oversight

Guaranteed Student Loan Program Bankruptcies

Published by the Government Accountability Office on 1977-04-15.

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

                          DOCUHBET BISURE
01903 -   A1092088

[Guaranteed Student Loan Program BankruptciCs]. HRD-77-83;
HBD-77-8J; B-164031(1).   pril 15, 1977. R.#Leased April 15, 197'.
9 pp.    3 enclosures (3 pp.).
Report to Rep. Don Edwards, Chairman, House Committee on the
Judiciary: Civil and Cnstitutional Rights Subccmmittee; Rp.
William Ford, Chairman, House Coamittee on ducation and Labor:
Postsecondary Education Subcommittee; by Robert P. Keller,
Acting Coptrcller General.
Issue Area: Education, Training, and BEployment Programs (1100).
contact: Human Resources and Development Div.
Budget Function: Education, anpower, and Social Services:
    Higher Education (502).
Organization Concerned: Department of Health, Education, and
    welfare; office cf Education.
congressional Relevance: House Committee on the Judiciary: Civil
    and Constitutional Rights Subccmuittee; House Committee on
    Education and Labor: Postsecondary Educatlca Subcomaittee.
authority: Higher Education Act of 1965, title IV, as amended.
    Education Amendeuts of 1976.
          Under the Guaranteed Student Loan program, loans are
sale to students by participating rivate lenders. These loans
are insured by tL O.S. Office of ducation or by State or
private noprofit guarantee agencies which have reinsurance
agreements with the Cffice. The Federal Government pays 100% of
lender losses on default and bankreptcy claiss on Office of
Education insured lcans, and reimburses State or nonprofit
agenci.es for 80%S os their payments to lenders. A randoa sample
of 606 bankruptcy claims paid during the period July 1, 1975,
through June 30, 1976, was studied.    Fiadings/Conclusions:
Analysis of 541 of bese cases showed the petitioners to havy:
average earnings of $6,678 or the year prior to filing
bankruptcy; average total debts of 14,115, of which $4,3P were
educational debts; and average assets of $4,454. The average
guaranteed student loan was for $2,588, and the average claim
paid to lenders was 2,292, indicating that little     is being
repaid on these loans. Other Federal and private loans averaging
about $1,600 were included ia the Mtnkruptcy petitions. About 8%
of the bankruptcy petitions listed educational loans as the only
indebtedness. Over 3 of those filing were still    ir school.
About 35% of the individuals hd educational debts which
represented 60S ur cre of the total unsecured debts. (SC)
   ,t             I~TwiUCn-ed   Net t   be re eaed etedde thea Oenrak




B-164031 (1)                                    April 15, 1977



The Honorable Don Edwards
Chairman, Subcommittee on Civil
  and Constitutional Rights
Committee on the Judiciary
House of Representatives
Dear Mr. Chairman:
     This letter is in further response to the August 5, 1976,
request from you and the Chairman of the Subcommittee on Post-
secondary Education, House Committee on Education and Labor,
that we perform a study of the discharge in bankruptcy of
educational debts resulting from federally insured or guar-
anteed loans under parts E and E, title IV of the Higher Edu-
cation Act of 1965, as amended. Our December 23, 1976, letter
to you outlined our proposal to analyze a sample of guaranteed
student loan borrowers who had petitioned for bankruptcy and
to provide a profile of the borrowers. We have completed our
review of 579 randomly selected cases using information from
the files of the Office of Education, the State guarantee
agencies, and te bankruptcy courts.
     Our analysis of 541 of these cases showed the pti-
tioners to have
        -- average earnings of $6,378 for the year prior to
           filing bankruptcy;
        -- average total debts of $14,115, of which $4,138
           were educational debts;
        -- average assets of $4,454; and
        -- an average guaranteed student loan made for approx-
           imately $2,600 of which &n average claim for approx-
           imately $2,300 was paid.
     The above averages do not include 22 business bankrupt-
cies or 16 cases which had extremely high debts. However,
these are included in our computation for the overall sample
(see enclosure II).

                                                             ERD-77-83
 B-164031(1)


GUARANTEED STUDENT LOANi PROGRAM

     Under the Guaranteed Student Loan program, loans are
made to students by participating 1Inders such as commercial
banks, savings and loan associations, credit unions, and
educational institutions. These loans are insured by the
Office of Education or by State or private nonprofit guarantee
agencies which have reinsurance agreements with the Office.
In either case, if an individual fails to repay his loan be-
cause of default, bankruptcy, death, or disability, the lender
may submit a claim to the Office of Education or the guarantee
agency and receive payment for the unpaid balance. The Federal
Government pays 100 percent of all lender losses on death and
disability claims. On default and bankruptcy claims, the
Federal Government pays 100 percent of lender   sses on Office
of Education insured loans and reimburses State or nonprofit
agencies for 80 percent of their payments to lenders.

     Borrowers are expected to begin repayment 9 to 12 months
after they cease to be at least a half-time student. The
repayment period normally extends from 5 to 10 years with
a minimum repayment of $360 annually. However, the Education
Amendments of 1976 allow the borrower and lender to agree to
payments of less than $360.  Repayment may be deferred for
military, Peace Corps or Vista service, or for resumption of
full-time study. Also, if the student is seeking employment
but is unable to find it, a one-time, one-year payment defer-
ment may be allowed.

SELECTION OF SAMPLE

     We obtained information on bankruptcy claims paid during
the period July 1, 1975, through June 30, 1976, from the COfice
of Education headquarters and the guarantee agencies partici-
pating in the Guaranteed Student Loan program. After selecting
648 cases at random, we requested information from the appr'-
priate bankruptcy courts and we received responses for 606 crses.

Office of Education headquarters sample

     When we started our work in September 1976, an Office offi-
cial provided us a report which showed that 3,350 bankruptcy
claims for over $5 million were paid under the Federal program
for the year ending June 30, 1976. Since then, we have been
given other figures which program officials said are more
reliable. These figures show that 4,414 claims for about $5.7
million were paid for the period.




