oversight

Examination of Financial Statements of the Student Loan Insurance Fund Fiscal Year 1969

Published by the Government Accountability Office on 1971-04-12.

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

        ORT TO THE CONGRESS




 xamination Of Financial
 tatement Of The Student
Loan Insurance Fund
Fisca I Year 1969 B-164o31(1,

Office of Education
Department of Health,   Education,
    and Welfare




BY THE COMPTROLLER    GENERAL
OF THE UNITED  STATES
               COMPTROLLER      GEMERAL    OF       THE       UNII-ED     STATES
                              WASHINGTON       DC         20548




B- 164031(l)




To the    President       of the Senate     and the
Speaker     of the     House    of Representatxves

        Thrs IS the report        on our exammation           of the financial       state-
ments    of the Student     Loan Insurance          Fund,   admnnstered         by the
Office   of Educatzon,      Department       of Health,     Education,      and We10
fare,  for fiscal    year    1969      Our exammnation         was made      m accor-
dance wxth sectxon        105 of the Government            Corporation       Control
Act, as requzred       by the Higher       Education      Act of 1965.

          Coples     of thus report      are        being     sent to the Director,     Office
of Management           and Budget,      the        Secretary      of the Treasury,     the
Secretary        of Health,   Education,             and Welfare,       and the Commrs-
sloner     of Education,      Department               of Health,    Education,     and Wel=
fare




                                                    Comptroller                General
                                                    of the United              States




                                                                                                 c   \




                       50 TH ANNIVERSARY                   1921-        1971
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            COBPTROLLERGENERAL'S                        EXAMINATION OF FINANCIAL STATEWENTSOF THE
i           REPORTTO THE CONGRESS                       STUDENT LOAN INSURANCE FUND, FISCAL YEAR
I
I                                                       1969
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I                                                       Off‘rce of Education,  Department of Health,
I                                                       Education,  and Welfare B-164031(1)
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I            DIGEST
            ------
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f
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            WHYJ?HE,EXAIuYNATIONWASMADE
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                  The Guaranteed Student Loan program comprises two components, a Federal
I                 student loan Insurance program and a State or private       nonprofit    agency
                  student loan Insurance program.      The Comptroller  General 1s required      by
1
                  the Higher Education Act of 1965 to audit annually,      ln accordance with
                  the Government Corporation    Control Act, the Student Loan Insurance Fund
                  which finances loan insurance    actlvitles  under the Federal program and
                  Federal relnsurance   of loans made under the State program.         The fund 1s
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                  admlnlstered   by the Office of Education,   Department of Health, Education,
I                 and Welfare (HEW)
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I           FINDINGS AND CONCLUSIONS
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I                 In the opinion of the General Accounting Office (GAO), the accompanying
I
                  financial   statements do not present fairly         the financial    position     of the
I                 Student Loan Insurance Fund at June 30, 1969, and the results                 of its
I                 operations    and the sources and application        of its funds for the fiscal
I
    I             year then ended, in conformity       ~7th principles      and standards      of account-
    I             ing prescribed    by the Comptroller     General of the United States.           The fi-
                  nancial statements were prepared by HEW, and minor modiflcatlons                 were
                  made by GAO to improve their clarity.

                   GAO was unable to express an oplnlon regarding            the reasonableness        of
    I
                   the amounts shown on the financial  statements          for*

                         --Accounts    receivable,  because lt was not practicable     for GAO to con-
                            firm year-end balances with lenders or to satisfy       itself     as to the
                            valldlty   of the accounts receivable  by other auditing       procedures;
                            also, not all the unpaid premiums on loans made during the year
                            had been -rncluded in the accounts receivable     at the year-end.
                             (See pp* 11 to 13.)
                         --Income from Insurance premiums and insurance     premium income de-
                             ferred,  because not all the premiums on loans made during the year
                             had been considered  in computing the amounts shown.   (See pp 11
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        I                    and 12 )
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       --Allowances   for losses on loans receivable      and accrued interest                                     I

                                                                                                                   I
          receivable,   because the reasonableness     of the data used to compute                                 I

          the loss rate was not readily    determinable.     (See p. 74,)                                          I
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     Further,    the amount for unpaid default  claims that were classlfled as                                     I

     deferred    charges was overstated  because an allowance for losses was not                               I
                                                                                                                   I


     provided.      (See pp. 13 and 14.)                                                                       I
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    A maJor change was made In the method of recognlzlng          Income from lnsur-                           I
    ante premiums      In fiscal year 1968 all Insurance premiums applicable                                   I
                                                                                                               I
    to loans insured during the year were treated       as income       In fiscal                              I
    year 1969 the method was revised to treat insurance premiums as income                                     I
    over a 5-year period--the      estimated average length of time federally                                  I
    Insured loans were expected to be outstanding.         Although the revised                                I
    method ot recognlzlng     premium Income 1s an acceptable method, GAO
                                                                                                               1
    believes    that such treatment    1s unnecessary because the premiums are                                 I
    nonrefundable.     (See pp 15 and 16.)                                                                     I
                                                                                                               I

     GAO also noted that losses due to death or dlsablllty      of student bor-                                I
                                                                                                               I
     rowers that were to be reimbursed from an appropriation,       rather than                                I
     from the fund, were not shown on the financial    statements,     although
     the oremlums collected   on such loans had been deposited     as income -in
     the ktudent Loan Insurance Fund      (See PP. 17 and 18.)


RK'OMMEi'JD~IONS OR SUGGESTIONS                                                                            I
                                                                                                           I
                                                                                                           I
     The following  changes are necessary to produce financial   statements                                I
                                                                                                           I
     that will present fairly  the financial condition  of the fund.                                       I
                                                                                                           I
       --Lenders'    default   claims on hand at the year-end,  which are sub-                             I
                                                                                                           I
          mltted to the Office of Education because borrowers       falled to                              I
          repay their loans, should be classlfled      as loans receivable   or                            I
                                                                                                           I
          some slmllar    type of current asset, rather than as deferred                                   I
          charges, and an allowance for losses on these claims should be                                   I
          provided   and charged to expense in the year in which the claims                                I
          are made against the fund.      (See pe 13.)
                                                                                                           I
                                                                                                           I
       --Accounting    procedures need to be strengthened to ensure that the
          amounts shown on the financial   statements for accounts receivable
          and insurance premium income are derived from reasonable    and sound
          bases.    (See p* 12.)                                                                       I
                                                                                                       I
                                                                                                       I
    GAO believes       also that the Office of Education could provide more in-                        I
    formative     flnanclal    statements by addlng a statement showing (1) losses                     I
    due to death or dlsabillty           of student borrowers on loans made after                      I
    December 14, 1968, (2) interest            benefits--payment      by the Government of             I
                                                                                                       I
    a part of the interest          on student loans--and        (3) adminlstratlve       ex-          I
                 Although such items are paid from appropriations                 that are not         I
                                                                                                       I
    F',","t",; the fund, this type of data would disclose the full                   cost of the       I
    Guaranteed Student Loan program to readers of the financial                      statements.       I
    (See pp. 17 and 18.)                                                                               I
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                                             2                                                         I
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                                                                                                       I
            AGENCYACZQNS AND UNRESOLVBDISSUES
                   The Assistant     Secretary, Comptroller,    HEW, advlsed GAO on October 1,
                   1970, that he agreed with the flndlngs         and views ln this report.     Ap-
I                  propriate   actlon was taken or planned on most of the matters dlscussed
                   in this report that affect     the flnanclal     statements of the Student Loan
                   Insurance Fund. (See pp. 12, 14, and 16 to 18.)              The Office of Educa-
                   tion, however, 1s contlnulng      the practice    of deferring    income from in-
                   surance premiums over a period of several years,             (See p 16.)


            iVATTBRSFOR CQ~S~E~TIOIV BY TEE CONc;RESS
                   This   report   is required   by laws as previously   stated.




