Offtce of Educatron Departmentof Health, Education, and Welfare BY THE COMPTROLLER GENERAL OF THE UN1 STATES COMPTROLLER GENERAL OF THE UNITED STATES WASHINGTON DC 20548 B-117604(7) To the President of the Senate and the L Speaker of the House of Repre sentatlve s This IS our report entltled “Office of Education Should Improve Procedures to Recover Defaulted Loans Under the Guaranteed Student Loan Program ‘I This program, admmls- 1 tered by the Offxe of Education, Department of Health, Edu- y -r- v cation, and Welfare, IS authorized by title IV, part B, of the 9 t Higher Education Act of 1965 In view of the llablllty of the Government If defaults occur m the repayment of these loans, our review was prlmarlly to ascertam whether clalms- collection operations were m accordance with the Federal Claims Collection Act of 1966 Our review was made pursuant to the Budget and Ac- counting Act, 1921 (31 U S C 53), and the Accountmg and Au- dltmg Act of 1950 (31 U S C 67) Copies of this report are bemg sent to the Director, Of- fice of Management and Budget, the Secretary of health, Educa- tion, and Welfare, and the Commlssloner of Education, Department of Health, Education, and Welfare Comptroller General of the United States 50TH ANNIVERSARY 1921- 1971 Contents Pane DIGEST 1 CHAPTER 1 INTRODUCTION 4 2 INADEQUACYOF RESOURCES ALLOCATEDTO THE COLLECTIONEFFORTS 10 Recommendation to the Secretary of Health, Education, and Welfare 12 3 IMPROVEMENTS NEEDEDIN CLAIMS-COLLECTION OPERATIONS 14 Recommendations to the Secretary of Health, Education, and Welfare 17 4 ADDITIONAL ACTION NEEDEDIN BANKRUPTCY CASES 18 5 NATIONAL REFUNDPOLICY NEEDED 19 Recommendation to the Secretary of Health, Education, and Welfare 20 6 SCOPEOF REVIEW 21 APPENDIX I Letter dated July 30, 1971, from the As- slstant Secretary, Comptroller, Depart- ment of Health, Education, and Welfare 23 II Prlnclpal offlclals of the Department of Health, Education, and Welfare having responslblllty for the actlvrtles dls- cussed In this report 26 COMPTROLLERGENERAL'S OFFICE OF EDUCATION SHOULD IMPROVE REPORT TO THE CONGRESS PROCEDURESTO RECOVER DEFAULTED LOANS UNDER THE GUARANTEEDSTUDENT LOAN PROGRAM Department of Health, Education, and Welfare B-117604(7) DIGEST ------ WHY THE REVIEW WAS MADE The Guaranteed Student Loan Program enables students attending colleges or vocational schools to finance part of their education by borrowing In cases of default the Offlce of Education (OE), Department of Health, Education, and Welfare, (which administers the program) 1s liable for un- paid balances of loans Because of the potential llabll~ty of the Fed- eral Government, the General Accounting OffIce (GAO) evaluated OE's --efforts to recover debts arising out of student defaults, --debt-collection operations, and --refund pollcles FINDINGS AND CONCLUSIONS As of January 31, 1971 --Over 1 million loans amounting to nearly $1 billion had been insured under the program --5,920 loans were in default, of which 751--about 12 percent--were due to death or dlsablllty (In which case neither the estate nor the stu- dent had to pay) --3,049 of the loans in default were unprocessed in OE, that IS, no collection action had been taken As of September 30, 1970, there were 704 unprocessed claims (See p 11 ) As of September 30, 1971, 15,427 loans were in default and 8,963 had not been processed (See p 10 ) Inadequate cotlectzon staff The raped buildup of unprocessed defaults 7s clear evidence that the Claims and Collection Section of OE 1s inadequately staffed (See p 13 ) Improzlements needed zn debt-collectcon operatzons GAO noted that improvements were needed an the following categories --Failure to proceed against all liable partles Collection action was being taken against the student borrower and not agajnst co- signers, such as parents or spouses (Seep 14) --Possible legal lmpedlment A cosigner on the promissory note usually does not s7gn the Installment note If default occurs and 7f the promissory note has been surrendered to the borrower (which fre- quently happens), there appears to be no right of the Government to proceed aga?nst the cos7gners of the promissory note (Seep 15) --Demand letters not forceful enough The form collection letters used by OE are not sufficiently forceful to impress the debtor of his legal obligation to repay (See p 16 > --Failure to obtain fjnanclal information OE should obtain flnanclal statements from debtors for evaluation of any proposed plan of payment and for use in subsequent collectIon efforts (Seep 16) OE has not attempted to ascertain the ultimate dlsposltlon of bankruptcy cases Such lnformatlon would assist OE in determining whether