Page images
PDF
EPUB
[blocks in formation]

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
are designed to reduce the loan default rate. The gross default rate is
expected to increase from 13.1 in 1987 to 14.4% in 1989. This unacceptably
high default rate will require American taxpayers to pay more than $1.6
billion to cover defaults on loans. These excessive costs threaten to
undermine public confidence in the GSL program and redirect scarce public
resources from other education priorities.

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

[blocks in formation]

--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,
PLUS and Consolidation loans against borrower default would be limited to
90 percent of principal and interest. Thus, participating lenders would
be required to bear a 10 percent risk of loss in the event of default.
This would also create a tangible incentive for lenders to pursue diligent
collection efforts before filing default claims.

o Reduced Reinsurance--The Federal Government's reinsurance of new guarantee
agency-insured regular, SLS, PLUS and Consolidation loans would be limited
to 90 percent of default claims, with the reinsurance level for any year
dropping to 80 percent or 70 percent depending on the ratio of each
agency's cumulative net defaults (cumulative defaults minus cumulative
collections on those defaulted loans) to the cumulative amount of loans
in repayment at the end of the previous year. The amount paid by the
guarantee agencies in reinsurance fees for any year would be based on a
similar ratio. These measures are designed to strengthen the role of
guarantee agencies in reducing defaults.

o Expanded Referrals to IRS. Due to the overwhelming success of the IRS
tax refund offset in its first year, the number of defaulted loans reported
to the IRS for Federal income tax offset has been expanded. Collections
via tax refund offset are expected to increase from $122 million in 1985
to $137 million in 1987 and to $131 million in 1988.

o Rehabilitation of Defaulted Loans. The pilot program to establish the
feasibility of selling ("rehabilitating") certain defaulted loans on which
the defaulter is making payments would be repealed. The statute stipulates
the exact amount to be paid to the Secretary in the case of rehabilitation
and this amount may not be appropriate under varying credit conditions.
Also, the costly benefits and privileges (e.g., deferment rights, special
allowance payments) of non-defaulted loans would be restored to a
rehabilitated loan.

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

[blocks in formation]

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.

[blocks in formation]

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
(dollars in millions)

[blocks in formation]

87

[merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][ocr errors][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small]

Interest Subsidies. SLS loans are made to undergraduate students and to
graduate and professional students. PLUS loans are made to parents of
dependent students. Otherwise, the loan terms are the same. Both SLS and
PLUS limits are $4,000 annual and $20,000 cumulative. There is no need
analysis requirement, although borrowing cannot exceed cost of attendance
minus other aid. For any award year (July 1 June 30) the interest rate
is the lesser of the average 52-week Treasury bill rate for the 12 months
preceding June 1 of the prior award year plus 3.25 percent or 12 percent.
The Federal Government does not pay the in-school/grace/deferment interest.
Repayment of loan principal begins within sixty days of disbursement unless
the borrower is eligible for deferment. No origination fee is assessed.
The purpose of Federal interest subsidization of PLUS/SLS loans is to promote
the availability of relatively low-interest postsecondary education loans
to students and their parents from commercial banks and other lenders.
Although PLUS/SLS borrowers are less subsidized than regular GSL borrowers,
the current interest rate applicable to PLUS/SLS loans (based on the
preceding year's 52-week Treasury bill rate plus 3.25 percent) is still
lower than market interest rates on comparable loans.

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

[merged small][merged small][merged small][ocr errors][merged small]

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

« PreviousContinue »