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             Tear Sheet




                                                       3
                            Contents
                                                                        Page
DIGEST                                                                    1

CHAPTER

   1        INTRODUCTION                                                  4
   2        OPERATION AND FINANCING                                       7
                Operation                                                 7
                Financing                                                 8
   3        COMMENTS ON FINANCIAL STATEMENTS                             11
               Accounts receivable                                       11
               Loans receivable,          deferred charges,      and
                 allowance      for losses                              13
               Deferred    credits--insurance       premium      in-
                 come                                                   15
               Capital    appropriated                                  16
               Contingent     liabilities                               17
               General comments                                         17
   4        SCOPE OF EXAMINATION                                         19
   5        OPINION OF FINANCIAL       STATEMENTS                       20
FINANCIAL     STATEMENTS

SCHEDULE
   1        Statement  of financial      condition    as of
               June 30, 1969                                             23
   2        Statement   of changes     in accumulated   net in-
               come for the fiscal       year ended June 30,
               1969                                                      24
   3        Statement   of income and expense        for   the   fis-
               cal year ended June 30, 1969                             25
                                                                            Page
SCHEDULE

   4         Statement  of sources and application               of funds
                for the fiscal  year ended June 30,              1969       26

             General Accounting         Office    notes   to financial
               statements                                                    27

APPENDIX

   I         Volume of commitments          for federally  Insured
                loans from inception          through June 30, 1969         31

   II        Outstanding   principal    balances  SubJect to
               reinsurance    provision    as of June 30, 1969              32

   III       Letter     dated October 1, 1970, from the Assls-
                tant Secretary,        Comptroller,    Department of
                Health,     Education,    and Welfare,    to the
                General Accounting        Office                            33

        IV   Principal       officials      of the Department   of
                Health,      Education,      and Welfare having re-
                sponsxbility          for the activities   discussed
                in this report                                              37

                               ABBREVIATIONS

GAO          General   Accounting       Office

             Department    of Health,       Education,    and Welfare
COMPTROLLERGENERAL'S                    EXAMINATION OF FINANCIAL STATEMENTS OF THE
REPORTTO THE CONGRESS                   STUDENT LOAN INSURANCE FUND, FISCAL \EAR
                                        1969
                                        OffIce of fducatlon,   Department of Health.,
                                        Education,  and Welfare B-164031(1)


DIGEST
------

WHY2TIE EXAMINATION WASMADE
    The Guaranteed Student Loan program comprises two components, a Federal
    student loan insurance program and a State or private         nonproflt    agency
    student loan insurance program         The Comptroller  General 1s required      by
    the H-rgher Education Act of 1965 to audit annually,       in accordance with
    the Government Corporation      Control Act, the Student Loan Insurance Fund
    which finances    loan insurance actlvltles    under the Federal program and
    Federal reinsurance    of loans made under the State program           The fund is
    administered   by the Off-r ce of Education, Department of Health, Education,
    and Welfare (HEW).


FINDINGS AND CONCLUSIONS
    In the opinion of the General Accounting Office (GAO), the accompanying
    financial   statements do not present fairly         the financial    posltlon    of the
    Student Loan Insurance Fund at June 30, 1969, and the results                of its
    operations    and the sources and application        of its funds for the fiscal
    year then ended, in conformity       with principles      and standards of account-
    ing prescribed    by the Comptroller     General of the United States           The fl-
    nancial statements were prepared by HEW, and minor modifications                were
    made by GAO to improve their clarity
    GAO was unable to express an opinion regarding             the reasonableness    of
    the amounts shown on the flnanc-ral statements           for

         --Accounts    receivable,  because it was not practicable     for GAO to con-
            firm year-end balances with 'ienders or to satisfy      itself     as to the
            valldlty   of the accounts receivable  by other audltlng       procedures,
            also, not all the unpaid premtums on loans made during the year
            had been included in the accounts receivable      at the year-end.
             (See pp 11 to 13 )

         --Income from insurance   premiums and insurance premium Income de-
           ferred,  because not all the premiums on loans made during the year
           had been considered  in computing the amounts shown    (See pp 11
           and 12 )
        --Allowances   for losses on loans receivable      and accrued interest
           receivable,   because the reasonableness     of the data used to compute
           the loss rate was not readily    determinable      (See P 14 )
     Further,   the amount for unpajd default claims that were classlhed  as
     deferred   charges was overstated because an allowance for losses was not
     provided      (See pp 13 and 14 )

     A maJor change was made in the method of recognlzlng         Income from lnsur-
     ante premiums      In fiscal year 1968 all insurance prem-rums applicable
     to loans Insured during the year were treated       as income      In f-rscal
     year 1969 the method was revised to treat Insurance premiums as income
     over a 5-year period--the      estimated average length of time federally
     insured loans were expected to be outstanding         Although the revised
     method of recognlzlng     premium Income 1s an acceptable method, GAO
     believes    that such treatment 1s unnecessary because the prem-rums are
     nonrefundable      (See pp. 15 and 16 )
     GAO also noted that losses due to death or dlsab?lity    of student bor-
     rowers that were to be reimbursed from an appropnatlon,      rather than
     from the fund, were not shown on the financial   statements,    although
     the premiums collected   on such loans had been deposlted as income in
     the Student Loan Insurance Fund      (See PP 17 and 38 )

RECOiViWflDATIOl!IS OR SUGGESTIOW

     The following  changes are necessary to produce financial   statements
     that will present fairly   the flnanclal condltlon of the fund

       --Lenders'    default   claims on hand at the year-end,  which are sub-
          mitted to the Office of Education because borrowers fa-rled to
          repay their loans, should be classlfled      as loans receivable or
          some similar    type of current asset, rather than as deferred
          charges, and an allowance for losses on these claims should be
          provided   and charged to expense in the year in which the claims
          are made against the fund       (See p. 13 )

       --Accounting    procedures need to be strengthened to ensure that the
          amounts shown on the financial   statements for accounts receivable
          and insurance premium income are derived from reasonable    and sound
          bases     (See p 12 )

     GAO believes     also that the Office of Education could provide more in-
     formative    financial   statements by addlng a statement showing (1) losses
     due to death or disability         of student borrowers on loans made after
     December 14, 1968, (2) interest          benefits--payment      by the Government of
     a part of the interest        on student loans--and        (3) administrative       ex-
     penses     Although such items are paid from appropnatlons                  that are not
     part of the fund, this type of data would disclose the full cost of the
     Guaranteed Student Loan program to readers of the financial                    statements.
     (See pp 17 and 18 >

                                              2
AGENCYACTIOiQSAND UNRESOLVEDISSUES
    The Assistant     Secretary, Comptroller,   HEW, advjsed GAOon October 7,
    1970, that he agreed with the findings        and views ln this report      Ap-
    propnate    action was taken or planRed on most of the matters dIscussed
    In this report that affect the flnanclal        statements of the Student Loan
    Insurance Fund       (See pp. 12, 14, and 16 to 18.)        The Offlce of Educa-
    tlon, however, 1s contlnulng     the practice    of deferring    income from In-
    surance premiums over a period of several years.            (See p. 16 )

MATTERSFOR COi%'IDERATIONBY TBE CONGRESS
    This   report   1s required   by law, as previously   stated.
                                    CHARTER 1

                                 INTRODUCTION

        The General Accounting      Office has made an examination
of the financial      statements    of the Student Loan Insurance
Fund administered      by the Office of Education,       Department  of
Health,    Education,    and Welfare,     for the fiscal  year ended
June 30, 1969.

       The Office       of Education       is responsible      for admmister-
mg various        support and assistance          programs in the educa-
tional    field.      One such program,         commonly known as the
Guaranteed       Student Loan program, established               pursuant     to
title   IV, part B, of the Higher Education                 Act of 1965, as
amended (20 U.S.C. 10711, provides                low-interest        insured
loans for students          in institutions       of higher education           and
in vocational        schools.     This    program    comprises      two   compo-
nents --a State or private            nonprofit     agency loan insurance
program and a Federal loan insurance                 program.