addlt-ronal collection action should be taken No collection actIon has been taken against cosigners who were not Joint participants in the bankruptcy pro- ceedlngs and who were, therefore, not released from llabil7ty (See P 18) Lack of refund poZz-cy An important deficiency in the entire program 1s the absence of a uni- form policy setting forth the cond7tlons under which participating schools will make tuition refunds--In cases of death, dropout, etc --and to whom refunds should be made In some cases no refunds are made un- less inquiries are sent directly to the schools, in other cases schools make refunds directly to students (See p 19 ) The Department of Health, Education, and Welfare (HEW) feels that refunds are assets of a student's estate in the event of his death, and It does not require that such refunds be used to reduce the indebtedness to the Federal Government (See p 19 ) In some cases tuition fees were in excess of the amount obtainable by the student on an insured loan, and the student obtained another loan from the same lender on condltlon that this additional loan be guaran- teed by the school The refunds paid by the schools were applied first to satisfy the private loans, and, if there were any amounts remaining, they were used to settle the Government insured loans GAO believes that refunds should first be applied toward reduction of the Federal loan (See p 20 ) 2 RECOMMENDATIONSOR SUGGESTIONS GAO recommends that HEW --Take all necessary action to assign required employees to the debt- collection sectlon of OE (Seep 12) --Take prompt action to improve claims-collection operations (See P 17) --Establish a national refund policy (See p 20 ) AGENCY ACTIONS AND UNRESOLVEDISSUES The Department of Health, Education, and Welfare agreed with GAO HEW's budget for fiscal year 1972 includes 52 additional posltlons for claims- collection activities (See p 12 ) HEW said that it would improve collection procedures and that every effort would be made to establish a nationwide tuition refund policy as soon as possible (See pp 17 and 20 ) MATTERS FOR CONSIDERATION BY THE CONGRESS In view of recent and anticipated budgetary restraints, this report 1s to inform the Congress of the rapid buildup of unprocessed default claims under the student loan program and of the necessity for improved clalms- collection operations It 1s also to call attention to the absence of a natlonal refund policy for educational lnstltutlons partlclpatlng in the Guaranteed Student Loan Program in connection with defaulted loans as well as loans involving students who have died or who have become totally and permanently disabled Tear Sheet 3 RECOMM&'NDATIONSOR SUGGESTIONS GAO recommends that HEW --Take all necessary action to assign required employees to the debt- collection sectlon of OE (See P 12 ) --Take prompt action to Improve claims-collection operations (See P 17) --Establish a natlonaf refund policy (See p 20 ) AGENCY ACTIONS AND UNRESOLVEDISSUES The Department of Health, Education, and Welfare agreed wjth GAO HEW's budget for fiscal year 1972 includes 52 additional posltlons for claims- collection activities (See p 12 ) HEW said that it would improve collection procedures and that every effort would be made to establish a natlonwlde tultlon refund policy as soon as possible (See pp 17 and 20 ) MATTERS FOR CONSIDERATION BY THE CONGRESS In view of recent and antlclpated budgetary restraints, this report 1s to Inform the Congress of the rapld buildup of unprocessed default claims under the student loan program and of the necessity for Improved claims- collection operations It 1s also to call attention to the absence of a national refund policy for educational institutions participating in the Guaranteed Student Loan Program in connection with defaulted loans as well as loans involving students who have died or who have become totally I- -‘ and permanently disabled 3 CHAPTER1 INTRODUCTION The Guaranteed Student Loan Program, establlshed pur- suant to title IV, part B, of the Higher Education Act of I.9651 comprises two components--(l) loans insured by a State or a pravate nonprofit agency and (2) loans insured by the Federal Government when students or lenders do not have rea- sonable access to a State or a private nonprofit program. Both of these components enable a student attending an In- stltutzon of higher education or a vocational school to fl- nance part of his education by borrowing. Cur report covers only those loans insured by the Federal Government. A student may obtain a loan directly from a bank, credit union, savings and loan assoclatlon, or any other partlcl- patlng lender. A loan 1s repayable commencing 9 to 