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entitled 'Federal Family Education Loan Program: Increased Department 
of Education Oversight of Lender and School Activities Needed to Help 
Ensure Program Compliance' which was released on August 1, 2007. 

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Report to Congressional Requesters: 

United States Government Accountability Office: 

GAO: 

July 2007: 

Federal Family Education Loan Program: 

Increased Department of Education Oversight of Lender and School 
Activities Needed to Help Ensure Program Compliance:

GAO-07-750: 

GAO Highlights: 

Highlights of GAO��0, a report to Congressional Requesters 

Why GAO Did This Study: 

Concerns have been raised about the Department of Education抯 
(Education) role in overseeing the lenders and schools that participate 
in the largest of the federal government抯 student loan programs, the 
Federal Family Education Loan Program (FFELP). GAO was asked to analyze 
Education抯 use of its oversight, guidance, and enforcement authorities 
under FFELP. To do this, GAO reviewed departmental documents and 
federal laws, regulations, and cases and interviewed officials from 
Education and the student loan industry. 

What GAO Found: 

While Education has some processes to oversee general compliance in 
FFELP, it has no oversight tools in place designed to proactively 
detect potential instances of lenders providing improper 
inducements梥uch as gifts to schools in exchange for preferred status 
on a school抯 suggested lender list梠r schools limiting borrower choice 
of lender, two activities that are prohibited by law. Instead, the 
department primarily depends on external complaints to identify 
potential instances of non-compliance with these prohibitions. 
Historically, Education did not process these complaints in a 
systematic manner because complaint processing was not overseen by any 
one group. However, Education does have plans to conduct lender and 
school reviews to gather information on inducements, and it is 
considering updating its audit guides to begin detecting potential 
instances of improper inducements. 

Education has not implemented formal comprehensive guidance on 
inducements since 1989, although it has repeated some of the 
information contained in that guidance in subsequent financial aid 
handbooks and other department publications. Instead, the department 
has responded informally to individual queries from the student loan 
community regarding allowable inducement practices. Education抯 Office 
of Inspector General recommended in 2003梐nd members of the student 
loan community have previously requested梩hat Education issue more 
guidance on these issues. In June 2007, Education issued proposed 
regulations that address improper inducements and limitations on 
borrower choice, and these regulations could become effective in July 
2008 at the earliest. 

Education has only attempted to use its sanctioning authority twice in 
the past 20 years to enforce prohibitions on improper inducements or 
limitations on borrower choice. In particular, Education disqualified 
one lender from FFELP for using misleading advertising and providing 
improper inducements to borrowers, and it initiated proceedings to 
limit the participation of another lender in light of what it had 
determined to be an improper inducement. When Education responds to non-
compliance, the department instead has commonly sent letters to 
offending parties noting the prohibited activity and requesting they 
cease the activity. In addition, Education has not established a 
protocol for how to best respond to non-compliance梬hether to write a 
letter requesting the activity to cease or to sanction a lender or 
school梟or has it routinely assessed the effectiveness of these actions 
in stopping prohibited activities. 

What GAO Recommends: 

GAO recommends that the Secretary of Education (1) update the 
department抯 oversight mechanisms to proactively identify possible 
instances of improper inducements and limitations on borrower choice, 
(2) be more proactive in investigating situations involving possible 
instances of these prohibited activities, (3) issue new guidance 
regarding inducements to guide the student loan industry until the 
relevant proposed regulations are finalized and become effective, and 
(4) develop a protocol to determine the appropriate level of response 
for cases of non-compliance and assess the effectiveness of these 
actions to inform and improve this protocol. Education agreed with the 
first two recommendations but did not explicitly agree or disagree with 
the other two. 

[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO��0]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact George A. Scott at (202) 
512�15 or ScottG@gao.gov. 

[End of section] 

Contents: 

Letter: 

Appendix I: Briefing Slides: 

Appendix II: Scope and Methodology: 

Appendix III: Comments from the Department of Education: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Abbreviations: 

DCL: Dear Colleague Letter: 
Education: Department of Education: 
FFELP: Federal Family Education Loan Program: 
FSA: Federal Student Aid: 

United States Government Accountability Office: 

Washington, DC 20548: 

July 31, 2007: 

The Honorable Edward M. Kennedy: 
Chairman: 
Committee on Health, Education, Labor, and Pensions: 
United States Senate: 

The Honorable George Miller: 
Chairman: 
Committee on Education and Labor: 
House of Representatives: 

The Honorable Richard J. Durbin: 
United States Senate: 

The Honorable Dale Kildee: 
House of Representatives: 

Concerns have been raised about the Department of Education's 
(Education) role in overseeing lenders and schools that participate in 
the largest of the federal government's student loan programs, the 
Federal Family Education Loan Program (FFELP), through which over $46 
billion in new student loans was disbursed in fiscal year 2006. 
Education is responsible for overseeing whether FFELP participants 
comply with federal laws and regulations that prohibit lenders from 
using inducements to increase loan volume[Footnote 1] and that prohibit 
schools from limiting a borrower's choice of lender.[Footnote 2] 

To respond to your interest in this subject, we answered the following 
questions: 

To what extent has Education conducted oversight to help ensure 
compliance with prohibitions on improper inducements and limitations on 
borrower choice within FFELP? 

To what extent has Education provided guidance to address concerns 
about improper inducements and limitations on borrower choice within 
FFELP? 

To what extent has Education used its enforcement authority to help 
ensure compliance with prohibitions on improper inducements and 
limitations on borrower choice within FFELP? 