         The basic purposes of the Guaranteed               Student Loan pro-
gram are to (1) encourage States or private                   nonprofit       in-
stitutlons      and organizations        to establish       adequate loan in-
surance programs for students              in instltutlons         of higher
education      and in vocational        schools,     (2) provide      a Federal
program of student loan insurance                for students       or lenders
who do not have reasonable             access to a State or private
nonprofit     program of student         loan msurance,          (3) pay, on
behalf     of qualified      students,1     a part of interest          charged
by lending      institutions      on loans which are insured under
either     the Federal program or an eligible              loan insurance
program established          by State or private         nonprofit      mstitu-
t ions, and (4) guarantee          a part of loans insured under an


1A student qualifies    for interest    benefits--payment       by the
 Government of a portion    of the interest        on his loan--if    the
 combined adJusted gross income of the student             (and his par-
 ents and spouse, If applicable),       as reported      for Federal
 tax purposes for the preceding      year, less 10 percent and
 amounts allowable   for exemptions,     was less than $15,000.


                                         4
eligible    loan msurance       program       established   by a State      or
prrvate    nonprofit  institution.

       Low-interest        insured loans were initially        provided     to
vocational      students      under a program established       pursuant      to
the National       Vocational      Student Loan Insurance      Act of 1965
 (20 U.S.C. 981).          Under this act, the Government was also
authorized      to make interest        payments to partrcipatlng        lend-
ers on behalf       of qualified       students  on loans insured at the
State or Federal         level,

       At the time the Higher Educatron Act and the National
Vocational     Student Loan Insurance       Act were enacted in 1965,
17 States had independent          agencies which administered     stu-
dent loan insurance         programs at the State level.       The Con-
gress intended       that the two acts would encourage each State
to further     develop    its student loan msurance      program,     In
its report     on the Higher Education       Act, the Senate Commlt-
tee on Labor and Public Welfare stated that the Federal               1~1-
surance program was a standby program to be used only when
the State programs were not adequate to meet the demand for
student    loans.

        To help accomplish           the obJectives        of the two acts, the
Congress,     through fiscal           year 1969, had appropriated
$31,875,000      to the Office          of Education       for making advances
to help establish         or strengthen         the student       loan insurance
programs operated         by States or private             nonprofit    agencies,
hereinafter      referred      to as the State program.               As of June 30,
1969, the Office         of Education        had advanced $18,620,483           to
state and private         nonprofit        agencies for this purpose.
After    funds were made available,               either     the States or the
Office     of Education      initiated       action      to have a student      loan
 Insurance    program established            at the State level         in each of
the remaining       33 States.

       During August 1967 the Office of Education           Initiated
the Federal      Insured    Student Loan program, hereinafter         re-
ferred   to as the Federal program,          because the demand for
student     loans exceeded the amount of State and/or Federal
funds available        for insuring    loans at the State level.          As
of June 30, 1969, 27 States and Puerto Rico were partici-
pating    in the Federal       program under the provisions       of the
Higher Education         Act of 1965, as amended.      (See app, I.>

                                          5
       During 1968 legislation        was enacted which affected       the
operation     of the Student Loan Insurance        Fund beginning    in
fiscal    year 1969.       The Higher Education    Amendments of 1968
 (Pub. L. 90-575, approved October 16, 1968) repealed             the
National    Vocational      Student Loan Insurance    Act of 1965 and
amended title      IV, part B, of the Higher Education        Act of
1965 to include        students   in vocational  schools covered by
the former act.

        In addition,      Public Law 90-460, approved August 3,
 1968, amended section          428 of the Higher Education         Act of
 1965 (20 U.S C. 1078) to provide             for Federal reinsurance         of
 loans guaranteed       by State or private       guaranty    agencies.
This was done to promote the continuatson                of existing     State
 or private    guaranty     agencies and to encourage the develop-
ment of adequate State programs where none existed.                     Rein-
 surance has the effect          of increasing    the guaranty      capacity
of State or private         agencies because these agencies will              be
reimbursed     by the Office       of Education     for a large percent-
age of their      losses.      As of June 30, 1969, 16 States and
the District      of Columbia were participating           under the rein-
surance provision         of the act.      (See app. II.)
       GAO is required by the Higher Education      Act of 1965,
as amended, to examine only those transactions         affecting
the Student Loan Insurance    Fund under which Federal program
insurance   activities and reinsurance   activities     authorized
by the act are financed.




                                       6
                                  CHAPTER 2

                         OPERATION AND FINANCING

OPERATION

        The Guaranteed  Student Loan program enables students
to borrow funds from participating          lendlng       institutions         to
help pay for their     educational     costs while attending               voca-
tional,    technical,  or degree-granting        institutions.             Under
the Federal program,     these loans are Insured             by the Govern-
ment, and, in the event of a student's             death,       total     and
permanent disabihty,       or failure     to pay, the lender is re-
imbursed for 100 percent       of the unpaid principal                balance of
the loan.

      Under Federal reinsurance      of loans made under the
State program,     the Office of Education     is authorized        to en-
ter into agreements with State or private            guaranty   agencies
whereby such an agency will      be reimbursed       for 80 percent     of
its loss resulting     from a student's    default      of a loan or
from the nonpayment of a loan made prior           to December 15,
1968, due to death or disability        of a student      borrower.

         The loss resulting        from the death or dlsabllity           of a
student borrower         on a loan made on or after           December 15,
1968, 1s not covered by reinsurance.                 For such a loan, the
legislatron       provides    t'hat the Office      of Education      pay the
entire      amount owed on a loan by a student             borrower    who dies
or is totally        and permanently      disabled,     regardless     of the
source of guaranty         (State or private)        and regardless       of
whether the guaranty          agency has signed a reinsurance             agree-
ment.       (See pp# 17 and 18 for further           discussion     regarding
payment of these claims.)

        Upon payment of a lender's        claim under the Federal
program,    the Government acquires         title    to the borrower's
note on whic'h the claim 1s filed.               The Government then at-
tempts to collect       the loan, except on a claim resulting
from the death or dlsabllity          of a student      borrower.     In the
event the borrower        dies or becomes totally         and permanently
disabled,     the obligation     to make any further        payment of
principal     and interest     1s canceled.

                                        7
       Under Federal reinsurance             of a loan made under the
State program, however, the Office of Education                     does not
acquire    title    to the borrower's         note on any claim that is
pald.    After a payment has been made by the Office of Edu-
cation   to a guaranty         agency for a default         claim, that
agency has full        collection      responsibility       and is required
to return      to the Office of Education             80 percent    of any
amount It subsequently            recovers    from a borrower.        As under
the Federal program,           in the event the borrower          dies or be-
comes totally       and permanently        disabled,     the obligation     to
make further      payment is canceled.

        Any student,    regardless   of residence       or family      income,
who is a cltrzen       or national   of the United States or who is
 in the United States for other than a temporary                  purpose and
who is enrolled       as at least a half-time       student at an eli-
 gible   institution    can apply for a loan.          Prior to Decem-
ber 15, 1968, the maximum loan that could be insured each
academic year was $1,000 for a vocational               or undergraduate
 student    and $1,500 for a graduate        student.       The total
amount of loans to any one student            that could be insured
was $5,000 for an undergraduate;           $2,000 for a vocational
student;      and $7,500 for a graduate       student,      including     loans
for undergraduate       and graduate   years,       Since that date, the
maximum loan that can be insured           for each academic year is
$1,500 and the total        amount of loans to any one student
that can be insured       is $7,500, regardless         of the type of
student.

FINANCING

        The Higher Education   Act of 1965 established      the Stu-
dent Loan Insurance      Fund.   Prior to December 15, 1968, all
moneys in this fund were to be used for making payments in
connection     with losses incurred    under the Federal program.
Effective    December 15, 1968, the fund was to be used also
for making payments in connection        with losses on defaulted
loans covered under the reinsurance         provision  of the act.

         The Student Loan Insurance       Fund is a revolving       fund
which is financed       by direct    appropriations      from the Congress,
insurance     premiums collected      from participating      lenders    on
loans made under the Federal program, and proceeds from the
collection     of defaulted    loans.     Also the Office of

                                       8
Education  is authorized    to issue notes or other obligations
to the Secretary     of the Treasury  If additional      funds are
required.    If available   funds exceed current       operating
needs, such excess funds may be invested         by the Office       of
Education  in bonds or other obligations        guaranteed      by the
United States.