12 months after the date on which the student leaves school or ceases to carry the prescribed academic work load. The repayment period may not exceed 10 years, exclusive of any deferment period. To obtain a loan from a lender, the student and his famrly submit an appllcatlon to the school or college which must certify (1) that the applicant 1s enrolled or has been accepted for enrollment, (2) that he 1s In good academic standrng, (3) that his estrmated educational expenses are reasonable, and (4) the amount of other financial aid made available by or through the lnstltutlon, The completed appllcatlon first goes to the lender, and, If he agrees to make the loan, the appllcatlon 1s next sent to the Office of Education for a commitment to insure the loan. The funds may then be disbursed by the lender directly to the student or, in some instances, to the school or college. Under the act a loan made by an elrglble lender shall -be evidenced by a promissory note or other written agreement 1Higher Education Act of 1965, as amended, 20 U S C. 1071 through 1087, and regulations published in the Federal Reg- ister, October 31, 1970, vol. 35, no. 213, p. 16888. 4 and shall be made without security and wrthout endorsement, except that, If the borrower 1s a minor and if the%note or written agreement would not, under applicable local law, create a blndlng obllgatlon, an endorsement may be required. As of August 31, 1970, there were loan commitments of over $743 million. These commitments increased by $91 mll- ' lion In September 1970 and continued to increase at 'an av- erage $36 mllllon a month through January 31, 1971, at which time over 1 million loans, amounting to neakly $1 bllllon, tit had been insured by the Federal Government under the Guar- anteed Student Loan Program. The accumulated loan total and guarantee commrtments by months, from September 1, 1970, through January 31, 1971, are shown on the chart on the fol- lowing page.l c 4 ' -12ic The act provrdes that the Government's llablllty on: any loan insured by OE be 100 percent of the unpaid balance 1 of the prlnclpal amount of the loan. OE's obllgatron to: pay Interest shall terminate (1) upon default by the bor- rower or (2) upon a determlnatron of the death or total end permanent dlsablllty of the borrower. 1 * OE will reimburse the lender for loss on an msured,,e lrd loan only if the loan (1) is determined to be In default or (2) 1s canceled in accordance with the law and regulations. "Default" means the failure to make an installment payment 'L when due or to comply with other terms of the note or other written evidence of agreement. Such failure must be cured either by payment or by other appropriate arrangements in ' 120 days if repayment is by monthly installments and ln 180 days for less frequent installments. ;I c, A claim for reimbursement for loss on an insured loan shall be filed on a form provided by OE and may be made (1) at such time as the lender determines that the loan cannot be collected, or (2) after such time as the lender ascer- tains that the borrower has died or has becomeJtotally and permanently disabled, or (3) upon notlflcatlon that the bor- rower has been adJudlcated a bankrupt. 1The figures shown on all of the charts In this report were furnished by OE. LOAN COMMITMENTS DOLLARS 1,100,000 n I I I I I 1, DOILLARS I100,000 1 ,ooo,ooo I$939 492 I3906 656 900 000 800 000 700,000 600,000 500,000 400,000 300 000 200,000 100,000 0 0 SEPTEMB OCTOBER NOVEMBER DECEMBER 1970 1970 1970 1970 1971 1fgfYy-J CUMULATIVE SINCE INCEPTION NUMBER OF LOANS tt DOLLAR AMOUNTS SHOWN IN THOUSANDS MONTHLY A lender must use due drllgence In attemptlng to effect collection. A written demand for payment must be made on the borrower and upon any endorser on a defaulted loan not less than 30 days nor more than 60 days prior to filing a claim with OE, and all claims must be supported by the re- quired documents. Upon payment to the lender by OE of the amount of the loss resulting from default on a student loan, the United States becomes subrogated to all of the rights of the holder of the obllgatlon upon the insured loan and 1s entitled to an assrgnment of the note or other evidence of the insured loan. 7 t As of January 31, 1971, OE had paid a total of $5,039,088 in 5,920 defaulted and canceled loans, as shown b&LOW. 414 claxms (7%) due to bankruptcy, amountlng to $435,528 751 claims (13%) due to death or dlsablllty, amountmg to $776,174 4,755 claims (80%) due to defaults, amountxng to $3,827,386 The law does not recplre that collection actlon be taken on claims due to death or dlsablllty. NUMBER NUMBER OF LOANS OF LOANS 6,000 6,000 TOTAL 5 920 s,ooa 5,000 4,000 1,000 3,000 ~,OOO 2,000 !,OOO 1,000 ,000 0 0 BANKRUPTCY DEATH AND DEFAULTS TOTAL DISABILITY ‘? 