                              2
B-164031(1)

     Bankruptcy claims for the Federal program were paid by
the Office of Education headquirters in Washington until the
spring of 1976 when Department f Health, Education, and Wel-
fare regional offices were given the responsibility to pay
such claims. As a result, only 751 bankruptcy claim files were
on hand at headquarters. An Office of Eduration official said
the bankruptcy claims at headquarters were similar to the bank-
ruptcy claims at the regional offices and differed only in that
they were paid early in the fiscal year by the headquarters.
In a November 30, 1976, meeting with your office and the Sub-
committee on Postsecondary Education office, it was agreed
that we would select our sample from the files on hand at Of-
fice of Education headquarters. From the 751 headquarters
files we randomly selected 20 percent, or 150 cases, and were
able to obtain records for 137 uZ these cases; Office of Edu-
cation officials were unable to locate 13 cases.
Guarantee agency sample
     The Office of Education's records showed that obligations
to guarantee agencies for 1,715 bankruptcy claims totaled
over $2.9 million during the year ending June 30, 1976. However,
the amounts paid by guarantee agencies to lending institutions
on such claims were higher because the Office of Education's
reimbursement normally covW only 80 percent of the amount
of the agencies' claims.
     Guarantee agencies, in responding to our request for
information on guaranteed student loan bankruptcies, reported
that 2,574 bankruptcy claims totaling about $7.1 million were
paid for the above period. This was about 50 percent more
claims than the Office of Education had recorded. Part of
this difference results from post-default bankruptcies--guar-
anteed student loans on which the individual originally de-
faulted. Such claims are paid by State guarantee agencies
and reported to the Office of Education as a default claim.
Subsequent to the default, the individual files bankruptcy.
However, claims categorized as a default remain in that cate-
gory for Office of Education recordkeeping purposes even
though a bankruptcy subsequently occurs. Therefore, Office
of Education figures on guarantee agency bankruptcy claims
are understated, and losses due to bankruptcy are higher than
actually reported to the Office.
     In addition, some of the guarantee agencies, in respond-
ing t our request, reported bankruptcies filed under chapter
13 of the Bankruptcy Act. Under these bankruptcies, which are
designed to liquidate all debts in 3 years, the bankruptcy
courts determine what portion of the petitioner's wages can
be applied to outstanding debts. Such cases, known as
                              3
B-164031(1)


(chapter 13) wage-eaLner plans, are not included in   ases re-
ported to the Office of Education.

     From the 2,574 State guarantee agency cases, we randomly
selected 511 cases, or about 20 percent, for our review.
Combined with the 137 Office of Education headquarters cases,
our ove:all sample contained 648 bankruptcy cases.

Information from bankruptcy courts

     Using our sample of 648 cases we contacted the appro-
priate bankruptcy courts to obtain information from their
records. Enclosure I shows the geographic distribution of
our sample.

      For each case, we requested copies of

      -- the statement of affairs which shows the petitioner's
         personal data, including employment status and incore;

      -- the A-1 debt schedule which lists priority debts such
         as wages an,6 taxes;

      -the A-2 debt schedule which lists secured debts such
        as home mortgages, automobile loans, etc.;

      -- the A-3 debt schedule which shows nonpriority unsecured
         debts such as educational loans, medical expenses, cre-
         dit card purchases, etc.; and

      -- the summary of debts and assets which shows the net
         worth of the ankruptcy petitioner.

     Of the 648 randomly selected cases, we received responses
from the bankruptcy courts on 606.  In our analysis we con-
sidered only those educational debts that were identifiable
on the petitioners' A-3 debt schedules.  In addition to guar-
anteed student loans, we identified National Defense/Direct
Student Loans, veterans benefits overpayments, and other Fed-
eral or school loans.

     Twenty-seven of the cases in our sample were chapter 13
wage-earner plans. These cases were not included in our
analysis because the bankrupt's debts are not discharged as
in a regular bankruptcy. However, we did check on the status
of the 27 cases.  In 10 cases, court-approved payments had
been made towards the guaranteed student loan debt, although
at the time we inquired, only 6 were current. For 17 cases,
no payments had ever been made towards the guaranteed student
loan debt, and 6 ases had been converted to regular bank-
ruptcy.
                                4
B-164031(1)


      Included also in our sample were 22 cases where the
petitioner filed as an individual engaged in business. These
business bankruptcies made up less than 4 percert of the sample,
yet accounted for over 11 percent of the total debts. Also, some
of the petitions in our sample listed debts which were greatly
in excess of the majority of the cases. For example, there
were 16 cases for which the A-3 debts (unsecured, nonpriority)
were $40,000 or more. These 16 cases made up less than 3 per-
cent of our sample, yet accounted for over 23 percent of all the
samples' debts. We included these 38 cases in our overall analy-
sis, ard then made the same analysis without the cases to high-
light the impact they had on the profile (see enclosure II).

      Complete information was not available for every case
in our sample; for instance, not every individual indicated
employment status or prior years' earnings. Our averages are
baised on the number of cases which contained the particular
data element in question.

RESULTS OF ANALYSIS

     The following pages highlight the results of our analysis
which is included as enclosure II.  A regional analysis of
bankruptcy cases is included as enclosure III.

Length of time from receiving
loans to   iling for bankruptcy
     The exact date when the student left school or graduated
generally could not be determined from the information avail-
able. For example, information for 136 students showed that
89 graduated from and 47 dropped out of school,     Another 443
students were ether  still in school  or  their   tatus was un-
known. Since  sfficient  information  was  not  available to de-
termine when a student graduated or  ceased  to  be a half-time
student, we determined the time between the date of the stu-
dent's last loan and the date the bankruptcy petition was
filed.  This span normally includes time for the students to
complete thei: education and a grace period of 9 to 12 months
before making loan repayments. Information that was available
for 573 individuals showed that the average time was 41 months.
The range was from zero--for an individual who filed for bank-
ruptcy in the same month he received his loan--to 130 months.