       1[The Higher     Education       Act of 1965 requires          the Office
of Education       to charge lenders           partrcipating        in the Federal
program a premium on each insured                   loan in an amount not to
exceed one fourth          of 1 percent        a year of the unpaid princl-
pal amount of such loan, payable in advance,                        at such times
and m such manner as may be prescribed                       by the Commlssloner
of Education.         The lenders may pass t'he charges on to the
students      borrowing      the funds.        The Office      of Education     has
the option       of either      collecting       the premiums or offsetting
them against       amounts payable to the lenders                 for interest     on
student loans.          During fiscal         year 1969 the Office         of Edu-
cation    billed     particnpatlng         lenders     for the premiums due.

       During fiscal      year 1969 insurance           premiums charged to
a lender were computed from the date of disbursement                        of the
loan to the student        borrower      to the anticipated         date of his
graduation      plus 12 months.         An Office     of Education      official
informed us that the Office             of Education       had elected      to
compute the premium over this period,                 rather    than over the
full   life    of the loan, to avoid the administrative                 work and
cost (both to the Office           of Education       and to the lender)
that would be involved         in recomputing         the premium each time
the principal       balance changed during the repayment period
or for every change in the student's                status     (such as leav-
ing school or entering         military     service).        The Office       of
Education      also does not refund or adjust              a premium as a re-
sult of (1) a student's          leaving    school or repaying          his loan
prior     to the date used in computing           the premium or (2) the
extension      of a student's      educational      program.
        In July 1969 we were Informed       by the Assxstant      Secre-
tary,     Comptroller, HEW, that the policy       of not collecting
premiums during the loan repayment period           would remain In
effect,     subJect to perlod1.c reevaluation.

     Precise estimates   were not readily    available                  to show
the period  in which students  would actually      repay                their

                                          9
loans.      Usually,  the amount of premiums charged would be
greater,     however,   if the premiums were computed over the
full   life   of the loan rather        than over the shorter      period
used under the present method.              The  maximum   repayment    pe-
riod for an insured        loan is generally        10 years, beginning
9 to 12 months after         the student     graduates    or ceases to
carry an acceptable        academic work load,         The repayment pe-
rlod is extended for service            in the armed services,       Peace
Corps, or Volunteers          In Service    To America.

        Because the Federal program has been in operation         for
only a short period,       sufficient experience    on loan defaults
does not exist      to permit any determination    as to whether
the present method of collecting       premiums will     provide suf-
ficient    revenue to cover such defaults.       We plan to examine
more fully     into this matter after    the Federal program has
been operating      for a sufficient  period to allow for an ap-
praisal    of the premium collection     policy.

      Under Federal reinsurance        of loans made under the
State program, no insurance        premiums are charged the State
or private   agencies   even though some of these agencies col-
lect premiums from the lenders,          The conference    report     on
the Higher Education      Amendments of 1968 (H, Rept          1919,
dated Sept, 25, 1968) stated that it was the intention                of
the Congress that payments under the reinsurance             provision
wrth respect   to default    claims be made from appropriated
funds and that collections        on all defaulted    loans and pre-
mium income under the Federal program be used only for mak-
lng payments under that program.




                                     10
                                      CHAPTER3

                     COMMENTS ON FINANCIAL          5TATEMENTS

ACCOUNTS RECEIVABLE

        Generally      accepted accounting          principles      and technques
require    that all transactions            affecting       accounts receivable
and income be properly           recorded      during     the accounting      period.
We found that the amount of $485,807 included                       in the Student
Loan Insurance         Fund statement      of financial         condition    at
June 30, 1969 (sch. l), as accounts receivable                        did not in-
clude all unpaid insurance             premiums applicable            to loans made
by lenders       during the fiscal        year.

        Under the Office       of Education's     billing     practices,
lenders were balled         for insurance     premiums on the basis of
loan transaction       statements     which showed amounts of the In-
sured loans as reported          by the lenders        and the premiums ap-
plicable     to the loans.       Under the Offlce         of Education's       op-
eratlng    procedures,      lenders were required          to report     loans
no later     than 31 days after       the date of the loan disburse-
ment.

       Our review showed that the amount of the accounts re-
celvable    at June 30, 1969, comprised        (1) the unpaid balance
of premiums billed     to lenders    through August 11, 1969, on
insured   loans made during the year and (2) estimated               premiums
on loans made during      the year that had not been billed             to
lenders due to a need for clarlfxatlon             of the data they had
submitted    to the Office   of Education.        The amount, however,
did not include    an estimate    for premiums billed        in September
and October 1969 on loans made during fiscal             year 1969.        The
September billing    of $62,286 comprised prlmarlly            premiums on
loans made during the year, and the October billing                included
some premiums on loans made during          the year.

       An Office   of Education    official      informed us that the
loan disbursement      data forming      the basis for the premiums
included   in these two blllxngs        was not available     at the time
the year-end     amount of the accounts receivable         was computed
because of computer-processing           problems and not because
lenders had failed      to report   loan disbursements      timely


                                         11
        Since the Office         of Education      did not have data avallable
showing the actual year-end              accounts receivable,         it was not
feasible      for us to follow       the normal auditing         procedure     of
confirming       accounts receivable         with lenders      or to satisfy
ourselves       as to the validity         of the accounts receivable          by
other auditing        procedures.        We are therefore       unable to ex-
press an opinion         regarding     the amount of the accounts re-
ceivable      as shown on the financial            statements.      Because the
premium billings         also affected       income, we cannot express an
opinion     regarding      the amounts shown on the financial             state-
ments for insurance           premium income earned during the year
and for insurance          premium income deferred.            (See pp. 15 and
16 for a discussion           of deferring      this income.)

       We suggested that accounting          procedures   be strengthened
to ensure that the amount shown for accounts receivable                 on
the statement     of financial     condition     and the amount shown for
insurance   premium income earned on the statement            of income
and expense are derived        from reasonable       and sound bases.

         In his letter    to us dated October 1, 1970, the Assis-
tant Secretary,        Comptroller,     HEW, agreed that such accounting
procedures      needed to be strengthened.            He stated that lending
institutions       would be requested        to report   loan transactions
more accurately        and that attempts would be made to improve
procedures      for estimating      year-end    accounts receivable      and
insurance      premium income earned.

       HEW informed us that Office       of Education      records showed
that an upward adJustment      of $54,738 had been made to the
amount of the accounts receivable         for premiums on loans dis-
bursed in fiscal    year 1969 for which lenders were billed               in
fiscal   year 1970.    Our analysis    of this adJustment         showed,
however,    that it was for estimated       premiums on loans that
the computer would not record because of a need for clarifl-
catlon of the data submitted        by lenders,     rather    than for
premiums on loans disbursed       in fiscal     year 1969 but not in-
cluded in the financial     statements      because of the processing
time lag.

       HEW suggested that GAO attempt            to confirm accounts re-
ceivable    on a scientific-sampling          basis,    in order to reach
a conclusion     as to their      validity       We believe    that request-
ing certain    lenders     to furnish      us with lnformatlon      regarding

                                        12
                                 -.
insurance      premiums due the Office     of Education     would not be
useful    in reaching     a conclusion   as to the validity      of the
amount of the accounts recenvable          shown on the financial
statements,       because, as previously    stated,   the Office    of Ed-
ucation     did not have data available       showing the actual year-
end accounts receivable.

LOANS RECEIVABLE, DEFERRED CHARGES
AND ALLOWANCE FOR LOSSES           ,
      The Office     af Education     pays lenders   and State or pri-
vate guaranty     agencies for claims made for defaulted        loans.
If a loan is in default         due to the death or disability     of
the borrower,     the amount of the unpaid loan is charged to an
expense account;      otherwise,    it is charged to loans receivable
and further    attempts     are made to collect    the amount from the
borrower.

       At the request         of the Treasury      Department,       loan default
claims on hand but not paid at June 30, 1969, in the amounts
of $9,595 under the Federal             insured    loan program and
$157,384 under Federal           reinsurance      were classlfled         as de-
ferred    charges instead        of loans receivable        on the statement
of financial       condition.        (See sch. 1.)      An Office        of Educa-
tion official       informed us that these claims,              totaling
$166,979,      were classified        as deferred     charges and were not
included     in the amount of loans receivable              in order for that
amount to be in agreement with the year-end                   reports      which
are submitted       to the Treasury        Department     on a cash basis.