8 As of September 30, 1971, payments had rncreased to a total of $13,272,750 on 15,427 defaulted and canceled loans, an aggregate increase In 8 months of $8,233,662 on 9,507 claims. The increase In defaults since inception of the program 1s shown below. Period Number of claims pard Amount Fiscal years 1968 and 69 237 $ 203,385 Fiscal year 1970 1,798 1,493,320 tt " 1971 9,507 8,034,250 CJily, Aug., " 1972 Sept.) 3,885 3,541,795 Total 15,427 $13,272,750 CHAPTER2 INADEQUACYOF RESOURCES ALLOCATED TO THE COLLFXTION EFFORTS The Federal Claims Collectxon Act of 1966 (31 U S C 952) and the lmplementlng Joint Standards, promulgated by the Comptroller General and the Attorney General of the United States pursuant thereto, Impose primary responslblllty for collectaon of debts due the United States on the agency whose operations give rise to such lndebtednesses At the time of our review beginning In December 1970, three employees were asslgned to handle collection opera- tions In the Insured bans Branch of OE Our review showed that the work performance of these employees was very good. We concluded that, in view of the rapid bulldup of defaulted loans under the Guaranteed Student ban Program and In view of the large number of these loans on which the branch had been unable to lnltlate any collection actxon, the re- sources asslgned to the collection efforts were inadequate. As illustrated on page 11, the number of loans in de- fault increased from 3,031 in September 1970 to 5,169 in January 1971 During the same period the number of these loans that were unprocessed, 1.e , those on which no collec- tion action had been taken by OE, rose from 704 to 3,049. As noted previously on page 9, the loans in default further increased to 15,427 as of September 30, 1971 Of these 15,427 claims, 8,963 had not been processed. Thus, during the 8-month period ended September 30, 1971, the total number of loans In default and the number unprocessed ahmost tripled The timely processing of these claims 1s of utmost im- portance Under the Federal Claims Collection Act and the lmplementlng Joint Standards, those claims which cannot be satlsfactorlly resolved by the agencies are to be promptly reported to GAO for further collection actnon and referral to the Department of Justice, If necessary As of August 31, 1971, however, no referrals had been made rn connection wxth the loans 10 NUMBER OF LOANS IN DEFAULT SEPTEMBER 1970 - JANUARY 1971 NUMBER BER 4s OANS oF4i-%~ , - 100 5 169 5,000 mo 5% , 4010 -0 4,ooc 000 3,000 300 2,oot 000 l,OO( ,000 0 SEPTEMBER OCTOBER NOVEMBER DECEMBER JANUARY TOTAL CLAMS RECEIVED - - - - PERCENTAGES SHOWN REPRESENT INCREASE OVER PRIOR MONTH CLAIMS UNPROCESSED 11 The chart on page 13 presents further analyses of loans m default as of January 31, In addltlon 1971 to showing that 59 percent of the defaulted loans had not been processed, the chart shows that payments were being re- ceived in only 8 percent of the cases. Also it should be noted that the average amounts of the lndivldual defaulting loans have been increasing yearly, as shown by the followrng table Approximate amount Period of each loan Fiscal years 1968 and 1969 $696.00 Fiscal year 1970 781.00 Fiscal year 1971 809.00 July 1971 (fiscal year 1972) 867.00 Aug. 1971 891.00 Sept. 1971 911.00 RECOMMENDATIONTO THE SECRETARY OF HEALTH, EDUCATION, AND WELFARE We recommend that the Secretary take the necessary ac- tion to assign required employees to the debt-collection section of OE HEWconcurred in our recommendation and advised us that its budget for fiscal year 1972 includes 52 additional posi- tions to administer claims-collection activities. Of these 52 positions 41 will be assigned to collection activities in the 10 regional offices of HEWand 11 will be assigned to the Washington, D C d office. An increased staff, in this instance, should result in a much improved collection opera- tion 12 STATUS OF LOANS IN DEFAULT AS OF JANUARY 31, 1971 NUMBER NUMBER oF%~~s , 5 169 5 000 -! i,ooo 4,000 4,000 3043 3 000 3,000 2#000 -: 1,000 1,000 -1 ,000 * 341 I r-m-1 0 0 1 2 3 4 5 6 7 TOTAL I CLAIMS REPAID IN FULL 5 PAYMENTS BEING RECEIVED 2 CLAIMS ACTION TEMPORARiLY DEFERRED _ t -5 6 FURTHER LOCATOR ACTION REQUIRED El 3 CLAIMS ON WHICH DEBTORS NOT PAYING 7 CLAIMS UNPROCESSED 4 BANKRUPTCY INVOLVED *COLLECTION ACTION ON 341 CLAIMS WAS TEMPORARILY DEFERRED BECAUSE THE STUDENTS HAD RETURNED TO SCHOOL OR THEY WERE SERVING IN THE MILITARY SERVICE OR THE PEACE CORPS CHAPTER3 IMPROVEMENTS NEEDEDIN CLAIMS-COLLECTIONOPERATIONS Although written claims-collection procedures have not been formulated as yet by OE, we did examine the HEWGeneral Administration Manual, Chapter 4-70, Claims Collectron Pro- cedures, issued November 1, 1968. We suggested certain changes, and we were assured by HEW that appropriate action would be taken. We noted that OE had established an effec- tive working arrangement with the Internal Revenue Service to assist in locating debtors. In addition to the delays we noted in the processing of claims, we noted that improvements were needed in claims- collection operations in the following categories. 