DEPARTMENT OF EDUCATION
The Department of Education has been, for some time, the primary source of student loans. Our Direct and Federal Family Education Loan programs have allowed many millions of students to enroll in postsecondary education. Through the Direct Loan Program, in which Federal loans are disbursed directly to students by their institutions, we have made about $20 billion in loans since the program began in 1994. Through the Federal Family Education Loan (FFEL) Program, about $245 billion in loans have been made since the program began in 1965. Under FFEL, loans are made to eligible students by participating lenders. Repayment of the loans is guaranteed by national or state guaranty agencies using Federal reserve funds. The guaranty agencies receive reinsurance and other funds from the Department. Of the approximately $285 billion in loans made to students and parents (including the $20 billion in loans made since 1959 through the Federal Perkins Loan Program), approximately $184 billion are outstanding. Of the outstanding amount, about $91 billion are in repayment, another $68 billion are held by students still in school, and almost $25 billion are in default.
The Department is, and has been, making concerted efforts to reduce the default rate on student loans and hence the amount that needs to be collected. I am proud to say we have had considerable success. The FFEL cohort default rate has declined from 22.4 percent in 1990 to 10.7 percent in 1994. And we recently determined that the default rate declined further to 10.4 percent in 1995 (see chart 1). This decline in the default rate throughout the 1990's has been brought about by the adoption of legislation and policies supported by both Congress and two Administrations.
Many parts of the Office of Postsecondary Education have contributed to our efforts to reduce defaults. The Guarantor and Lender Oversight Service (GLOS) helps to ensure that lenders and guaranty agencies comply with due diligence requirements and provide pre-claims assistance, among other efforts. The Institutional Participation and Oversight Service (IPOS) has, through its gatekeeping initiatives, tightened financial and administrative requirements that schools must meet in order to participate in the loan programs. IPOS also ensures that borrowers receive counseling on managing and repaying their loans before they leave school. In addition, through the Default Management Division, IPOS has responsibility for taking actions against schools having excessively high default rates, including terminating their eligibility.
The vast majority of borrowers has repaid or are currently repaying their student loans. Some borrowers do default, however, and the Department is determined to see to it that those defaulters fulfill their obligations to repay their loans.
When defaults do occur, despite our prevention activities, the Debt Collection Service (DCS) is the organizational unit within the Department that bears responsibility for collecting the defaulted student loans. DCS is also responsible for implementing most aspects of the Debt Collection Improvement Act of 1996.
Over the past six years, the Department has collected almost $4.5 billion on defaulted loans (see chart 2). Working with the Treasury Department, the Department has realized substantial savings for taxpayers over the last decade or so. In 1986, the Department began referring to the IRS eligible debts that we had tried unsuccessfully to collect using other available tools. Using our data, the IRS has been offsetting federal income tax refunds and has collected about $3.2 billion over the past six years, including about $500 million in FY 1997 (see chart 3). In FY 1997, the Department provided Treasury with information on past-due student loan accounts valued at over $10.6 billion, which the Treasury Department also uses to offset other Federal payments to defaulters. We also provided Treasury with 1,123 accounts on past due institutional receivables (mostly from postsecondary institutions) valued at about $380 million. The Department has referred more accounts to Treasury than any other Federal agency.
Using private collection agencies has been one of our most successful strategies. We have been contracting with private debt collection agencies since 1979. We currently have 15 debt collection contracts. Our contracts with collection agencies are performance-based, as measured by the percentage of defaulted loans on which the agencies collect. Over the past six years, private collection agencies have generated $766 million in collections. Moreover, the contracts we have awarded to collection agencies have been used as a model by at least one other federal agency.
The Department was also the first Executive Branch agency to work with the Internal Revenue Service (IRS) to match defaulted student loan records with IRS addresses. The Department began these matching activities 15 years ago. In addition, over ten years ago we implemented the Federal Salary Offset Program, by which we began to match to defaulted and delinquent student loan records with Federal employment records to identify and collect from Federal employees who are in default on their loans. We have found this matching activity to be quite effective and have collected $33 million over the past six years from Federal employees.
Another initiative we have undertaken is reporting delinquent student loan debt to credit bureaus. The Department first undertook this activity over fourteen years ago. We believe credit reporting has been a contributing factor in both the reduction in the default rate on student loans and the increased amounts we have collected on defaulted student loans in recent years.
For the last fifteen years, the Department, under the authority of the Higher Education Act of 1965, has also required all student loan borrowers to provide taxpayer identification numbers. Without this step, our success in collecting on delinquent and defaulted student loans would have been significantly reduced.
Administrative wage garnishment, which we began using five years ago, has been another effective tool in improving our collections on student loans. Over 53,000 defaulted loans are now in garnishment status, and we have collected almost $34 million since 1992. The Department is conducting this activity under the authority of the Higher Education Act of 1965 (HEA). In order to improve the effectiveness of wage garnishment, we want to work with the Congress to develop legislation that would provide access to other Federal databases for employment information. We believe such access would allow us to expand the use of this tool.
We have also used our records of student aid recipients to deny additional aid under Title IV of the HEA to those borrowers with unresolved defaulted student loans. Over the period between the beginning of 1995 and the middle of 1996, the Department identified more than 125,000 student aid applicants as prior defaulters, helping to prevent these ineligible students from receiving about $300 million in loans. We are currently having discussions within the Department on the issue of denying Title IV aid to prospective borrowers who are delinquent on other Federal debts. These discussions, which will be expanded to include Treasury Department officials, are focused on determining the best way for the Department to proceed with regard to full compliance with this provision, while considering the best interests of the taxpayer and the Department.
We have developed a working relationship with the Treasury Department in several areas. One joint venture began in July, when the Department of Education started a pilot program with Treasury's Financial Management Service (FMS). The program will test FMS's ability to collect defaulted student loans, with results expected by April 1998. We will examine FMS's overall recovery rate as well as its success on selected loan cohorts. We will use the data to develop strategies for further cooperation between FMS and the Department to improve collections on defaulted student loans.
Although our working relationship with Treasury has been successful on a number of projects, we need additional discussions with their Financial Management Service (FMS) to improve collections through the "other Federal payments to defaulters" program. Improving collections through this program requires the exchange of information between large and complex data systems. The Department has considerable experience in using such data systems and hopes to share its expertise with Treasury in developing mutually satisfactory solutions.
Although the Debt Collection Improvement Act has primarily focused on improving collections, the Act also includes another tool which the Department has used to improve the efficiency of our operations, namely the use of electronic funds transfer. The Department is proud to report that 91 percent of its payments are now being made electronically. Recipients of those payments include institutions, businesses, and individuals.
I want to thank you for the opportunity to discuss the significant progress we have made in improving debt collection within the Department and our plans for further improvement. I also would like to mention that we have developed and are now using performance indicators, as required by the Government Performance and Results Act of 1993, for managing our programs. We have several indicators addressing default prevention and loan collections which are further helping us focus our efforts on preventing defaults and increasing collections. I am also now submitting the debt performance indicator table you requested and would be happy to answer any questions you may have.