refunds. This has resulted in some $259 million in collections through FY 1987 on approximately 277,000 accounts. The Department expects to collect an additional $131 million in FY 1988. --Collection Services. ED has expanded contracts with private sector collection services to collect on defaulted debts. More than $62 million was collected in FY 1987 and it is projected that approximately $84 million will be collected in FY 1988. --Write-offs. ED is currently developing realistic write-off policies to ensure that appropriate accounts are held in an inactive file for possible Subsequent offset against future benefits, refunds or other Federal payments. Accounts that are not collectable accounts are written off and thus considered as taxable income of the borrower, resulting in an increased tax liability for such borrowers. 1989 Budget Proposal Gross obligations of $3.338 billion are expected to be incurred for projected interest benefits; special allowances; default claims; related contract collection costs; and death, disability and bankruptcy claims. This compares with an expected $3.535 billion in total obligations for 1988. Although gross obligations are expected to decline, net obligations, which more accurately reflect program costs by accounting for collections and other receipts, increase from an estimated $2.629 billion in 1988 to $2.703 billion in 1989. The Department proposes several changes to the regular loan program that Many of the Department's accountability initiatives will reduce significantly the cost of defaults. These accountability initiatives, which affect PLUS and SLS loans, and several other Federal student aid programs, are discussed in the account summary. Those proposals in the summary that require legislative changes include the following: --Removing restrictions from the National Student Loan Data System; --Improvements in the exchange of information between schools, lenders, guarantee agencies and the Department; 85 --Elimination of farm, business and home assets from need analysis; and --Repeal of the "ability-to-benefit" eligibility option. Other legislative proposals designed to reduce defaults in the GSL program include the following: o Peduced Loan Insurance--Guarantee agency insurance of both regular, SLS, o Reduced Reinsurance--The Federal Government's reinsurance of new guarantee o Expanded Referrals to IRS. Due to the overwhelming success of the IRS o Rehabilitation of Defaulted Loans. The pilot program to establish the o State Garnishment Law Requirements. The statutorily defined garnishment program is very restrictive; agencies currently with garnishment programs do not even meet its requirements. Furthermore, the statute does not require an agency to implement a garnishment program; it only requires that the agency obtain the authority to garnish wages to receive an increased subsidy. The Administration is therefore proposing to repeal that program since guarantee agencies would still be able to establish effective garnishment programs as a part of their overall collection efforts. 1/1988 and 1989 estimates assume adoption of proposed legislative changes. 2/ Includes interest collections and defaulted FISL loans. Net Savings to the Activity Resulting from Proposed Policy 87 Interest Subsidies. SLS loans are made to undergraduate students and to o Special allowance This supplemental interest payment to lenders varies with 52-day Treasury bill rates. Quarterly payments to lenders (based on outstanding loan volume) assure that, when added to the borrower's interest, the lender receives a total variable yield equal to the quarterly average of 52-week Treasury bill rates plus 3.25 percent (if the Treasury bill rate plus 3.25 percent exceeds 12.5 percent for any 12-month period), or to the borrower's interest rate, whichever is greater. Because Treasury bill rates are expected to remain below 9.25 percent in 1987-92, no special allowance payments to lenders are projected under current law. Insurance costs. This activity promotes the availability of PLUS/SLS loans for postsecondary education by providing Federal reinsurance to participating State and private nonprofit guarantee agencies for up to 100 percent of their losses in insuring commercial banks and other lenders against borrower default on PLUS/SLS loans. Based on annual default claim experience, an agency's reinsurance rate can drop to 90 or 80 percent. The Department of Education also reimburses guarantee agencies for 100 percent of their losses due to borrower death, disability and bankruptcy. The guarantee agencies promote lender participation and provide various services to lenders. They must also require collection diligence on the part of lenders as a condition of paying default claims. Once a claim has been paid to a lender, the guarantee agencies collect on defaulted accounts. They return to the Secretary about 65 percent of their collections, depending upon the level of Federal reinsurance and the percentage retained to meet administrative expenses (by statute, 30 or 35 percent of collections may be retained for this purpose). Beginning in 1989 guarantee agencies will be required under current authority to turn over to the Department some or all of the defaulted accounts on which their collection efforts have not been successful. The Department will then attempt to collect on these accounts and will incur small contract collections costs for this activity. Accomplishments The Federal PLUS/SLS reinsurance programs have successfully promoted the availability of PLUS/SLS loans for 676,000 students and their parents. Guarantee agencies now operate the PLUS/SLS loan programs in all 50 States, American Samoa, the District of Columbia, Guam, the Northern Mariana Islands, Puerto Rico, the Trust Territory of the Pacific Islands and the Virgin Islands. 1989 Budget Proposal Gross loan obligations of $62.9 million are expected for the PLUS/SLS program in FY 1989. This is an increase of $18 million from the expected FY 1988 level of $44.6 million. As with regular loans, PLUS/SLS net obligations, which reflect collections and other receipts, are expected to increase from $40.4 million in 1988 to $56.2 million in 1989. 89 |