohort rates, which are the most recent available, are:

Outcomes

• When the FY 1989 cohort default rate is used, 81 schools had default rates above 60 percent. In contrast, 3,428 schools (excluding foreign and unclassified) had default rates below 20 percent, accounting for 68 percent of the schools. These figures exclude those postsecondary institutions with fewer than 30 borrowers entering repayment status in FY 1989.

• During the 1989-90 award year, graduate and professional students received 12.2 percent of Federal Family Education Loans. However, because of their higher costs, this group of borrowers received 25.9 percent of FFEL dollars. The average loan for graduate borrowers was $6,858, compared with $3,232 for all borrowers in the FFEL program.

• defaulters were four times more likely than non-defaulters to begin their postsecondary education without a high school diploma. Of this group of defaulters, approximately 40 percent had not received a general educational development (GED) certificate.

• defaulters were more than twice as likely as non-defaulters to have dropped out of their postsecondary program.

• defaulters were more than twice as likely to be unemployed or underemployed (earning less than $10,000) than non- defaulters at the time when repayment was scheduled to begin.

• defaulters had fewer and smaller loans, which indicates that defaulters attended postsecondary institutions for shorter periods or went to relatively inexpensive institutions. This statistic may be explained in part by the fact that a significantly larger percentage of defaulters than non-defaulters attended proprietary institutions with programs lasting no more than two years and usually less (III.2).

During FY 1991, the General Accounting Office addressed aspects of the Federal Family Education Loan Program.

In Stafford Student Loans: Millions of Dollars in Loans Awarded to Ineligible Borrowers, the GAO found that ED did not use the Stafford Loan tape dump to identify student loan defaulters who were trying to obtain new loans or determine whether borrowers had exceeded legal loan limits. Their analysis indicated that loan defaulters may have received $109 million in new loans and that students received millions of dollars in loans over the legal loan limits (III.3).

In Student Loans: Characteristics of Defaulted Borrowers in the Stafford Student Loan Program, the GAO identified nine defaulter characteristics most frequently cited in published studies of defaults. These are:

1. attended vocational/trade schools
   
2. had low incomes
   
3. had little financial support
   
4. had minority backgrounds
   
5. lacked high school diplomas
   
6. failed to complete education programs
   
7. attended school for one year or less
   
8. borrowed small amounts
   
9. were unemployed when defaulting.

Defaulter characteristics cannot be used to predict who will default. An often misunderstood fact about default is that while most defaulters have certain characteristics, the majority of borrowers with these characteristics do not default on their loans (III.4).

In Analysis of Factors Related to Default, Mathematica Policy Research, Inc., found three key results from their analyses of the 1986-1987 NPSAS study (III.6):

• A borrower's ability to pay is a powerful determinant of default. The likelihood of default is greater for borrowers whose incomes after leaving school are lower, whose monthly FEEL payments are higher, and who have more dependents.

• Default rates differ significantly by level of educational attainment. Borrowers who did not complete high school and borrowers who did not complete their postsecondary education programs were more likely to default. After adjustment for other factors, including post-school earnings, borrowers who had most recently attended proprietary or two-year schools were also more likely to default. Differences in (adjusted) default rates between borrowers attending proprietary or two-year schools and borrowers attending four-year schools are greater when the effect of school type on post-school earnings is taken into account.

• Default rates differ significantly by the characteristics of borrowers. Black and Hispanic borrowers were more likely to default, after income, education, and other individual characteristics were controlled for.

Management Improvement Strategies

• authority to direct a guaranty agency to promptly assign defaulted loans when it is determined that such action will protect the Federal financial interest;

• the preservation and recovery of guaranty reserves by clarifying that they are the property of the United States. The Department has broad authority to preserve or recover such reserves where there has been misuse or improper expenditure of reserve funds. The Secretary also has the authority to require a guaranty agency to return any portion of an agency's reserve fund that the Secretary determines is unnecessary for paying the program expenses and contingent liabilities of the agency.

• authority to terminate a guaranty agency's reinsurance agreement if the Secretary determines that such action best protects the Federal fiscal interest.

• authority to make emergency advances to guaranty agencies to meet their immediate cash needs, including uninterrupted payment of claim to lenders, as well as to assist them in fulfilling their lender-of-last-resort obligations.

• a variety of revenue-sharing and risk-sharing provisions including loan fees from lenders and from Sallie Mae, reduced reinsurance payments to guaranty agencies, and a fee to be paid by States whose schools have default rates exceeding 20 percent.

The Department also published a booklet, Reducing Student Loan Defaults: A Plan for Action (III.5). The booklet describes the rising cost of defaults, which types of students default, and the most common reasons for default. It also contains recommendations on what steps can be taken by postsecondary institutions, lenders, guarantee agencies, accrediting agencies, States, and the Federal Government to reduce defaults. The booklet recommends that:

• schools counsel all students on their loan responsibilities, work closely with lenders to reduce defaults, improve the quality of their education, and establish good job placement programs;

• lenders communicate effectively with student borrowers during all phases of the loan process, use effective collection techniques, and carefully monitor organizations that service Federal Family Education Loans;

• state guaranty agencies monitor lenders and postsecondary institutions and help enforce program laws and regulations, help institutions in their default reduction efforts, help lenders collect repayments before loans default, and diligently pursue collections of loans that default (III.5).

As part of the Department's quality-control program, mandatory verification continued to be employed in FY 1993 to include, along with other Federal student aid programs, the FFEL program. Nationally, an overall average of 30 percent of all financial aid applications are selected for verification. Verification requires submission by students (and parents, if dependent) and review by institutions of documentation for key items in the student aid application form (such as tax forms and asset estimates). Verification and institutional documentation requirements reduce student misreporting in the program.

The Department is working on the implemention of the National Student Loan Data System. The System, when completed, will contain data on all FEEL borrowers and will allow ED to detect overpayments and ineligible borrowers before payments are made.

In 1990, the Department released a study entitled Integrated Quality Control Measurement Project. The study found that the overcertification rate attributable to institutional error in the Stafford Loan program is 6.0 percent of the dollars certified, while the overcertification rate attributable to student error is only 4.2 percent of total certification dollars (III.7).

III. Sources of Information

1. Program files.

2. National Postsecondary Student Aid Study 1989-90 school year. Data Files. (Washington, DC: U.S. Department of Education, National Center for Education Statistics, 1991.)

3. Stafford Student Loans: Millions of Dollars in Loans Awarded to Ineligible Borrowers (Washington, DC: General Accounting Office, December 1990).

4. Student Loans: Characteristics of Defaulted Borrowers in the Stafford Student Loan Program (Washington, DC: General Accounting Office, April 1991).

5. Reducing Student Loan Defaults: A Plan for Action (Washington DC: U.S. Department of Education, August 1990).

6. Analysis of Factors Related to Default (Washington, DC: Mathematica Policy Research, Inc., April 1991).

7. Integrated Quality Control Measurement Project, Executive Summary (Washington, DC: Price Waterhouse, Inc., September 1990).

IV. Planned Studies

V. Contacts for Further Information

Program Operations:

Gary Beanblossom, (202) 708-8242

Program Studies:

Dan Morrissey, (202) 401-0182

[Federal Pell Grant Program]

[Federal Supplemental Educational Opportunity Grant Program]