     In 19 cases, over 3 percent, the students filed for bank-
ruptcy while still in school.  The average time between the
students' last loan and filing -)r bankruptcy was 21 months.
For five of these students the educational debts were the
only debts listed in the bankruptcy petition. Overall, the 19
students had average educational debts of $5,470 which were
about 28 percent of the students' total debts.

                                  5
B-164031(1)


Type of school attended

     The following table shows the type of educational !.nsti-
tution that the students were attending at the time they
received a guaranteed student loan.

                           Number of students             Percentage
Type of institution          receiving loans               of total

4-year public                          230                   35.5
4-year private                         129                   19.9
2-year public                           48                    7.4
2-year private                           4                     .6
Proprietary                             77                   11.9
Vocational/technical                    37                    5.7
Graduate                                 6                     .9
Other (unknown,
  foreign, etc.)                       117                   18.1

    Total                              648                  100.0

     It should be noted that we did not determine whether the
educational institution was the lender in the above cases, nor
did we obtain information on the percentage of loans that were
made to students attending the various types of nstitutions.

Employment status and earnings

     At the time of filing their bankruptcy petitions, 411 in-
dividuals (72 percent) stated they were employed while 156
(28 percent) stated they were unemployed. Of those unemployed,
22 listed their occupations as housewife, and 19 indicated that
they were still in school.  The following table summarizes the
employment status indicated by five or more individuals.

Occupation                Number             Occupation       Number

Teacher                     43               Accountant             9
Clerk                       34               Counselor              8
Salesman                    25               Nurse                  8
Housewife                   22               Attorney               7
Student                     19               Laborer                6
Manager/                                     Soldier                5
  Assistant Manager         16               Carpenter              5
Secretary                   10               Supervisor             5
Mechanic                    10               Truck Driver           5

     Other occupations occurring less frequently included
buyer, bus driver, computer operator, construction worker,
cook, draftsman, engineer, firefighter, anJ machinist.  Al1so

                                   6
B-164031(1)


listed were doctor, dentist, psychologist, and several other
occupations in the medical field.

     In addition, the earnings for 1 and 2 years prior to fil-
ing bankruptcy as listed on the bankruptcy petitions are shown
below.

                                    2 years          1 year
                  Income            before           before

           $        0                     95           65
                    1- 5,000             187          156
                5,001-10,000             189          212
               10,001-15,000              61           85
               15,001-20,000               7           20
               Over 20,000                 4            6

                   Totals
                     (note a)            543          544

a/One individual reported earnings for 1 year prior to filing
  but not for 2 years prior.

     The above shows that overall the individual earnings
increased in the year prior to filing for bankruptcy. For
the year prior to filing, 111 individuals (20 percent) had
incomes in excess of $10,000; for 2 years prior to filing,
72 individuals (13 percent) had incomes in excess of $10,000.
The average earnings for the 543 individuals 2 years prior
to filing or bankruptcy were $5,361; for the year prior to
filing, the average earnings for all individuals were $6,490.
However, when individuals with no income were excluded, the
average earnings increased to $6,498 and $7,371 for the
respective years.

Debts

     Total debts for the entire sample averaged $20,115,
categorized as follows.

        -- Priority (A-l) - $479.

        -- Secured (A-2) = $7,550.

        -- Nonpriority, unsecured (A-3)        $12,086.

     The average debts for the individuals engaged in business
were higher in all categories than for the sample as a whole.
Total debts for the business bankruptcies averaged $61,612.
For the 16 cases we identified with exceptionally high debts,

                                     7
B-1641(1) l)

the total debts averaged $167,491.  In almost all cases, these
debts resulted from business-related activities or from
personal liability as a result of accidents. When the 22
business and 16 high-debt cases are xcluded, the average total
debt drops to $14,115.

     In 520 cases we were able to identify educational loans
and relate them to total nonpriority debts.  For 184 of these
cases (over 35 percent) educational debts accounted for
60 percent or more of all nonpriority, unsecured indebtedness.
For 41 cases (8 percent) educational debts were the only debts
listed by the petitioner, and in nine other cases, educational
debts were the only nonpriority, unsecured debts listed.   For
these 50 cases, total debts averaged $6,954, 93 percent of
which was educational.

     We computed the average guaranteed student loan made to
all individuals in our sample base, on the information fur-
nished by the Office of Education and the guarantee agencies;
the average loan was $2,588.  Individuals often received more
than one loan, and t   total amounts loaned ranged from $200
to $10,000. The average bankruptcy claim paid by the Office
of Education or the guarantee agency was $2,292. This would
indicate that, on the average, borrowers are repaying little
on these loans prior to filing for bankruptcy.

     Federal obligations other than guaranteed student loans
were noted in 17 percent of our sample. National Defense/Direct
Student Loans and Health Professions Student Loans were evident
in 81 and 4 cases, respectively. The average loan amounts
listed were $2,310 and $2,962.  Fourteen individuals sought re-
lief from obligations--averaging $904--to the Veterans Admin-
istration for overpayment of veterans benefits. Three indi-
viduals listed Small Business Administration loans, averaging
$54,191.

Observations

     Based on our sample of bankruptcy petitions and program
data we noted that:

    -- The average guaranteed student loan made was for $2,588
       and the average claim paid to lenders was $2,292. This
       indicates that little is being repaid on these loans.

    -- In addition to guaranteed student loans, other Federal
       and private loans averaging about $1,600 were also in-
       cluded in bankruptcy petitions.

    -- About 8 percent of the bankruptcy petitions listed
       educational loans as the only indebtedness.

