Examination of the Financial Statements of the Guaranteed Student Loan Fund for FY 1976

Published by the Government Accountability Office on 1977-09-22.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                         WMiHINGTQN                FEGIONAL           OFFICE
                                            F I FTH    FLOOR

                                   803   WEST
                                                                      22046    040 181
Ns. Mary Jane Calals
Acting  Assocxate   Commlssloner
Offlce  of Guaranteed   Student Loans
Offxce of Edxatlon
Department   of Health,  Education,  and Welfare
Dear Ms. Calais:
       We have completed    our review of the flnanclal          statements
of the Guaranteed     Student Loan Fund (Fund) for the fxscal             year
ended June 30, 19/6, and the transltlon           quarter    ended
September 30, 1976.       A congressional    report     ~1.11 not be Issued
until   we complete the fiscal      year 1977 audit.        That report     ~111
present   the results    of our examlnatlons      of the Guaranteed
Student Loan Fund flnanclal       statemercs    for fiscal      years 1976
and 1977.     ,
        Enclosure    I presents    certain    matters   we have ldentifled
in thus and prxor yearsp which In our VICW requlro                Tnanagement
attention        While we recognlz e that action         on s&me ntatters   mugt
awalt lnstallatlon        of the new management lnformatlon         system,
we Ltrge that action       be taken now where possible          As you hnQtip
many needed xmprovements         in the Fund's operations       are closely
associated      with the systemis       lmplementatlon.
       Considering    the results      of the audnt lust completed,            we
antxapate      our oplnxon     on the Fund's fiscal          years 1976 and 1977
statements     will  again be adverse.          An overall      conclusion    based
on this and prior       years'   audit work 1s that the Fundis auto-
mated records do not provide           reliable     information       to admlnlster
the program nor necessary,          detailed     accotantlnq     records adequate
to support     the fxnanclal     statements.
        Our report     to the Secretary      of Health,      Education,     and
Welfare, ‘Collection        Efforts,  Not Reeplng Pace with Grownng
Number of Defaulted         Student  Loans,'    B-115604 issued August 11,
1977, contains       recommendations     whlcn are also pertinent            to the
Guaranteed      Student Loan Fund's financial           statements,        Specs-
focally     improved collection      procedures      to process defaulted
student    loans to collection,       referral     for legal      action,*   or
termlnatlon    would materially   improve the rellablllty        of the
defaulted   loans receivable    and accrued Interest      receivable
accounts by removing     known uncollectable   amounts from these
       We    would appreciate     being advised of any actions      taken In
response      to the recommendations     presented    in the enclosure.
We would      be happy to meet with you to discuss         these matters.
We also      would like   to express our appreciation        for the many
courtesies       extended   to the staff  during   the audit
                                               SIncerely   yourb,

                                               David P, Sorando
                                               Regional lylanager

    ENCLOSURE I                                                               ENCLOSURE I

            Malntalnlng    subsldlary     ledgers    and balancing        the totals
    of these ledgers       to control     account    balances       1s essential
    for good internal        control      Recording     transactlons        in such
    a way that they can be readily            traced    from the orlglnatlng
    documents      to summary records       and ultimately        to the financial
    reports     is necessary      for sound flnanclal        management
           The Offlce       of Guaranteed        Student      Loans (OGSL) does not
    have subsldlary         record      support    for the September           30, 1976,
    balance      in the claims        in process,       Insurance       premiums     receiv-
    able,    and accrued       interest      receivable       accounts.        OGSL derived
    the claims-rn-process             balance    by using the following              formula:
    unpaid claims        on hand at the oeglnnlng               of the period        plus
    claims     received     minus claims        paid.      The insurance        premiums
    receivable       balance     was computed        from summaries         of bjlllngs
    and collections            A listing       of individual.        premiums     receivable
    was not maintained              The accrcred interest            xeceavable      balance
    was estimated        by applying        an interest       factor      to the average
    loans receivable          balance
             According    to     OGSL officials,         the new management           informa-
    tlon     system should         pro\irde   the necessary        subsldlary       records
    For tne insurance            premiums     receivable      account         The system
    will     also compute        accrued    interest       and is expected        to provide
    reliable      accrued      interest     receivable       subsldlary       records      by
    the end of fiscal            year 1977.
           We recommend         that OGSL develop        detailed     subsldlary
    records   in support          of the claims      In process8      Insurance    pre-
    miums receivable,           and accrued     interest     receivable      account
    balances.                                                                        n
            The allowance         for losses      should reflect        that porKnon of
    insured     defaulted       loans receivable        I purchased       and accrued
    interest      on insured        loans receivable,        and claims      in process
    which 1s estimated            to be uncollectable            To most accurately
    reflect     the uncollectable           amount, we continue           to believe    the
    allowance      should be derived           from actual     collection       expe-
    rience.       The allowance         should be adlusted        annually      to reflect
    most recent       collection        experience.
               p.                                       ,

