ARCHIVED INFORMATION -- Financial Management Status Report & Five-Year Plan - October 1996

Credit Management/Debt Collection

ED has designed and implemented a comprehensive credit management and debt collection program that enables the agency to effectively administer its multi-billion dollar student loan programs. The credit management and debt collection program covers each phase of the credit cycle including pre-screening of loan applicants, account servicing, collection and close-out and it conforms to the Government-wide policies in the Federal Claims Collection Standards and OMB Circular A-129.

Direct Loans Program

In July 1994, ED began operating the Direct Loans Program, eliminating the need for lenders and guaranty agencies which have acted as middlemen. The Department estimates that the Direct Loans Program will save taxpayers $6.8 billion from fiscal years 1995-2000. These savings result from reduced subsidy and administrative payments to lenders and guaranty agencies, and reduced origination and servicing costs.

Numerous surveys and assessments of the Direct Loans Program have been conducted with positive reports from participants. Findings indicate a high level of satisfaction with the Direct Loans Program, especially among four year institutions and those with centralized processing. Institutions have been very satisfied with ED's responsiveness and support. Positive effects of the program include the capacity to provide service to borrowers during peak times and improved institutional cash flow. One key assessment of the Direct Loans Program was an external audit of the program's financial statements which resulted in an unqualified opinion.

ED will continue the phased implementation of the Direct Loans Program. Nearly 40 percent of the total loan volume is being handled through the Direct Loans Program. By academic year 1999-2000, direct loans will be at least 60 percent of total student loan volume. ED will be working to expand its capacity to issue funds to schools to enable them to originate the loans to students.

Default Rates

The national student loan cohort default rate has been steadily declining and it has been cut almost in half, from 22.4 percent three years ago to 11.6 percent in the most recent year. The declining default rate is a function of ED's aggressive debt collection program and steps it has taken in the gatekeeping area to remove schools with high default rates from participating in federal student loan programs.

Since 1993, some 600 schools have become ineligible. In addition, ED's strengthened accountability standards have prevented many schools that do not meet basic financial and administrative criteria from participating in the loan programs.


Institutional eligibility and certification for participation in federal student aid has been strengthened. Although the State Postsecondary Review Entities (SPREs) have been eliminated, recertification reviews are currently underway and will be conducted for all participating institutions. In the case of initial certification, the Secretary also provisionally certifies an institution to participate in Title IV programs for not more than one year. Those institutions which are not able to perform in accordance with financial and administrative responsibility regulations will be removed from the programs within the first year of participation, greatly increasing protection to the taxpayers.

National Student Loan Data System

The first phase of the National Student Loan Data System is now operational. This is the first national database on recipients of student aid and one of the largest relational databases in the world. This database will help prevent those who have defaulted on loans or reached maximum award levels from receiving additional loans or Pell Grants.


Total collections on defaulted student loans in fiscal year 1995 amounted to $2 billion. This was an increase of $400 million over fiscal year 1994 collections of $1.6 billion.

One of the most effective collection tools being used by ED is the tax refund offset mechanism. ED collected $588 million from 778,000 student loan defaulters in calendar year 1995 through cooperation with the Internal Revenue Service, which allows tax refunds to be offset set by the amount of delinquent debt owed.

Other collection tools used by ED include private sector collection agencies, administrative wage garnishment, salary offsets, denial of further federal aid and litigation.

The significant increase in collections has brought the net cost of student loan defaults down to an all time low. The net cost of defaults has dropped by more than two thirds from--$1.7 billion in FY 1992 to $400 million in FY 1995.

Computer Matching Activities

ED continues to conduct computer matches with eight other Federal agencies as part of its effort to strengthen the management and oversight of student financial assistance programs. ED conducts computer matches with the Department of Defense, Department of Justice, Immigration and Naturalization Service, Department of Housing and Urban Development, Internal Revenue Service, Selective Service, Social Security Administration and the U.S. Postal Service. These computer matches are designed to ensure that students meet various eligibility criteria and to increase the collections from students who have defaulted on their loans.
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