1. Failure to proceed against all liable partles--Sec- tlon 103.6 of the Joint Standards contemplates si- multaneous collection actions being taken against jointly and severally liable partles. &r examina- tion of 219 defaulted loans, exclusive of those lnvolvlng bankruptcy, death, and dlsabllity cases, shows that, at the time of our review, collection action was being taken only against the student borrower. In 78 of the 219 cases, the promnssory notes had been cosigned by parents, spouses, or others. In 13 of the cases, the student borrower was under 21 years of age and his parents had not cosigned the note. The HEWOffice of General Counsel has informed us that, since there are many differences in State laws, appropriate guidelines for OE will be issued in connection with the liability of parents for educational debts of a minor. GuIdelines also will be Issued concerning a spouse's liability for educa- tional debts. OE is now making demands on those parents or others who have cosigned the notes with the student bor- rower. Pending the issuance of guidelines, however, demand is not now made on the parent of a minor un- less the parent has cosigned the note. This results 14 In collection actlon being taken on a plecemeal basis since demand would not be made simultaneously on all liable parties. Prior to referring a claim to GAO for collection assistance, the admlnlstratlve office must take collection action against everyone who 1s liable for the debt. 2. Possrble legal lmpedlment --The promissory note (OE form 1164) contains the terms and condltlons for ansured student loans. At the time of repayment, an attempt 1s made by the lender to have a student execute a note (OE form 11711, which provides for installment payments. The installment note contains the following state- ment. "The undertaking of the maker 1s In satls- faction of his exlstlng obllgatlon to repay sums advanced to him by the lender as evl- dented by the promissory note(s) executed by the maker and dated the repayment of which has been insured by the U.S. Government **. The obllgatlon of the maker hereunder 1s subJect to the terms &id condltlons of such promissory note(s)." Instructions to lenders for filing claims, which were issued by OE, provide that, If the lender 1s unable to obtain a signed installment note (OE-1171) from the student, he may attach a schedule of pay- ments to the promissory note (OE-1164) and inform the student of the payment schedule. We were Informed by OE that, upon execution of an installment note by a student borrower, many States require the lender to surrender the original prom- issory note to the borrower. Our review confirmed this. In addltlon, a close examlnatlon of these installment notes showed that they seldom contained the signature of a cosigner, even though the prom- issory note had a cosigner. 15 If default occurs in the payment of the installment note and If the promissory note has been surrendered to the borrower, the Government apparently has no rrght to proceed against the signers of the promissory note. 3. Demand letters not sufficiently forceful--The form collection letters used by OE are not sufficiently forceful to impress the debtor of hrs legal obllga- tlon to repay his debt. Speclf lcally the letters do not request payment in full or in part but merely request that the debtor propose a plan of repayment. Nerther do the letters set forth the fact that, If payment 1s not received, the clarm may be referred to GAO for referral to the Department of Justrce, if necessary. We have furnished OE with copies of our various form collection letters and card forms for locating debt- ors whose addresses are unknown, a procedure which we have found to be effective rn our collection activities. OE representatives have indicated that they would consrder the use of such materlal In fu- ture revisions of their form letters and card forms, 4. Failure to obtain flnanclal information from debtor-- Claims-collection procedures of HEWprovide for ob- taining financial information from (1) a commercial credit report, (2) an agency investigative report which