                              8
B-164031(1)

     -- Over 3 percent of those filing were still in school.
     -- Thirty-five percent of the individuals had educational
        debts which represented 60 percent or more of the total
        unsecured debts.


     tie did nt obtain formal comments from Office of Educa-
tion officials but have discussed our report with them and
considered their comments.
     This letter is also being   nt ot the Chairman of the
Subcommittee on Postsecondary Education HSouse Committee on
Education and Labor.
                              Sincerely yours,




                       Acting Comptroller General
                              of the United States

Enclosures - 3




                               9
ENCLOSURE I                                            ENCLOSUAE I



                    REGIONAL DISTRIBUTION OF

           SAMPLE GUARANTEED STUDENT LOAN BANKRUPTCIES

                    BY LOCATION OF COURT

                                                                  Number
                                                                    in
                                                                  sample
1. New England     Connecticut   (93)   New Hampshire      (3)
                   Maine          (4)   Rhode Island       (2)
                   Massachusetts (17)   Vermont            (2)       51
2. Mid Atlantic    D.C. (1)             New Jersey        (36)
                   Delaware    (0)      New York         (108)
                   Maryland    (5)      Pennsylvania      (35)     185

3. South            Alabama   (2)       Mississippi     (2)
                    Arkansas  (3)       Missouri        (6)
                    Florida (15)        North Carolina (6)
                    Georgia  (17)       South Carolina (0)
                   Kentucky (5)         Tennessee       (9)
                    Louisiana 4)        Virginia       (12)
                                        West Virginia   (8)          89
4. Midwest         Illinois (68)        Minnesota  (4)
                   Indiana  (13)        Ohio      (31)
                   Michigan (21)        Wisconsin (30)             167

5. Plains and
   Rocky
   Mountains       Colorado    (6,      Nebraska         (3)
                   Idaho       (3)      New Mexico       (2)
                   Iowa        (4)      Oklahoma         (3)
                   Kansas      (7)      South Dakota     (2)
                   Montana     (3)      Texas            (4)
                   N. Dakota   (0)      Utah             (0)
                                        Wyoming          (0)         37

6. West            Alaska      (0)      Nevada           (0)
                   Arizona     (9)      Hawaii           (1)
                   California (70)      Oregon          (15)
                                        Washington      (23)       118

                                                                 a/647
a/One petition was filed in Canada producing a total sample
  size of 648.
  ENCLOSURE II                                                                               ENCLOSURE II




                                                 O S~uER2IPtCCIjll
                                             MU3.S1                                              t

                                                                                              Complete ample
                                                              Ccsplets ample          Ice*   busine-s bonkruptcies ad
                                                Complete      loes 22 boiLese             1c ases with hiibelt un-
                                                 mei         banhko  ies              onote ,) nonDrior-ty debts (note b)
                                                                                     secured,

Canes (loess chapter 13)   (note c)                 /S79               551                           541

Average number f onth betweoon
  loat loan and filln" for bank-
  ruptcy                                              41.2              40.9                          40.5
                                                                                                      3
 mploymWrt stats
                      .bpls w-~d   ~411                                3s
                                                                       152
                                                                                                      33
                                                                                                      14
     mnoyop   d                                      194
Aversge prior years   earnings
  2 years prior                                t 5361              $ 5,323                       S 5271
  1 year prior                                 S 6,490               6,447                        16.378

Average debts                                                                                         1
    Prior ity (A-I)                            5    479            S    376                      S 177
    Secured (A-2)                              S 7,SS0             I 6.a90                       $ 5,092
    Unseocured onpriority (A-3)                $12,0.$             *11,262                       $ 8,46
    Total (A- + A-2 + A-3)                     $20,11S             $181,44                         e14.115
    Educational (included in A-3)              $ 4,151             $ 4112                        $ 4.138

Pr entaoe of meured, non-
  priority debts represented
  by educational dbtSa
    100%                                              50                 so                            so
    '-   9%"                                          51                 S0                            50
    *0 - 79%                                          83      82                                       82
    40- St%                                           64                 94                            94
    20 - 39%                                         121                11I                           117
    Less than 20%                                    121                111                            9C

Aver"*ge asts                                   $   ,364           $ 4.640                       $ 4,454

Average garanteed student     ran mde           $ 2,506            S 2,512                       S 2,583

Average guaranteed student loan claim paid      S 2,292            S 2,306                       $ 2,317

a/_The smple icluded 22 cases      there the petitioner filed as n individual ngaged in busin*ss. These buc)i
   nos bankruptcies cooposed 3.8 percent of the sample, yet ac-ounted for 11.2 percent of the total debts.
g/Soe petitions in the ample listed debts which were greatly in were *eess of the majority of the cases.   here
     ere 16 caess for which the A-3 debts (nsecured,    nonpriority)      40,000 or more. These 16 cases co posed
   2.3 percent of the ampile, yet accounted for 23.2 percent of the entire ample's   debts.

£/Twenty-sven of the cases in the sample were filed as chapter   13 waqc-earner plans.   tider such a plan, de-
  signed to liquidate all debts in 3 years, the bankruptcy court determines what portion of the petitner's
  wages can be applied to outstanding debts. Thea cases weroeAot    included in our analysis  becuse the ndj-
  vidual's debts are not discharged as ii regular bankruptcy.
g/Compte information was not available fo:severy   case ib, our samplo. Our averSq,os are based on the number
  of cases which containod the particular data element.
   ENCLOSURE III                                                                 ENCLOSURE III




                       REGIONAL ANALYSI   O      ANJRUPTCY CASZS (note a)
                                              Plains
                                               and
                                              toun-         Mid-                 .id-         New
                                  eost        tains         west       South      Atlantic   Eniland
Cases (less chapter 13)           112            33           140         73         172         49
Average number of months
  between last loan and
  filing for bankruptcy            36.7          41.4          37.6       45.2        47.1       34.3
Employment status:
    fEployed                       75            22           106         S          11           34
   Unemployed                      32             8            33         11          S7          75
Average prior years'
  earnings:
    2 years prior             S 5,373     $ ,S10          $ 5,052     $ 6,634    S 5,317     $ 4,471
    1 year prior              $ 6,263     $ 5,953         $ 6,452     $ 8,030    $ 6,407     $ 5,520
Average debts:
    Priority (A-1)            S   427     $       70      $   479     $ 1,327    $   323         146
    Secured (A-2)             $ 8,148     S 5,802         $12,881     $ 7,206    $ 4,166     $ 4,322
    Unsecured nonpriority
      (A-3)                    $12,684    $ 9,634         $10,544     $14,884    $10,540     117,958
    Total (A-1 + -2 + A-3)     $21,255    515,506         $23,904     $23,417    $15,029     S22,426
    Educational (included
      in A-3)                  $ 4,371    S 4,189         $ 3,735     $ 3,305    $ 4,309     S S,320