        Because "deferred         charge&'      is a classification           which
usually     denotes expenditures           which are allocable           to the in-
come of a number of years,              we believe        that the unpaid de-
fault    claims should have been classified                   as loans receivable,
or some similar         type of current         asset, and that an allowance
for losses should have been provided                    to reduce them to their
estimated      realizable      value.      The amount of the total             assets
on the statement          of financial       condition       would have been re-
duced correspondingly.             This treatment           would have been con-
sistent     with that accorded to loan default                   claims paid and
charged to loans receivable               during     the fiscal      year.     The ef-
fect of such treatment            would have been consistent               also with
the Office       of Education's        practice      of charging      unpaid death
and disability         claims at the end of the fiscal                year as ex-
pense in the fiscal          year.
                                          13
       The Office of Education           used a rate of 55 percent            to
compute the allowances          for losses on accrued Interest              re-
cesvable     and on default       clarms pard and charged to loans re-
ceivable     during fiscal      year 1969.         Thus rate was based on
the experrence        of the Federal Housing Admrnrstratron's                 Tr-
tle I Insurance         Fund for the period July 1934 through June
1967.     An Offrce of Educatron          offlclal       informed us that this
rate had been used because of srmrlar                  factors   Involved     -Ln
the operations        of the two funds and because of the lack of
experience      to date under the Student Loan Insurance                  Fund.
We are unable to readily            determrne      the propriety     of this
loss rate wrth respect          to the Federal program or the Federal
rernsurance       of loans under the State program and therefore
cannot express an oprnlon            on the reasonableness          of the al-
lowances for losses on loans receivable                    and on accrued in-.
terest    recervable.

       If an allowance   for losses on the loan default      claims
 that were classified    as deferred  charges had been provided
on the basis of the rate of 55 percent used to establrsh            an
allowance   for losses on the loans receivable,     the total     as-
sets, as shown on the statement      of financial  condition     at
June 30, 1969, would have been decreased by $91,838,          and the
expenses,   as shown on the statement     of income and expense
for the fiscal     year, would have been increased    by $91,838.

        In his letter      to us of October 1, 1970, the Assistant
 Secretary,    Comptroller,        HEN, agreed that the preferred             ac-
counting     and reporting       treatment       would require      an adjustment
of the loans receivable            for the items classrfied            as deferred
charges and of the allowance               for losses to show the realiz-
able value of the assets.               He stated,    however,      that HEM's
accounting     and reporting         treatment     was governed by instruc-
tions of the Office          of bnagement         and Budget and the Trea-
sury Department        which requrre         that the amount of the loans
recervable     include     only those defaulted          loans for which
lendsng lnstrtutions          have been reimbursed.            He advised US
that our suggested accounting               and reporting      treatment    would
be drscussed wrth the Office               of Management and Budget and
the Treasury      Department.
      We were subsequently    informed     that the Offrce of Educa-
tion,  in preparing  its fiscal     year 1970 financial    statements
on the Student Loan Insurance       Fund, had provided    an allow-
ance for losses on unpaid default        claims on hand at year-end.
                                         14
DEFERRED CREDITS--INSURANCE            PREMIUM INCOME

        For fiscal      year 1968, the first         year of operation          of
the Student Loan Insurance              Fund, the Office of Education
followed       the policy     of treating     premiums on loans insured
during     the fiscal     year as income m that year.                 In fiscal
year 1969 the Office           of Education       adopted the policy         of in-
cludlng      premiums on loans insured during              the fiscal      year as
income over a 5-year period-- the estimated                   average length
of time federally          insured    loans were expected to be out-
standing.
                                              .
        This change in accounting            policy    resulted     in the in-
clusion      in*

       --The statement      of financial     condition   at June 30,
          1969, of a deferred       credit   of $1,188,219,   represent-
          ing insurance     premium income of $322,921 and
          $865,298 on loans insured        in fiscal    years 1968 and
          1969, respectively.

       --The statement      of    changes in accumulated     net income
          for fiscal   year      1969 of an adjustment     of $415,184,
          representing    the     deferral  to later   years of premiums
          on loans insured        in fiscal   year 1968.

       --The statement   of income and expense for fiscal                   year
          1969 of premium income of $210,077,  representing
          premiums of $92,263 on loans insured   in fiscal                  year
          1968 and premiums of $117,814 on loans insured                    in
          fiscal  year 1969.

        In his letter     to us of October 1, 1970, the Assistant
Secretary,     Comptroller,     HEW, stated that the decision          to
prorate    insurance     premiums over a period       of years,   beginning
with the fiscal       year 1969 financial     statements,      was based
upon generally       accepted accounting    principles     which require
assignment     of revenues and expenses to the periods            affected.

       This method of recognizing        premium income, which is an
acceptable     practice,    would be necessary    If, under certain
circumstances,       the Office   of Education  was obligated    to re-
fund parts of the premiums collected.           Since there are no
refunds    or adjustments      of premiums, regardless    of when

                                         15
students    repay loans, we believe        that deferring     premium in-
come 15 unnecessary,         We noted that the Office        of Educa-
tlon,    in preparing    its fiscal    year 1970 flnanclal       state-
ments on the Student Loan Insurance            Fund, continued      the
practice    of deferring      income from insurance      premiums over
a period    of several     years.

CAPITAL APPROPRIATED

        Through fiscal        year 1969 Federal funds totaling
$3,750,000     w ere    provided     as capital    for the Student Loan
Insurance     Fund, to support         operations     under the Federal
program.      Of   this    amount,    $50,000    was  appropriated       in fis-
cal year 1966 and $3,200,000             was appropriated         in fiscal
year 1967.       In fiscal       year 1967 $500,000 additional            was
transferred      to the fund from the hxgher education                 Insured
loans appropriation.             No appropriations      were made to the
fund during fiscal          years 1968 and 1969.

        The statement      of financial     condition of the Student
Loan Insurance       Fund at June 30, 1969, shows that the appro-
priated     capital    of the fund was reduced by $262,325,       repre-
senting     the payment of claims of losses under the Federal
reinsurance       of loans made under the State program.         Because
the Congress provided         that claims for such losses be paid
from appropriated        funds (see p. lo>, we believe      that the
losses of $262,325 should not have been charged to the
caprtal     of the fund but should have been shown as a receiv-
able due from appropriations            for losses under the Federal
reinsurance       of loans made under the State program.

       In hxs letter       to us of October 1, 1970, the Assistant
Secretary,      Comptroller,      HEW, agreed with our view that such
losses should not have been charged to the capital                  of the
fund and stated that additional            funds for making such pay-
ments had been requested           and had been made available
through appropriations           by the Congress.     We noted that the
Office    of Education       had provided    full disclosure      on this
matter     in the fiscal      year 1970 financial      statements.




                                       16
CONTINGENT LIABILITIES

        The Offlce   of Education    notes to the statement        of fi-
nancral    condrtlon    (sch. 1) showed contlxrgent    lrabllltres
of $205,256,220      for loans msured under the Federal            program
and of $496,115,602       for reinsured     loans made under the
State program.       These amounts were not reduced,        however,      by
repayments made by student         borrowers.

        We noted that m fiscal            year 1970 the Office               of Educa-
tlon began requlrmg            State or private            guaranty     agencies
partlclpatlng      under the Federal           rernsurance          provlslon    of the
Higher Education        Act of 1965 to report               data on repayments
by borrowers.        In our opinion,         rt would also be desirable
for the Office       of Education        to know, at the end of the fls-
cal year,     the  correct       contrngent      lrabillty        under the Federal
program.      Therefore     we suggested         to the Offrce of Education
that It consider        the feasiblllty          of obtalnlng          such informa-
tlon from lenders         partlclpatlng        111 the Federal          program,
since current      procedures         do not provide         for lenders       to re-
port the unpaid balance of loans.

        In his letter     to us of October 1, 1970, the Assistant
Secretary,     Comptroller,    HEW, agreed with our suggestion    and
stated that all partrclpatlng        lenders  had been requested   to
provide    this and other related      data to the Office  of Educa-
tion.