ENCLOSURE I                                                          ENCLOSURE I

        In fiscal      year 1976, a 55 percent          allowance    for loss
rate was used for defaulted             loans.    'Ills     rate 1s based on
the experience         of the Federal      Housing Admln1stratlon's
Title     I Housrng Insurance        Fund from July 1934 through June
1967.      In our view, the two programs are not sufficiently
similar      to Justify      the expectation     of ldentlcal      loss rates.
In addition,        OGSL has used the same loss rates since 1969
with no annual adlustments            for program experience,           notwlth-
standlng       the enormous program changes that have occurred
As a result,        the allowance     for losses may not reallstlcally
reflect      actual    program experience.
       Each year since fiscal           year 1973, we have recommended
that OGSL develop         an allowance        for loss rate based on
actual   program experience             Each year OGSL has stated that
these changes would be made.                In fiscal    year 1973, OGSL
stated   that the change would be made by fiscal                 year 1974 or
fiscal   year 1975          In fiscal     year 1975, when the changes
stall.  had not been made, OGSL stated the change may be
accomplished      by fiscal      year 1978.         OGSL is now developing
a loss estimation         model that 1s expected           to use hlstorlcal
program data and proJected             collectron      data to estimate      the
unrecoverable       portlon     of default       claims and the related
arcrued    ~ni-nrnCr=       Br-Pnrr71ng
              --- -I - * ..-)YYY&  %.I    c,c 06SL offlz,;zs,     tb&gJ;ic<el
may be ready for use by fiscal                year 1978.
Recommendation                                                                     c
        We recommend that OGSL develop an allowance        for loss
rate based on actual      program experience without     further
delay,    so that the allowances   may be more reallstlcally
IdPROVEMENTS NEEDED IN                                                       3
        The loss rates used In computing       the estimated       future
loss llablllty    on nondefaulted     insured    loans should be
based on actual     program experience      and adlusted     annually
to account for the most recent experience.              In addltlon,
the method used to compute the llablllty            should be consistent
from year to year to allow for meaningful            comparison      of his-
torlcal    data and highlight     any unusual varlatlon       in the
accoun't balance.
         OGSL does not have support   for the          rates used ln'com-
putlng     the estimated  future loss llablllty            on the fiscal  year
ENCLOSURE I                                                           ENCLOSURE I

1976 flnanclal         stetements         These rates     have been carried
forward     since 1974 with no adlustment             for the 1975 or 1976
activrty        Also,     OGSL's method of determlnlng            the estimated
future    loss llablllty         has varied     each year since fiscal         year
1973 when estimated           future    losses   were first     reported    on the
financial      statemenis,         As a result,     we were unable       to deter-
mine whether        the account      balance    was fairly    stated     at
September      30, 1976
          We recommend that OGSL base the estimated            future  loss
rates      on actual   program experience       and update the rates      each
year to reflect        the most recent      program experience.       The
method of computing          the rates   and calculating     the estimated
liability       for future     losses  should be consistent       from year to
         Prior     to March 1976, all unldentlfled           collections      and
suspense        Items of the Fund were recorded            in the OffIce      of
Education's          (OB) suspense    account     Amounts In this         account
are not reflected           in the Fund's accounts        or flnanclal       state-
ments.        In our fiscal      year 1975 report      to Congress       we noted
that the Fund's cash account              1s understated      by the amount in
the OE suspense account.              We suggested     that unidentified          OGSL
collections          be recorded    in the accounts      of the Fund.
       Beginning    in the third   quarter        of fiscal       year 1976,
OGSL began applying       all unidentified         collections          to the
Fund appropriation.        While this      action      constitutes        a needed
improvement,     over $977,000    of OGSL collections              still     remained
in the OE suspense account        at September          30, 1976, and thus
not included     in the financial       statevents.                             2

        A large  portion of OGSL collections       remaining   in the
OE suspense     account, almost   $800,000,    consists    of a refund
from a bank received     by OGSL in trust      for students    of a
proprietary     school.  We understand      OGSL is currently     consld-
erlng methods to distribute      the refund      to the students.
        The remainder      in OE's suspense account--over       $184,000--
consists    of collections      that did not contain     enough informa-
tion to determine        which defaulted   loan accounts     should be
credited       Approximately,      $11,000 of this   amount was &aced


*   .
        c &CLOSURE I


         Ln the account in fiscal     year 1974, wh3,le approximately
         $150,000 of fiscal     year 1975 collections  stlli   remain In this
         account      Over $23,000 was placed In the suspense account
         during  fiscal   year 1976.
               Since last year's   audit,  few OGSL items have been
         removed from OE's suspense account.       As of September 30,
         1976, only $1,195 of tne Fund's items In the suspense account
         as of January 1976 had been removed.        In addltlon, a review
         of OGSL's records   for the first    I months of fiscal  year 1977
         showed that no Items had been removed.
               We recommend that the refund due the students                       and var-
         ious unldentlfled   collections    be removed from the                   Oh suspense
         account and recoraed     In proper E'und accounts
                 OGSL blils     a lender       for Insurance        premiums due and does
         not attempt      further     collection       if payment isn't            received
         Previously,      a corlrractor        created    a delinquent          rnsurance
         premiums receivable          report      and followup       blillng       letters   tor
         delinquent      accounts.       However, these two services                   were
         dlscontlnued       when a new contractor            was selected           In September
         1975.      Consequently,       no followup       collection         actlon     has been
         taken since these services               were stopped.           Good business
         practice     would require        that delinquent          accounts       be SubJect
         to vigorous      collection       attempts.
                 We estimate      over $250,000 of insurance       premiums billed
         during     or before September i976 renalned          uncollected   as of
         April     8, 1977.      With an effective      system to ldentlfy   and
         collect     these overdue receivables,          many should have been
         collected      or for the older      items written    off as uncollectable
         before now. An OGSL offrclal              told us a system to report
         delinquent       Insurance   premiums 1s under development.
               We recommend that the report       of overdue Insurance   pre-
         miums receivable      be developed promptly    and used in systematic
         attempts   to collect    overdue accounts.                    .