Percentage of unsecured,
  nonpriority debts rpre-
  sented by ducational
  debts:
    100%                             S                2         5          2         26          10
    80 - 99t                         6                3         7          3         26           6
    60 - 791                        25                7        19         10         16           6
    40 - 59%                        13                7        32          9         25           S
    20 - 391                        33                7        28         18         30           5
    Less than 201                   20                5        34         18         32          12
Average assets                 $ 9,023    S 4,589         $ 5,912     $ S,980    $ 3089      S 3,076
Average guaranteed student
  loan made                   S 2,253     $ 2,205         $ 2,258     S 2,157    $ 3,066     $ 3,516
Average guaranteed studet.t
  loan claim paid             $ 1,874     $ 2,049         $ 2,026     5 1,776    $ 2,829     $ 3,045
a/Roresentrs analysis of complete sample, including business bankruptcies and 16 cases
  with highest unsecured, nonpriority debts.
             FM,-ICD      N9 t   be ralemod subli




B-_31()                                       April 15, 1977


The Honorable William Ford
Chairman, Subcommittee on
  Postsecondary 'Education
Committee on Education and
  Labor
House of Representatives
Dear Hr. Chairman:
     This letter is in further response to the August 5, 1976,
request from the former Chairman of your Subcommittee and the
Chairman of the Subcommittee on Civil and Constitutional
Rights, House Committee on the Judiciary, that we perform a
study of the discharge in bankruptcy of educational debts re-
sulting from federally insured or guaranteed loans under
pafts B and E, title IV of the Higher Education Act of 1965,
as amended. Our December 23, 1976, letter to you outlined
our proposal to analyze a sample of guaranteed student loan
borrowers who had petitioned for bankruptcy and to provide
a profile of the borrowers. We have completed our review of
579 randomly selected cases using information from the files
of the Office of Education, the State guarantee agencies, and
the bankruptcy courts.
     Our analysis of 541 of these cases showed the peti-
tioners to have
     -- average earnings of $6,378 for the year prior to
        filing bankruptcy;
     -- average total debts of $14,115, of which $4,138
        were educational debts;
     -- average assets of $4,454; and
     -- an average guaranteed student loin made for approx-
        imately $2,600 of which an average claim for approx-
        imately $2,300 was paid.
     The above averages do not include 22 business bankrupt-
cies or 16 cases which had extremely high debts. However,
these are included in our computation for the overall sample
(see enclosure II).


                                                       HRD-77-80
 B-164031(1)


GUARANTEED STUDENT LOAN PROGRAM

     Under the Guaranteed Student oan program, loans are
made to students by participating lenders such as commercial
banks, savings and loan associations, credit unions, and
educational institutions. These loans are insured by the
Office of Educaticn or by State or private nonprofit guarantee
agencies which have reinsurance agreements with the Office.
In either case, if an individual fails to repay his loan be-
cause of default, bankruptcy, death, or disability, the lender
may submit a claim to the Office of Education or the guarantee
agency and recenve payment fo. the unpaid balance. The Federal
Government pays 100 percent of all lender losses on death and
disability claims. On default and bankruptcy claims, the
Federal Government pays 100 percent of lender losses on Office
of Education insured loans and reimburses State or nonprofit
agencies for 80 percent of their payments to lenders.

     Borrowers are expected to begin repayment 9 to 12 months
after they cease to be at least a half-time student. The
repayment period normally extends from 5 to 10 years with
a minimum repayment of $360 annually. However, the Education
Amendments of 1976 allow the borrower and lender to agree to
payments of less than $60.   Repayment may be deferred for
military, Peace Corps or Vista service, or for resumption of
full-time study. Also, if the student is seeking employment
but is unable to find it, a one-time, one-year payment defer-
ment rmay be allowed.

SELECTION OF SAMPLE

     We obtained information on bankruptcy claims paid during
the period July 1, 1975, through June 30, 1976, from the Office
of Education headquarters and the guarantee agencies partici-
pating in the Guaranteed Student Loan program. Aft2r selecting
648 cases at random, we requested information from the appro-
priate bankruptcy courts and we received responses for 606 cases.

Office of Education headquarters sample

     When we started our work in September 1976, an Office offi-
cial provided us a report which showed chat 3,350 bankruptcy
claims for over $5 million were paid under the Federal program
for the year ending June 30, 1976.  Since then, we have been
given other figures which program officials said are more
reliable. These figures show that 4,414 claims fr about $5.7
million were paid for the period.
B-164031(1)


     Bankruptcy claims for the Federal program were paid by
the Office of Education headquarters in Washington until the
spring of 1976 when Department of Health, Education, and Wel-
fare regional offices were given the responsibility to pay
such claims. As a result, only 751 bankruptcy claim files were
on hand at headquarters. An Office of Education official said
the bankruptcy claims at headquarters were similar to the bank-
ruptcy claims at the regional offices and differed only
in that they were paid early in the fiscal year by the head-
quarters. In a November 30, 1976, meeting with your office
and the Subcommittee on Civil and Constitutional Rights office,
it was agreed that we would select our sample from the files on
hand at Office of Education headquarters.   From the 751 head-
quarters files we randomly selected 20 percent, or 150 cases,
and were able to obtain records for 137 of these cases; Office
of Education officials were unable to locate 13 cases.

Guarantee agency sample

     The Office of Education's records showed that obligations
to guarantee agencies for 1,715 bankruptcy claims totaled
over $2.9 million during the year ending June 30, 1976.   However,
the amounts paid by guarantee agencies to lending institutions
on such claims were higher because the Office of Education's
reimbursement normally covers only 80 percent of the amount
of the agencies' claims.