GENERAL COMMENTS

       The Higher Education         Amendments of 1968 provided       for
the payment of claims for loans made on or after                December 15,
1968, that were unpaid because of the deaths or dlsablll-
ties of the borrowers,           to be charged to the higher      educa-
tlon actlvitles       appropriation     rather    than to the Student
Loan Insurance       Fund.     Consequently    premiums on all loans
under the Federal program are shown as income on the income
and expense statement          but only losses resulting      from de-
faults    (not because of the deaths or dlsabllltles             of the
borrowers)      of loans made on or after         December 15, 1968, are
shown as expenses on the statement.




                                           17
       We belreve     that all losses on loans insured under the
Federal     program and on reinsured              loans made under the State
program should be shown in a footnote                   to the statement       of
income and expense.          We belleve         also that the Office        of Edu-
catlon    should consider       including        wrth the frnancral       state-
ments a statement        showing the Interest             benefits   (see p. 4),
administrative       expenses,     and losses on insured           loans made
after   December 14, 1968, that are paid from the higher edu-
cation    actlvltles     approprlatlon,           so that the full      cost of
the Guaranteed       Student Loan program will              be apparent     to
readers     of the flnanclal        statements.

       The Assistant    Secretary,    Comptroller,       HEW, m his let-
ter to us of October 1, 1970, agreed with our views regard-
mg full    disclosure    of losses and informed us that the fis-
cal year 1970 flnanclal        statements    would be developed     ac-
cordingly.      We noted that appropriate        footnotes    had been
added to the fiscal      year 1970 financial        statements,   to pro-
vide full    disclosure    of losses on insured        loans under the
Federal program and on reinsured          loans under the State pro-
gram.




                                        18
                                   CHAPTER4

                           SCOPE OF EXAMINATION

        We have examined the financial          statements    of the Stu-
dent Loan Insurance      F'und administered        by the Office    of Edu-
cation,    HEN, for the fiscal      year ended June 30, 1969, in-
cluded herein.       Our examination     was made in accordance         with
generally    accepted auditing      standards      and included    such
tests of the accounting       records and such other auditing            pro-
cedures as we considered       necessary      in the circumstances,
except as stated rn the following           paragraph.

        Our examination      showed that the amount of the year-end
accounts receivable        did notinclude      all the unpaid insurance
premiums that had been billed            to lenders with respect             to
loans made in fiscal         year 1969.      Moreover the amount in-
cluded estimated       premiums that had not been billed                to
lenders    for insured     loans made during        fiscal     year 1969.
Therefore      it was not feasible       for us to follow         the normal
auditing     procedure    of confirming      year-end      balances     of in-
surance premiums due from lenders             or to satisfy         ourselves
as to the amount of the year-end             accounts receivable           through
other means.

         Our examination   included   a review of the laws autho-
rizing     the Student Loan Insurance      Fknd and of the Office     of
Education's     policies   and procedures      for implementing   the
legislation.       We also corresponded      directly   with students  on
a test basis to confirm         the amount of loans obtained      by
them.

.




                                        19
                                 CHAPTER 5

                   OPINION OF FINANCIAL       STATEMENTS

      The financial   statements   accompanying      this report
(schs. 1 through    4) were prepared    by HEW and minor modifica-
tions were made by GAO to Improve their         clarity.

     We cannot express an opinion             regarding    the reasonable-
ness of the amounts shown on the            financial     statements  for:

       --Accounts     receivable,     because it was not practicable
          for us to confirm year-end         balances with lenders      or
          to satisfy     ourselves    as to the validity      of the ac-
          counts   receivable      by other auditing     procedures;
          also, not all the unpaid premiums on loans made dur-
          ing the year had been included           in the accounts re-
          ceivable    at the year-end.       (See pp. 11 to 13.)

       --Income     from Insurance    premiums and insurance  premium
           Income deferred,     because not all the premiums on
           loans made during the year had been considered        in
           computing the amounts shown.        (See pp. 11 and 12.)

       --Allowances     for losses on loans receivable   and ac-
          crued interest     receivable, because the reasonable-
          ness of the data used to compute the loss rate was
          not readily    determinable.   (See p. 14.)

       Further,   the amount for unpaid default    claims that
were classified      as deferred charges was overstated   because
an allowance    for losses was not provided.     (See pp. 13 and
14.)

        For the reasons set forth        in the preceding      paragraphs,
we are of the opinion       that the accompanying        financial
statements     do not present    fairly    the fznanclal     position     of
the Student Loan Insurance         Fund at June 30, 1969, and the
results    of its operations     and the sources and application
of its funds for the fiscal          year then ended, in conformity
with principles      and standards      of accounting    prescribed     by
the Comptroller      General of the United States.


                                      20
PXNAEJCIALSTATEMENTS




   21
                                                                                                                                                                                                            SCHEDULE I


                                                                                        OFFICE                       OF             EDUCATION
                                                                                                 SNDEhT         LOAN IhNiWICE                    FUhD


                                                                                               STATEHEhT        OF FIhAXIAL                 CONDITION

                                                                                                        AS OF JUNE 30                     1969

                                                                                                                   ASSETS
CASHANDNNDBAWNCE
     Cash on hand                and in transit                                                                                                                                         S       6 877
     Fund balance                with I, S Treasury                                                                                                                                      4,095.540
             Total         cash and            fund        balaru      e                                                                                                                                               54,102          417
IWESTNENTS--PUBLIC                       DEBT SECURSTItS                    {par      value)       (note      1)                                                                                                              412 003
ACCOUh7S       RECEIV4Bl.E                                                                                                                                                                                                    485      807
                                                                                                                                 Insured                  ReinSWed
ACCRUED IKIERESI                 RECEIVABLE                                                                                  $ 1 051                      s            214
    Less ellowance                 for losses                                                                                 578                             118
             Net      accrued            interest            receivable                                                          473                          96                                                                       569
&%NS       RECEIVABLE            (note         2)                                                                                66 055                         21 096
        Less ellovawze              for        losses                                                                            36,330                       11.603
              Net loans             receivable                                                                                   ?9,725                             9.493                                                       39.218
DEFERRED CKAFXXS                 (note        a)                                                                             SD                           s157.384                                                            165.57"
             Total         assets                                                                                                                                                                                      55.206,=^3
                                                                                                        LIABILIIIES
ACCRUED LIABILITIES                      (note        3)                                                                                                                                                               5      242 6&
DEFERF%D CREDITS
     Discount   on investment--public                                      debt    securities                                                                                           $           8,036
     In'surance   premium income                             (note         b)                                                                                                                1.188.219
             Sots1         deferred           credits                                                                                                                                                                      1.196.255
              Total        liabilities                                                                                                                                                                                     1,439,099
                                                                                                   NET               IHvESTHENT
CAPITAL      APPROPRIATED                   (note       c)     (note        4)                                                                                                              53.487.675
IWRSTMENT            IN REINSURED                LoAh.         (schedule           2)                                                                                                           166,974
ACCWULATED            h=       INCOYE--1hSUFXD                       (schedule          2)                                                                                                      113.242
              TdA          investment                                                                                                                                                                                      3,767       631
             Totel         liabilities                and investment                                                                                                                                                   $5,206          470
%npeid        defaulted             loans        guaranteed                by the U S Government
‘A major change In our method of statement           presentation                                                 involves     tk deferring        of insurance                       premiw   income over             the a%er-
  age length     of loans       Our best estimate  of expected                                               losses      for the $205 226 220 of Insured                              Loans is $1 325 000                 As fx-
  ther experience       is gained   I* this program alternate                                                methods of state-t            presentation       will                    be cons dered
‘Xeduced        by Reinsured                 Claims          processed
 Contingent      liabiliv                     for     loans undervritten
       Insured      Loan.5                  $205      256 220
       Reinsured         Loans               496      115 602
Notes
   'ihe    opinion         of the General                    Accounting            Office         on these           financial            statements      appears            on page 20 of +his              repart
   The notes          on page 27                    vhich kere             prepared            by the      Genersl        Accounting             Office       should         be coxfdered           &en      reading    the
   statement          of financial                    condition




                                                                                                                                 23
SCHEDULEi 2


                            OFFICE OF EDUCATION

                        STUDENT LOAN INSURANCE FUND


          STATEMENT OF CHANGES IN ACCUMULATED NET INCOMFl

              FOR THE FISCAL YEAR ENDED JUNE 30, 1969

                                              Insured   Reinsured     Total

Balance at beglnnrng      of
  perrod                                     $450,491        -      $450,491
Less adJustment    to defer
   Income of prior   year                     415,184        -       415,184

AdJusted  balance at begm-
  nlng of perrod                               35,307        -        35,307
Add net income or deficit    (-1
  for current   period (Sched-
  ule 3)                                       77,935   $-95,351     -17,416

     Total                                    113,242    -95,351      17,891

Add costs      funded    by approprl-
  ations                                                 262,325     262,325

Balance      at end of period                $113,242   $166,974    $280,216

The oplnlon   of the General Accounting  Offlce  on these             flnan-
clal statements    appears on page 20 of this report.




