Education Department Fails to Oversee College Lenders, Report Asserts.

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Author: Field, Kelly

Dateline: WASHINGTON

THE U.S. EDUCATION Department must improve its oversight of colleges that act as lenders in the federal guaranteed student-loan program, the Government Accountability Office concludes in a report released last week.

The report reveals that the department's Office of Federal Student Aid, known as FSA, failed to collect compliance audits for the 2002 fiscal year from 10 of the 29 college and university lenders that made or held more than $5-million in loans, and did not conduct program reviews of any such lenders. The audits and reviews are used to ensure that colleges and universities are financially stable and are awarding loans only to eligible students.

During the 2003-4 academic year, 64 college lenders made $1.5-billion in government-subsidized student loans, $1-billion more than in the 1993-94 academic year.

Over the past five years, a growing number of institutions have forged exclusive deals with banks and other lenders that allow the colleges to lend money directly to their graduate and professional students and then sell the loans back to the lenders for a hefty gain (The Chronicle, November 5).

Under those "school as lender" arrangements, a college establishes with a lender a line of credit that the college uses to make loans to its graduate students. The institution typically holds the loans for a short time, then sells the debt back to the lender for a premium that equals a percentage of the total amount of money it lent.

The report from the GAO, the investigative arm of Congress, comes at a time when some critics of the program are pushing Congress to eliminate the provision in the Higher Education Act, the law governing most federal student-aid programs, and that gives colleges the authority to act as lenders. The critics say that the deals create a potential conflict of interest because the institutions, which are supposed to have their students' best interests in mind, profit from their graduate students' indebtedness.

The critics also question whether colleges are using the proceeds from the sales not to supplement their student-aid budgets, as they claim, but to free up money for other purposes.

The report notes those concerns but does not take a position on them. Instead, the report focuses on the department's failure to ensure that the institutional lenders are complying with the law and regulations that govern the guaranteed-loan program.

In its response, which was published along with the report, the Education Department acknowledges that increased oversight is important. But it points out that it has taken steps recently to ensure that colleges are submitting the required audits.

After the GAO's investigation began, the department barred 6 of the 10 delinquent lenders from receiving interest and government subsidies on their loans. The department subsequently collected fiscal-2002 audits from 3 of those institutions.

The department also asked 31 college lenders about their compliance with a law that requires them to dedicate interest income and federal subsidies--known as special-allowance payments--to need-based grants.. The department says it plans to conduct a thorough review of 10 more lenders soon.

The full texts of the report--"Federal Family Education Loan Program: More Oversight Is Needed for Schools That Are Lenders"--and the Education Department's response are available on the GAO's Web site at http://www.gao.gov

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By Kelly Field