     Guarantee agencies, in responding to our request for
information on guaranteed student loan bankruptcies, reported
that 2,574 bankruptcy claims totaling about $7.1 million were
paid for the above period. This was about 50 percent more
claims than the Office of Education had recorded.  Part of
this difference results from post-default bankruptcies--guar-
anteed student loans on which the individual originally de-
faulted. Such claims are paid by State guarantee agencies
and reported to the Office of Education as a default claim.
Subsequent to the default, the individual files bankruptcy.
However, claims categorized as a default remain in that cate-
gory for Office of Education recordkeeping purposes even
though a bankruptcy subsequently occurs. Therefore, Office
of Education figures on guarantee agency bankruptcy claims
are understated, and losses due to bankruptcy are higher than
actually reported to the Office.

     In addition, ome of the guarantee agencies, in respond-
ing to our request, reported bankruptcies filed under chapter
13 of the Bankruptcy Act.  Under these bankruptcies, which are
designed to liquidate all debts in 3 years, the bankruptcy
courts determine what portion of the petitioner's wages can
be applied to outstanding debts. Such cases, known as

                               3
B-164031(1)


(chapter 13) wage-earner plans, are not included in cases re-
ported to the Office of Education.

     From the 2,574 State guarantee agency cases, we randomly
selected 511 cases, or about 20 percent, for our review.
Combined with the 137 Office of Education headquarters cases,
our overall sample contained 648 bankruptcy cases.

Information from bankruptcy courts

     Using our sample of 648 cases we contacted the appro-
priate bankruptcy courts to obtain information from their
records. Enclosure I shows the geographic distribution of
our sample.

     For each case, we requested copies of

     -- the statement of affairs which shows the petitioner's
        personal data, including employment status and income;

     -- the A-1 debt schedule which lists priority debts such
        as wages ad taxes;

     -the A-2 debt schedule which lists secured debts such
       as home mortgages, automobile loans, etc.;

     -- the A-3 debt schedule which shows nonpriority unsecured
        debts such as educational loans, medical expenses, ce-
        dit card purchases, etc.; and

     -- the surmuary of debts and assets which shows   he net
        worth of the bankruptcy petitioner.

     Of the 643 randomly selected cases, we received responses
from the bankruptcy courts on 606.  In our analysis we con-
sidered only those educational debts that were identifiable
on the petitioners' A-3 debt schedules.  In addition to guar-
anteed student loans, we identified National Defense/Direct
Student Loans, veterans benefits overpaymerts, and other Fed-
eral or school loans.

     Twenty-seven of the cases in our sample were chapter 13
wage-earner plans. These cases were not included in our
analysis because the bankrupt's debts are not discharged as
in a regular bankruptcy. However, we did check on the status
of the 27 cases.  In 10 cases, court-approved payments had
been made towards the guaranteed student loan debt, although
at the time we inquired, only 6 were current. For 17 cases,
no payments had ever been made towards the guaranteed student
loan debt, and 6 cases had been converted to regular bank-
ruptcy.

                               4
B-164031(1)


     Included also in our sample were 22 cases where the
petitioner filed as an individual engaged in business. These
business bankruptcies made up less than 4 percent of the sample,
yet accounted for over 11 percent of the total debts. Also, some
of the petitions in our sample listed debts which were greatly
in excess of the majority of the cases. For example, there
were 16 cases for which the A-3 debts (unsecured, nonpriority)
were $40,000 or more. These 16 cases made up less than 3 per-
cent of our sample, yet accounted for over 23 percent of all the
samples' debts. We included hese 38 cases in our overall analy-
sis, and then made the same analysis without the cases to high-
light the impact they.pad on the profile (see enclosure II).
     Complete information was not available for every case
in our sample; for instance, not every individual indicated
emplcyment status or prior years' earnings. Our averages are
based on the number of cases which contained the particular
data element in question.

RESULTS OF ANALYSIS

     The following pages highlight the results of c r analysis
which is included as enclosure II. A regional analysis of
bankruptcy cases is included as enclosure III.

Lenqth of time from receiving
loans to filiing for bankruptcy

      The exact date when the student left school or graduated
generally could not be determined from the information avail-
able.   For example, information for 136 students showed that
89 graduated from and 47 dropped out of school. Another 443
students were either still in school or their status was un-
known. Since sufficient information was not available to de-
termine when a student graduated or ceased to be a half-time
student, we determined the time between the date of the stu-
dent's last loan and the date the bankruptcy petition was
filed. This span normally includes time for the students to
complete their education and a grace period of 9 to 12 months
before making loan repayments. Information that was available
for 573 individuals showed that the average time was 41 months.
The range was from zero--for an individual who filed for bank-
ruptcy in the same month he received his loan--to 130 months.

      In 19 cases, over 3 percent, the students filed for bank-
 ruptcy while still in school.  The average time between the
 students' last loan and filing for bankruptcy was 21 months.
 For five of these students the educational -debts were the
 only debts listed in the bankruptcy petition. Overall, the 19
 students had average educational debts of $5,470 which were
 about 28 percent of-the students' total debts.
                                  5
B-164031(1)


Type of school attended

     The following table shows the type of educational insti-
tution that the students were attending at the time they
received a guaranteed student loan.

                           Number of students             Percentage
Type of institution          receiving loans               of total

4-year public                          230                   35.5
4-year private                         129                   19.9
2-year public                           48                    7.4
2-year private                           4                     .6
Proprietary                             77                   11.9
Vocational/technical                    37                    5.7
Graduate                                 6                     .9
Other (unknown,
  foreign, etc.)                       117                   18.1

    Total                              648                  100.0

     It should be noted that we did not determine whether the
educational institution was the lender in the above cases, nor
did we obtain information on the percentage of loans that were
mace to students attending the various types of institutions.