shows a debtor's assets, income, etc., or (3) a debtor's own statement made under penalty of per- jury. Current financial lnformatlon 1s required under the Joint Standards for use in evaluating any plan of payment proposed by a debtor. This informa- tion serves as a basis for conslderatlon of any offer in compromise submitted by the debtor and provides a basis for other determinations, such as terminating collection action or referring the debt to GAO. It has not been the practice of OE to request flnan- clal information from debtors at the time demand for payment 1s made. This method, however, has proved to be very effective in GAO's collection efforts, 16 and It also ellmlnates the expense of obtalnlng a commercial credit report, RECOMMENDATIONSTO THEi SECRETARY OF HEALTH, EDUCATION, AND WELFARE The Federal Claims Collection Act of 1966 and the lm- plementlng Joint Standards provide that admlnlstratlve agencies take timely and aggressive collection actlon on all debts due the United States. We therefore recommend that the Secretary of Health, Education, and Welfare urge the Offlce of General Counsel and OE to take prompt actIon* to a , 1. Issue lnstructlons or guidelines concerning the llablllty of a parties so that piecemeal collec- tion actlon may be avoided. 2. Protect the interest of the United States when State laws require that the orrglnal promissory note be surrendered upon execution of an Install- ment note. The substltutlon of an installment note omlttlng the signature of a cosigner on the prom- lssory note could be preJudicla1 to the United States since apparently It will prevent the Government from proceeding against the cosigners. 3. Make appropriate changes to strengthen the demand approach since an effective collection program 1s dependent In part on the manner In which request for payment 1s made. 4. Obtain flnanclal statements from debtors whenever practicable. We suggest the use of a form similar to that utlllzed by GAO, a copy of which was fur- nlshed to OE. HEW concurred In our four recommendations for lmprov- ing collection operations. 17 CHAPTER4 ADDITIONAL ACTION NEEDEDIN BANKRUPTCYCASES Cur examination of 30 bankruptcy cases shows that no attempt has been made to ascertaln the ultimate disposition of bankruptcy cases, Such information is necessary if the Government's interest is to be protected. A debtor may file a petition in bankruptcy, but, unless he is discharged in bankruptcy, there is no legal release of his obligation to pay his debt. Further, in proceedings for Wage Earners' Plans under chapter XIII of the Bankruptcy Act, as amended (11 U.S.C. lOOl>, the debt is not released and, should the debtor fall to remain under the plan until final payment is made to the Government, regular collection proceedings should again be instituted. We have furnished OE a copy of the let- ter we have used successfully to elicit information as to whether additional collection action is required or if the claim may be closed. In 16 cases 12 spouses and four parents were cosigners of the notes, but in only three cases were the cosigners Joined in the bankruptcy proceedings. No collection action was taken against the cosigners. Unless a cosigner is a Joint participant in a bankruptcy proceeding, the filing of a petition by the signer of the note will not excuse the cosigner from liability. In five cases it appeared that the lender did not file proofs of claim. OE has agreed to file proofs of claim in these five cases and to review its action in the other 25 cases. We called attention to the fact that an erroneous pay- ment of $1,000 had been made to a lender on the assumption that the student borrower was bankrupt, whereas her parents were the bankrupts. OE has agreed to contact the lender for refund of $1,000 and to ascertain the status of the loan. Also OE plans to investigate a similar case involving a pay- ment of $500 to a lender since it is not clear from the rec- ord whether the bankrupt was the father or the son. If the father is the bankrupt, appropriate action will be taken against the son (borrower). We have been assured that all bankruptcy cases ~111 be carefully processed in the future so that appropriate col- lection action will be taken against all proper parties. CHAPTER5 NATIONAL REFUNDPOLICY NEEDED An Important deflclency In the entire federally insured student loan program 1s the absence of a uniform tultlon re- fund policy settang forth the condrtlons under which educa- tional facllltles partlclpatlng In the program ~111 make re- funds and the parties to whom such refunds should be made. Studies made by the Accredltatlon and Instltutlonal Ellglblllty Staff, OE, show