                                        24
                                                                  SCHEDULE 3


                           OFFICE OF EDUCATION

                   STUDENT LOAN INSURANCE FUND


                 STATEMENT OF INCOME AND EXPENSE

            FOR THE FISCAL YEAX ENDED JUNE 30,             1969


                                           Insured    Reinsured      Total
                                                                     --
INCOME:
    Insurance     premiums                $210,077                 $210,077
    Amortization      of discount
       on investment--public
       debt securities                       4,765                     4,765
    Interest     on loans receiv-
       able                                  1,036          214        1,250

         Total   income                    215,878          214     216,092
EXPENSE:
    Loss on loans                          101,035      83,844      184,879
    Allowance    for losses on
        loans receivable                    36,330      11,603       47,933
    Allowance    for losses on
       accrued interest    re-
        ceivable                                578         118              696

         Total   expense                   137,943      95,565      233,508

         Net income    or def-
           icit(-)                        $ 77.935    $-95,351     $--17,416

The opinion    of the General       Accounting Offuze on these         fl-
nanclal   statements  appears       on page 20 of this report.




                                     25
SCHEDULE 4



                                            QFFICE OF EDUCATION

                                     STUDENT LOAN INSURANCE FUND


                         STATEMENT OF SOURCES AND APPLICATION                  OF FUNDS

                                  FOR THE FISCAL YEAR ENDED JUNE 30,                    1969


  Funds applied      to
       Purchase of Investment--public        debt securltzes
          (par value)                                                                                   $412,000
       Increase    In operatrng   fund balance with U.S
          Treasury                                                                                         302,028
       Insurance     claims pald, no asset recerved                                                        184,879
       Loans receivable      m payment of claims                                                            85,996
              Total      funds applied                                                                  $984,903

  Funds provided      by
        Insurance    premrums                                                                           $210,077
       Amortlzatron      of discount    on investment--public
          debt securxties                                                                                    4,765
       Interest     on loans receivable                                                                      1,250
       Repayments recerved        on loans receivable                                                           645
       Decrease In working capital          (note 5)
           (see subschedule      below)                                                                    768,166
              Total      funds   provided                                                               $984,903
                                                                                                  SUBSCHEDULE

                                     DECREASE IN WORKING CAPITAL               (note     5)

  Decreases m working capital'
       Accrued llabllltles                                                          $242,844
       Deferred   insurance premium income                                           773,035
       Deferred  dLscount on investment--publx
         debt securltxes                                                                 8,036      $1,023,915

  Increases      in    working capital
        Cash on       hand and In transrt                                                6,877
        Accounts        recervable                                                      80,643
        Accrued       Interest     receivable                                            1,250
        Deferred        charges                                                        166,979             255,749
             Decrease        in working     capital    (note       5)                               $      768,166,

  The opinion of the General Accountrng                    Offxe        on these    flnanclal    statements
  appears on page 20 of thus report

  Note 5 on page 28, whxh was prepared    by the General                           Accounting    Office,
  should be considered when reading  this schedule



                                                      26
                          GENERAL ACCOUNTING OFFICE

                       NOTES TO FINANCIAL         STATEMENTS

                                JUNE 30, 1969

1. Moneys in the Student Loan Insurance            Fund not needed for
   current    operations     may be invested     in bonds or other ob-
   ligations     guaranteed    as to principal     and interest    by the
   U.S. Government.         The moneys available     for rnvestment
   must be from sources other than appropriatrons               and must
   not Jeopardize       any approprrations     in the fund.      The in-
   vestments     at June 30, 1969, consrsted        of U.S. Treasury
   bills,    maturity    date October 23, 1969, having a par
   value of $412,000 and a market value of $403,379.

2. Loans receivable       represented      the amounts pard to lenders
   for federally      insured    defaulted     loans--the     notes are as-
   signed to the Office of Education--and                 the amounts    paid
   to State and private         guaranty     agencies for federally         re-
   insured   defaulted      loans --the notes are retained            by those
   agencies.

3. Accrued liabrlitles          represented        claims    payable to lenders
   and State or private           guaranty       agencies    and consrsted  of.

             Insured   loan claims due lenders                $ 14,135
             Reinsured    loan claims due State
                and private    guaranty agencies               228,709

                 Total                                        $242,844

4. Capital      appropriated        consisted     of:

             Balance July 1, 1968                           $3,750,000
             Less costs for reinsurance
                claims funded by appropri-
                ations                                         262,325
             Balance     June 30,    1969                   $3,487,675




                                            27
5. Decrease In workmg capital      does not mclude conslder-
   atlon of the Increase   m the cash balance on deposit
   with the Treasury.    As adJusted,   the decrease would be
   as follows.

        Decrease m working capital  as
          shown above                         $768,166
        Less Increase  m cash on deposit
          with the Treasury                    302,028

                                              $466,138




                              28
APPENDIXEIS




    29
                                                                    APPENDIX I

                        STUDENT LOAN INSURANCE FUND

     VOLUME OF COMMITMENTS FOR FEDERALLY INSURED LOANS

                   FROM INCEPTION THROUGH JUNE 30, 1969

                                                       Commitments
                       Date implemented                              Amount
  Location              Federal program          Number              (note    a)

Alabama                        5-68               10,763        $    8,598,820
Arizona                      12-67                11,145             8,054,157
California                   12-67                94,273            83,265,805
Colorado                       8-67               18,922            17,806,311
Florida                        2-68               16,551            15,428,464
Hawaii                         8-67                3,221             3,124,589
Idaho                          2-68                3,785             3,152,696
Indiana                        9-67               18,657            16,469,005
Iowa                           1-69                4,607             4,177,332
Kansas                          9-67              10,358             8,412,959
Kentucky                     12-68                 4,654             3,932,135
Minnesota                       9-67              34,797            29,310,763
Mississippi                  12-68                 4,631             3,302,073
Montana                      lo-67                 7,787             6,329,615
Nebraska                     11-67                 7,397             6,399,126
New Jersey                   lo-67                11,895            11,096,395
New Mexico                      8-68               2,222              1,493,091
North Dakota                    8-67              16,330            13,337,479
 South Dakota                   3-68                6,248             5,041,077
Tennessee                    10-68                     166               155,120
Texas                         12-68                 6,242             5,491,OlO
Utah                            9-67                9,743             8,305,947
Vermont                         9-67                2,842             2,539,680
Virginia                        9-68                1,353             1,307,613
Washington                    11-67               10,056              7,614,567
West Virginia                 lo-67                 6,380             5,431,911
Wyoming                       11-67                 1,144                991,236
 Puerto Rico                    8-68                4,131             2,931,763

    Total                                         330,300        $283,500,739
                                                                           I
aAmount      the    Office of Education      agreed   to insure,    not the
 actual      amount      of loans disbursed.