Employment status and earnings

     At the time of filing their bankruptcy petitions, 411 in-
dividuals (72 percent) stated they were employed while 156
(28 percent) stated they were unemployed.  Of those unemployed,
22 listed their occupations as housewife, and 19 indicated that
they were still in school. The following table summarizes the
employment status indicated by five or more individuals.

Occupation                Number             Occupation       Number

Teacher                     43               Accountant             9
Clerk                       34               Counselor              8
Salesman                    25               Nurse                  8
Housewife                   22               Attorney               7
Student                     19               Laborer                6
Manager/                                     Soldier                5
  Assistant Manager         16               Carpenter              5
Secretary                   10               Supervisor             5
Mechanic                    10               Truck Driver           5

     Other occupations occurring less frequently included
buyer, bus driver, computer operator, construction worker,
cook, draftsman, engineer, firefighter, and machinist. Also

                                   6
B-164031(1)


listed were doctor, dentist, psychologist, and several other
occupations in the medical field.

     In addition, the earnings for 1 and 2 years prior to fil-
ing bankruptcy as listed on the bankruptcy petitions are shown
below.

                                        2 years          1 year
               Income                   before           before

           $     0                            95           65
                 1- 5,000                    187          156
             5,001-10,000                    189          212
            10,001-15,000                     61           85
            15,001-20,000                      7           20
            Over 20,000                        4            6

                Totals
                  (note a)                   543          544

a/One individual reported earnings for 1 year prior to filing
  but not for 2 years prior.

     The above shows that overall the individual earnings
increased in the year prior to filing for bankruptcy. For
the year prior to filing, 111 individuals (20 percent) had
incomes in excess of $10,000; for 2 years prior to filing,
72 individuals (13 percent) had incomes in excess of $10,000.
The average earnings for the 543 individuals 2 years prior
to filing for bankruptcy were $5,361; for the year prior to
filing, the average earnings for all individuals were $6,490.
However, when individuals with no income were excluded, the
average earnings increased to $6,498 and $7,371 for the
respective years.

Debts

     Total debts for the entire sample averaged $20,115,
categorized as follows.

        -- Priority (A-l)   =   $479.

        -- Secured (A-2) - $7,550.

        -- Nonpriority, unsecured (A-3)            $12,086.

     The average debts for the individuals engaged in business
were higher in all categories than for the sample as a whole.
Total debts for the business bankruptcies averaged $61,612.
For the 16 cases we identified with exceptionally high debts,
                                         7
B-'64031(1)


the total debts averaged $167,491.  In almost all cases, these
debts resulted from business-related activities or from
personal liability as a result of accidents.  When the 22
business and 16 high-debt cases are excluded, the average total
debt drops to $14,115.

     In 520 cases we were able to identify educational loans
and relate them to total nonpriority debts. For 184 of these
cases (over 35 percent) educational debts accounted for
60 percent or more of all nonpriority, unsecured indebtedness.
For 41 cases (8 percent) educational debts were the only debts
listed by the petitioner, and in nine other cases, educational
debts were the only nonpriority, unsecured debts listed.   For
these 50 cases, total debts averaged $6,954, 93 percent of
which was educational.

     We computed the average guaranteed student loan made to
all individuals in our sample based on the information fur-
nished by the Off;- of Education and the guarantee agencies;
the average loan was $2,588.  Individuals often received more
than one loan, and the total amounts loaned ranged from $200
to $10,000. The average bankruptcy claim paid by the Office
of Education or the guaranzee agency was $2,292. This would
indicate that, on the average, borrowers are repaying little
on these loans prior to filing for bankruptcy.

     Federal obligations other than guaranteed student loans
were noted in 17 percent of our sample. National Defense/Direct
Student Loans and Health Professions Student Loanis were evident
in 81 and 4 cases, respectively. The average loan amounts
listed were $2,310 and $2,962. Fourteen individuals sought re-
lief from obligations--averaging $904--to the Veterans Admin-
istration for overpayment of veterans benefits. Three indi-
viduals listed Small Business Administration loans, averaging
$54,191.
Observations

     Based on our sample of bankruptcy petitions and program
data we noted that:

    -- The average guaranteed student loan made was for $2,588
       and the average claim paid to lenders was $2,292. This
       indicates that little is being repaid on these loans.
    -- In addition to guaranteed student loans, other Federal
       and private loans averaging about $1,600 were also in-
       cluded in bankruptcy petitions.

    -- About 8 percent of the bankruptcy petitions listed
       educational loans as the only indebtedness.

                              8
8-164031(1)


     -- Over 3 percent of those filing were still in school.

     -- Thirty-five percent of the individuals had educational
        debts which represented 60 percent or more of the total
        unsecured debts.



     We did not obtain formal comments from Office of Educa-
tion officials but have discussed our report with them and
considered their comments.

     This letter is also being sent to the Chairman of the Sub-
committee on Civil and Constitutional Rights, House Committee
on the Judiciary.

                              Sincerely yours,




                       Acting Comptrol r General
                              of the United States

Enclosures - 3




                              9
ENCLOSURE I                                            ENCLOSURE I



                    REGIONAL DISTRIBUTION OF

           SAMPLE GUARANTEED STUDENT LOAN BANKRUPTCIES

                     BY LOCATION OF COURT

                                                                 Number
                                                                   in
                                                                 sample
1. New England     Connecticut   (23)   New Hampshire      (3)
                   Maine          (4)   Rhode Island       (2)
                   Massachusetts (17)   Vermont            (2)       51

2. Mid Atlantic    D.C. (1)             New Jersey        (36)
                   Delaware    (0)      New York         (108)
                   Maryland    (5)      Pennsylvania      (35)     185

3. South           Alabama   (2)        Mississippi     (2)
                   Arkansas  (3)        Missouri        (6)
                   Florida  (15)        North Carolina  (6)
                   Georgia  (17)        South Carolina (0)
                   Kentucky (5)         Tennessee       (9)
                   Louisiana (4)        Virginia       (12)
                                        West Virginia   (8)          89

4. Midwest          Illinois (68)       Minnesota  (4)
                    Indiana (13)        Ohio      (31)
                    Michigan (21)       Wisconsin (30)             167

