WMiHINGTQN FEGIONAL OFFICE F I FTH FLOOR FALLS 803 WEST CHURCH, BROAD VIRGINIA STREET 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 accounts. 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 -2- * ENCLOSURE I ENCLOSURE I NEED TO MAINTAIN SUBSIDI%FY RECORDS 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. Recommendation 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 !- LOSS RATES SHOULD BE BASED ON ACTUAL PROGRAlY EXPERIENCE 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. , -a- 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 stated. IdPROVEMENTS NEEDED IN 3 ESTIMATING FUTURE LOSSES 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 9 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 Recommendation 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 year. IMPROPER RECORDING OF UNIDENTIFIED COLLECTIONS 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 i -3- * . c &CLOSURE I Y 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. Recommendation 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 NEED FOR FOLLOWUP COLLECTION ACTION ON OVERDUE INSTJRANCE LjREkIUMS RECCIVABLE- 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. Recommendation We recommend that the report of overdue Insurance pre- miums receivable be developed promptly and used in systematic attempts to collect overdue accounts. . a -4-
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)