                                        31                  I
APPENDIX II

                     STUDENTLOAN INSURANCEFUND
                  OUTSTANDINGPRINCIPAL BALANCES
                  SUBJECTTO REINSURANCEPROVISION
                         AS OF JUNE 30, 1969
                                    Effective    date
                                    of reinsurance            Balance
              location                  agreement             (note a>

     Arkansas                               9-68         $  3,639,331
     Connecticut                           12-68           52,411,383
     District     of Columbia               9-68            1,518,510
     Georgia                               12-68           17,854,OOO
     Massachusetts                          9-68           30,115,647
     Michigan                               2-69           20,836,452
     New Hampshire                          9-68            3,592,386
     New Jersey                            12-68           53,875,050
     New York                               9-68          282,500,OOO
     Ohio                                   6-69           22,528,216
     Oklahoma                               9-68            6,615,458
     Oregon                                 9-68            8,571,574
     Pennsylvania                           9-68           88,618,904
     Rhode Island                           2-69            7,056,517
     Tennessee                              9-68           10,434,290
     Vermont                                5-69            2,153,397
     Wisconsin                              9-68            7,823,386

          Total                                          $620,144,501

     aBalances     were estimated        by the Office       of Education.




                                    32
                                                                                            APPENDIX   III




                             DEPARTMENT OF HEALTH,EDUCATION                   AND WELFARE
                                             WASHINGTON,       D C    20201



OFFICE   Ot- THE SECRETARY

                                                   OCT     1   1970


              Mr. Philzp Charam
              Associate Blrector
              U. S. General Accounting Office
              Washington, D. C. 20548

              Bear Mr. Charam:

              The Secretary has asked that I reply to your letter   of July 13, 1970, re-
              questing comments on your draft report on the Fiscal Year 1969 financial
              statements for the Student Loan Insurance Fund. We have reviewed the re-
              port and offer the following   information for your consideration:

              GENEZAL
              As previously     indicated     the Insured Student Loan Program is only a few
              years old and has unique and complex characteristics.                 In developing
              the financial     statements for Fy 1969, we had several discussions                with
              operating    personnel and the DHEWaccounting         system staff regarding           the
              treatment of certain        transactions   and accounts and the presentation             of
              rnformatzon     in the formal reports.       We plan to continue thus process
              in order to provide        the most meaningful    and appropriate       reports possible.
              In this regard it should be recognized that until             suffrclent       experience
              1s gained and mprovements           are made we will,  of necessity,        have to
              provide certain estates            m the reports.

              ACCOUNTSRECEIVABLE AND INSUBANCE PREMIUM INCOME

              We recognize the need to further          strenghten    our accounting procedures
              and will soon request lendmng lnstitutlons             to cooperate with us by
              reporting    loan transactions    more promptly and accurately.           Also, we will
              try to develop an improved procedure for estimating              outstanding
              transactlons     so that our financial       statements will be presented on a
              realistic    basis.     In this regard the report noted the omission of certain
              PY 1969 transactions       from our statements,      however, our records show that
              we included an estimate of $54,738 in our report for transactions
              subsequently     billed   to the lenders.




                                                               33
APPENDIX III


Page   2   - Mr. PhIllIp   Charam

The report states that GAO did not follow the normal procedure of
confIrming    account     balances and that the auditors         could not satisfy
themselves as tf> the valldlty          of the accounts receivable       balance by
other audltlng      procedures.      We are presently     obtalnlng    data from
partlclpatlng      lendrng lnstltutlons       classlfylng   outstandlng     loan balances.
This lnformatlon       should be helpful      for both OE planning purposes and
for audit reviews.         However, until     this 1s compiled we feel that
conflrmatlon     of transactions      could be attempted on a sclentlfic         sampling
basis In order to reach a conclusion             as to the valldlty     of the accounts
receivable    we report.       We ~~11 be happy to cooperate In this. effort
In any way possible.

LOANS RECEIVABLE, DEFERREDCHARGESAND ALLOWANCEFOR LOSSES

This flndlng    concerns our classlflcatlon       of unpaid, defaulted      loans as
a deferred   charge In the statements rather than descrlblng             them as loans
receivable,    and the effect of this treatment upon the loan receivable
account and its related       allowance for losses on loans.        In thzs instance
our accounting    and reporting      treatment was governed by Bureau of the
Budget and Treasury Department lnstructlons           which require    that we show
as loans receivable     only those defaulted      loans for which we had actually
rermbursed the lendlng lnstltutrons.           Consequently we recorded the
unpaid loans for which we were responsible           as a deferred    charge and
dzd not make any adJustment to the allowance for note losses.

We agree wrth GAO that preferred     accounting and reporting     treatment
would require    adJustment of the notes receivable      and loss accounts for
the realizable    value of the assets.    However, until    the conflict   between
the above mentioned regulations     and accounting   theory 1s resolved we
will follow the regulations.      We will review this matter with the Bureau
of the Budget and the Treasury Department,       and ml1 lnvlte     GAO to
participate    in OK observe the sessions.

DEFERREDCREDITS - INSURANCE PREMIUM INCOME
As noted our policy was changed last year to report as income only that
portlon     of collectrons    which were applicable     to FY 1969 and to defer
the balance to other periods.          As these periods occur the accounts and
reports wrll be adJusted approprrately.            This was done based upon our
rnterpretatlon       of generally   accepted accountsng principles    which
require     assignment of revenues and expenses to the periods affected.
Also, It would appear desirable          to do this in accord wrth current
emphasrs and lnstructrons         to achieve the accrual basis of accounting
which provides       for such an allocation    of costs and revenues.




                                          34
                                                                     APPENDIX III

Page 3 - Mr. Phxll~p     Charam




                       [See GAO note.]




CAPITAL APPROPRIATED

Reference 1s made to the relnsurance        activity    of the fund whjch involves
the Government underwrrting       State Insured loan programs.         The consequent
losses are absorbed by the fund capital         wh+ch was previously      appropriated
for other purposes.      It  1s indicated   in   the report    that we  should  request
an additional  approprlatlon      for this new actlvlty.        We agree; and during
FY 1969 we requested and were given addItIona             funds by the Congress.

CONTINGENTLU3IJiIT1ES

It 1s suggested that OE obtain xnformatlon       from lending and guaranteeing
agencies partlclpating      m the program regarding   the outstandlng
principal  balances of loans for which the Government has a contingent
liability.    We agree, and during June 1970, we requested all partxclpatlng
lenders to provide     this and other related  data.

GENERALCOMMENTS

Reference 1s made to a change in leglslatlve             requirements   and the
resulting  change in our reports showrng part            of the loan losses under
the Higher Educatxon Actlvltles  Approprlatxon             and part under the fund.

GAO note:     The deleted      material       related     to matters     that were
              Included     In the draft         report    but omltted      from the
              final    report.
                                         35
APfENDIX   III


Page 4 - Mr. Phrlip   Charam
It is suggested that we make full drsclosure of all losses m the
financial statements of the fund by means of a footnote or other
suitable method, We agrees and will develop the Fy 1970 fund
financial statements accordmgly.
Thank: you for the opportunxty   to review ad ccmnent on your proposed
report.
                                   Sincerely   yours,


                                     &       Lh2!ujd
                                   J8mes B, Cerrdwell
                                   Assistant Secretary,   Comptroller




                                   36
                                                               APPENDIX IV

                          PRINCIPAL OFFICIALS OF THE
                  DEPARTMENTOF HEALTH, EDUCATION, AND WELFARE
                   HA'VINC RESPONSIBILITY FOR THE ACTIVITIES
                           DISCUSSED IN THIS REPORT

                                                   Tenure of office
                                                   From            To
                                                                   -
SECRETARYOF HEALTH, EDUCATION,
  ANDWELFARE:
    Elliot L. Richardson                       June     1970    Present
    Robert H, Finch                            JZKl.    1969    June 1970
    Wilbur J. Cohen                            Mar.     1968    Jan. 1969
ASSISTANT SECRETARYFOR EDUCA-
  TION:
    Vacant                                     June     1970    Present
    James E. Allen, Jr,                        May      1969    June 1970
    Peter P. Muirhead (acting)                 Jan.     1969    May 1969
    Lynn M. Bartlett                           July     1968    JZUI* 1969
COMMISSIONEROF EDUCATION:
   Sidney P. Marland, Jr.                      Dec.     1970    Present
   Terre1 H. Bell (acting)                     June     1970    Dec. 1970
   James E, Allen, Jr.                         May      1969    June 1970
   Peter P. Murrhead (actmg)                   Jai-l,   1969    May 1969
   Harold Howe, II                             Jan.     1966    Dec. 1968




US   GAOWaeh,BC
                                        37