oversight

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)

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