a dlverslty of refund pollcles by both school-accredltlng agencies and schools. Some ac- crediting agencies, In instances In which rIllnlmum policy standards have been establlshed, do not require that the ac- credited schools have refund pollcles or that the existence of a refund policy be acknowledged or published in the school catalog or In enrollment agreements. OE employees emphasized this dlverslty of refund poll- cles by calling to our attention a number of cases In which former studehts contacted lenders OL OE after they had left school and alleged that they were entitled to tultlon re- funds. When the schools were informed of the sltuatlon, some of them made refunds for appllcatlon to the loan indebtedness but others did not, for a variety of reasons. In many cases schools were making refunds directly to students instead of remlttlng the amount involved to the lender or to OE. The present law provides that, If the borrower dies or becomes totally and permanently disabled, the Commlssloner of Education discharge the borrower's llablllty by repaying to the lender the balance owed on the loan. We understand that, because of this statutory provlslon, HEWhas taken the view, In the case of deceased student debtors, that tuition refunds due from schools are assets of a student's estate and that such refunds are not required to be applied to reduce the loan Indebtedness. Although permanent and total dlsablllty or death re- lieves the student and/or his estate from llablllty, it 1s our view that provlslons should be made which would require that any refunds due should be applied to reduce the bor- rower's obllgatlon under the loan. 19 We noted certam cases m which tuition fees were in ex- cess of the amount obtainable by the student on an insured loan. The student then obtarned another loan from the same lender on condition by the lender that this additional loan be guaranteed by the school. When the borrowers terminated their student status, the refunds paid by the schools were applied first to satxsfy the loans guaranteed by the schools, and, rf there were any amounts remaining, they were used to settle the Government-insured loans. The unpaid balances on the Government-insured loans were then claimed by the lenders (after appropriate collection action was taken against the student borrowers without success) and OE satisfied the Gov- ernment guarantees by relmburslng the lenders. We under- stand that OE 1s now taking steps to correct this situation. RECOMMENDATIONTO THE SECRETARY OF HEALTH, EDUCATION, AND WELFARE We recommend that, to the maximum extent practicable, a national refund policy in the Guaranteed Student Loan Program be established. Such polz~cy should set up uniform conditions and procedures under which tuition refunds would be made by educational institutions and should require specifically that any refunds due, regardless of the reason therefor, be ap- plied first to reduce the outstanding loan indebtedness or to reimburse the Government in the event the Government pre- viously has paid the lender under Its guarantee obligation. HEWconcurred in our recommendation and advised us that a nationwide refund policy proposal was under consideration in OE and that every effort would be made to effect this policy as soon as possible. 20 CHAPTER6 SCOPEOF REVIEW Our review was directed to the claims-collection opera- tions of OE In WashIngton, D.C., in connection wrth loans insured by the Federal Government under the Guaranteed Stu- dent Loan Program, We were concerned with (1) the potential liability of the Government because of defaults by students in the pay- ment of their insured loans, (2) the resources allocated to recover debts araslng out of defaults by students in the pay- ment of their loans, (3) the efforts made by OE to collect the amount paid to lenders when default occurred, and (4) whether collection efforts are in compliance with the: 1. General Accountmg Office Policy and Procedures Manual for Guidance of Federal Agencies. 