5. Plains and
   Rocky
   Mountains       Colorado    (6)      Nebraska         (3)
                   Idaho       (3)      New Mexico       (2)
                   Iowa        (4)      Oklahoma         (3)
                   Kansas      (7)      South Dakota     (2)
                   Montana     (3)      Texas            (4)
                   N. Dakota   (0)      Utah             (0o
                                        Wyoming          (0)         37
6. West             Alasa^      10)     Nevada           (0)
                    Arizona     (9)     Hawaii           (1)
                    California (70)     Oregon          (15)
                                        Washington      (23)       118

                                                                 a/647

a/One petition was filed in Canada producing a total sample
  size of 648.
 ENCLOSURE II                                                                                ENCLOSURE         II




                                       ANALYSIS OP    ANKRUPTCItCASS

                                                                                                Complete sample
                                                                  Complete sample        less business b&akruptcie and
                                              Complete            less 22 busiceli          16 cases with highest un-
                                               samile            bnkrupties (note a)   secured, nonpriorty debts (note b)

Cases (less chapter 133) (note     )            /5S79                    557                         541

Average number of months between
  lest loan and filing fr bank-                                                                        40.S
  ruptcy                                              41.2                40.9

Employment tatus:                                                                                      383
    Employed                                         411                 395
                                                     156                 152                           148
    Unemployed
Average prior years'   earnings
                                                                                                     5,271
  2 years prior                               S 5,361                S S,323
                                              $ 6,490                S 6,447                         6,378
  1 year prior
Average debts:                                                                                    S   177
    Priority (A-1)                            S   479                S   376
                                              S 7,550                S 6,906                      S 5,092
    Secured (A-2)                                                                                 S 8,84S
    Unsecured nonpri,,riy (A-3)               $12,086                $11262
                  A-2  A-3)                   $20,115                $18,544                      $14,115
    Total (A-1                                                                                    $ 4,138
    Educational (included in A-3)             S 4.151                S 4,112

Percentage of unsecured, non-
  priority debts represented
  by educational debts:
                                                      50                   50                           50
    100%                                                                                                50
    80 - 99%                                          51                   50
                                                      83                   82                           82
    60 - 79t                                                                                            94
    40 -59%                                           94                   94
    20 - 39%                                         121                  118                          117
                                                     121                  111                           96
    Leas than 20%
Average assets                                S 5,364                 S 4,640                      $ 4,454

Average guaranteed student loan made          S 2,588                 $ 2,582                      S 2,583

Average guaranteed student loan claim paid    $ 2,292                 S 2,306                      S 2,317
                                                                                                 These busi-
a/The sample included 22 cases where the petitioner filed as an individual engaged in business.
  ness bankruptcies composed 3.8 percent of the sample, yet accounted for 11.2 percent of the total debts,
g/Sowe petitions in the sample listed debts which were greatly in excess   of the majority of the cases. There
  were 16 cases for which the A-3 debts (unsecured, nonpriority) were $40,000 or more. These 16 cases composed
   2.8 percent of the sample, yet accounted for 23.2 percent of the entire aample's debts.
c/Twenty-seven of the cases in the sample were filed as chapter 13 wage-earner plans. Under thesuch   pioan, de-
   signed to liquidate all debts in 3 years. the bankruptcy court determines what portion  of     petitioner's
  wages can be applied to outstanding debts. These cases   were not  included in our analysis because the indi-
   vidual's debts are not discharged as in regular bankruptcy.
d/Completo information eas not available for every case in our sariple. Our averages are based on the number
   of cases which contained the particular 6ata elment.




                                                             2
   ENCLOSURE III                                                              ENCLOSURE III


                       REGIONAL ANALYSIS OF BANKRUPTCY CASES (note a)

                                          Plains
                                           and
                                          Noun-          Mid-                   Mid-       New
                                 West     tains          west       South      Atlantic   England
Cases (less chapter 13)           112         33           140         73         172         49
Average number of months
  between last loan and
  filing for bankruptcy            36.7       41.4          37.6       45.2        47.1       34.3
Employment tat W
    Employed- W                    75         22           106         59         115          34
    Unemployed                     32          8            33         11          57          15
Average prior years'
  earnir.gs:
    2 years prior             $ 5,373     $ 5,510      S 5,052     $ 6,634     $ 5,317    $ 4,471
    1 year prior              $ 6,263     $ 5,953      $ 6,452     $ 8,030     $ 6,407    $ 5,520
Average debts:
    Priority (A-1)            $   427     $    70      $   479     $ 1,327     $   323        146
    Secured (A-2)             $ 8,148     $ 5,802      $12.881     $ 7,206     $ 4,166    $ 4,322
    Unsecured nonpriority
      (A-3)                   $12,684     $ 9,634      $10,544     $14,884     $10,54G    $17,958
    Total (A-1 + A-2 + A-3)   $21,259     $15,306      $23,904     $23,417     $15,029    $22,426
    Educational (included
      in A-3)                  $ 4,371    $ 4,189      $ 3,735     $ 3,305     $ 4,309    $ 5,320
Percentage of unsecured,
  nonpriority debts repre-
  sented by educational
  debts:
    100%                             5             2         5          2          26         10
    80 - 99%                         6             3         7          3          26          6
    60 - 79%                        25             7        19         10          16          6
    40 - 59%                        13             7        32          9          25          8
    20 - 39%                        33             7        28         18          30          5
    Less than 20%                   20             5        34         18          32         12
Average assets                $ 9,023     $ 4,589      5 5,912     S 5,980     $ 3,089    $ 3,076
Average guaranteed student
  loan made                   $ 2,253     $ 2,205      $ 2,258     $ 2,157     $ 3,066    $ 3,516
Average guaranteed student
  loan claim paid             $ 1,874     $ 2,049      $ 2,026     $ 1,776     $ 2,829    $ 3,045
a/hepresents analysis of complete sample, including business bankruptcies and 16 cases
  with highest unsecured, nonpriority debts.