2. Regulations issued Jointly by the Comptroller Gen- eral and the Attorney General of the United States under section 3 of the Federal Claims Collection Act of 1966. These regulations, referred to as Joint Standards (4 CFR 101-105), provide for the administrative collection, compromise, termination of agency collection action and referral of debt claims to GAO. APPENDIX I DEPARTMENT OF HEALTH, EDUCATION AND WELFARE WASHINGTON D C 20201 OFFKE OF THE SECRETARY JUL 30 1971 Mr. James M. Campbell blrector, Claims Dlvlsion Unxted States General Accounting Offace Washington, D.C. 20548 Dear Mr. Campbell The Secretary has asked me to reply to your letter dated June 25, 1971, pertaining to the General Accounting Offxe draft report to the Congress entitled "Need for Improved Collection Procedures on Claims Pald Under the Federal Insured Student Loan Program." The enclosed comments set forth the actxons taken or planned on the matters discussed In the report. Sincerely yours, Assistant Secretary, Comptroller Enclosure 23 APPENDIX I Department of Health, Education and Welfare Comments Pertinent to the Draft of Report to the Congress of the United States by the Comptroller General of the UnIted States on the Need for Improved Collection Procedures on Claims Pald Under the Federal Insured Student Loan Program OVERVIEW OF GAO REPORT GAO's report lndlcates that they believe the Department needs to strengthen its pollcles and procedures m admlnlsterlng the collection of defaulted loans paid under the Federal Insured Student Loan Program m the Offlce of Education To accomplish this, they offer recommendations calling for the Department to (1) provrde the necessary resources to the Claims and Collections Section (11) provide guldellnes and dlrectlons through the Office of Legal Counsel to strengthen the collection procedures, and (111) establish a natlonwlde refund of tultlon policy for all schools ellglble to partlclpate in the program Our speclflc comments on each of GAO's recommendations follow GAO RECOMMENDATIONS 1 That the Secretary take all necessary action in the Immediate future to assign such addrtlonal personnel as required to the Claims and Collections Sectlon of the Offlce of Education to enable it to carry. out its responslblllty DEPARTMENTCOMMENT We concur m the recommendation and as stated in the report have requested m our 1972 budget submlsslon 52 addItIona posltlons to administer claims- collections activltles Of these 52 posltlons, 41~111 be assigned to collection actlvltles m the 10 regional offices of the Department, and 11 will be assigned to the Washmgton, D C office This increased staff should result 1n a much Improved collection operation 2 That the Secretary of Health, Education and Welfare urge the Offlce of General Counsel and the Office of Education to take prompt action to, a Issue lnstructlons concernlna the llabrllty of all parties b Protect the interest of the United States when State laws require that the orlglnal promissory note be surrendered upon execution of an installment note C Make appropriate changes to strengthen the demand approach d Obtain flnanclal statements from debtors whenever practicable DEPARTMENTCOMMENTS We concur 1n these recommendations 24 APPENDIX I The OffIce of General Counsel 1s exploring these matters and preparing appropriate instructions for guidance As soon as these are completed, they will be adopted and instructIons will be Issued to partlclpatlng lenders promptly, Also, we are maklng changes m the collection approach and obtaining, when possible, financial statements from defaulted borrowers, 3 That the Secretary request the Commlssloner of Education to either formulate a refund polz~cy under his existing authority, or seek enactment of legislation to accomplish such purpose DEPARTMENTCOMMENT We concur with this recommendation A natlonwlde refund policy proposal 1s under active conslderatlon in the Office of Education at the present time Every effort will be made to effect this policy as soon as possible 25 APPENDlX II PRINCIPAL OFFICIALS OF THE DEPARTMENTOF HEALTH, EDUCATION, AND WELFARE HAVING RESPONSIBILITY FOR THE ACTIVITIES DISCUSSEDIN THIS REPORT Tenure of offlce From TO SECRETARYOF HEALTH, EDUCATION, AND WELFARE Elliot L. Rxchardson June 1970 Present Robert H. Finch Jan. 1969 June 1970 Wilbur J. Cohen Mar. 1968 Jan. 1969 John W. Gardner A%* 1965 Mar. 1968 COMMISSIONEROF EDUCATION. Sadney P. Marland, Jr. Dec. 1970 Present Terre1 H. Bell (actlng) June 1970 Dec. 1970 James E. Allen, Jr. May 1969 June 1970 Peter P. Mulrhead (acting) Jan. 1969 May 1969 Harold Howe, II Jan. 1966 Dec. 1968 Francis Keppel Dec. 1962 Jan. 1966 USGAO Wash,DC 26 Copies of this report are available from the U S General Accounting Offtce Room 6417 441 G Street, N W , WashIngton, D C ,20548 Copies are provided without charge to Mem- bers of Congress congressiona I commlttee staff members Government offtcia Is members of the press college libraries faculty mem- ~bers and students The price to the general public IS $1 00 a copy Orders should be ac- 1companled by cash or check
Office of Education Should Improve Procedures To Recover Defaulted Loans Under the Guaranteed Student Loan Program
Published by the Government Accountability Office on 1971-12-30.
Below is a raw (and likely hideous) rendition of the original report. (PDF)