On June 29, 2007, we briefed interested congressional staff on the 
results of our study, and this report formally conveys the information 
provided during this briefing. In general, we found that Education has 
no tools for proactively detecting potential instances of prohibited 
inducements and the limiting of borrower choice, although the 
department is considering revising some of its processes used to 
oversee general compliance with FFELP to begin detecting potential 
instances of these activities. Also, Education has been limited in its 
guidance and enforcement activity but has recently issued proposed 
regulations on inducements and borrower choice. More specifically, we 
found that: 

While Education has some processes in place to oversee general 
compliance with FFELP requirements, it has no oversight tools designed 
to proactively identify potential instances of prohibited inducements 
or limitations on borrower choice of lender. Instead, Education 
primarily depends on complaints to identify potential non-compliance. 
However, Education has begun to conduct lender and school reviews to 
gather information on inducements and is considering updating audit 
guides to begin detecting these prohibited lending activities. 

The department has not updated comprehensive guidance on inducements 
since 1989--despite requests for more guidance from the student loan 
community--but it has responded to individual queries regarding 
allowable practices. In June 2007, Education issued proposed 
regulations that could become effective in July 2008 at the earliest. 

As of June 2007, Education had either sanctioned or attempted to 
sanction a total of two lenders in the past 20 years. In particular, 
Education disqualified one lender from FFELP in 1988 and attempted to 
limit the participation of a second lender starting in 1995, both for 
offering prohibited inducements. More frequently, Education has written 
letters to offending parties when it responds to instances of non- 
compliance instead of imposing sanctions, but it has not routinely 
assessed the effectiveness of these letters. 

In order to protect students and parents from paying unnecessarily high 
interest rates and fees because of improper lending activities among 
FFELP participants, we are recommending that the Secretary of Education 
update the department's oversight tools, more proactively investigate 
possible cases of program non-compliance, issue guidance on 
inducements, and develop a protocol to determine the appropriate level 
of response for cases of non-compliance and assess the effectiveness of 
its responses. In particular, we recommend that Education should: 

Update its oversight tools--such as financial audit and program review 
guidance--to identify possible instances of improper inducements and 
limitations on borrower choice. 

Be more proactive in examining situations involving possible improper 
inducements and limitations on borrower choice, such as exploring how 
schools generate preferred lender lists to determine if improper 
inducements have occurred. 

Issue new guidance--for example, through a Dear Colleague Letter (DCL)-
-regarding inducements to guide the industry until the relevant 
proposed regulations become effective in 2008 at the earliest. 

Establish a protocol for determining the level of response appropriate 
for different cases of non-compliance involving improper inducements or 
limitations on borrower choice--from writing letters to imposing fines 
to terminating participation--and assess the effectiveness of these 
actions to inform and improve this protocol. 

We used the following methodology to develop our findings. To 
understand the framework of Education's oversight, guidance, and 
enforcement authorities, we reviewed relevant laws, regulations, and 
cases pertaining to prohibited inducements and limitations on borrower 
choice. To assess the extent of Education's oversight activities, we 
interviewed Education officials and reviewed departmental documents. 
Specifically, we reviewed and catalogued complaints received by 
Education and the department's responses to those complaints. We also 
reviewed the department's audit guides and its evaluations of program 
performance. To determine the extent to which Education provided 
guidance to the student loan community, we interviewed Education 
officials and student loan industry representatives. We also reviewed 
the department's various forms of guidance, including DCLs and 
individual letters to FFELP participants in response to their requests 
for guidance. To assess the extent of Education's enforcement 
activities, we interviewed Education officials, reviewed departmental 
documents, and reviewed the case between Education and a lender 
pertaining to prohibited inducements. For additional information on our 
scope and methodology, please see appendix II. We conducted our work in 
accordance with generally accepted government auditing standards from 
February 2007 through June 2007. 

We provided a draft copy of this report to the Department of Education 
for review and comment and also for technical review. In written 
comments on our draft report, Education concurred with our 
recommendations that the department update its oversight tools and that 
the department more proactively investigate possible cases of program 
non-compliance. Education also provided updates on its activities in 
these areas that we incorporated into this report, where appropriate. 

With regard to our third recommendation that Education issue new 
guidance regarding inducements to guide the industry until the relevant 
proposed regulations are finalized and become effective, Education did 
not explicitly agree or disagree with the recommendation. Instead, 
Education noted that, as circumstances dictate, it may determine that 
specific guidance regarding inducements is appropriate. Education also 
stated that it will encourage schools and lenders to voluntarily 
implement the new regulations before they go into effect. Given that 
the proposed regulations will not become effective until July 1, 2008, 
at the earliest, we believe that Education should issue interim 
guidance on inducements to help ensure that schools and lenders comply 
with program requirements. 

With regard to our fourth recommendation that Education develop a 
protocol to determine the appropriate level of response for incidents 
of non-compliance involving improper inducements or limitations of 
borrower choice and that Education routinely assess the effectiveness 
of its responses, Education again did not explicitly agree or disagree 
with the recommendation. Instead, Education discussed its review 
procedures to assess compliance with general FFELP regulations and 
noted its recent and ongoing updates to those procedures, points that 
were included in the draft copy of our report. Education added that 
these procedures include an explanation of which responses are 
appropriate for varying degrees of general non-compliance and stated 
that the procedures require FFELP participants to provide evidence of 
corrective action, and it noted that it will continue to review and 
enhance its existing protocols in these areas. Because routine and 
consistent follow-up in incidents of non-compliance involving improper 
inducements or limitations on borrower choice has not occurred, even 
with the updated review procedures, we continue to believe that 
Education should develop a response protocol specific to improper 
inducements and limitations on borrower choice and to routinely assess 
the effectiveness of its responses. 

Education's written comments appear in appendix III. We also 
incorporated Education's technical comments and other updates that the 
department provided on its activities, where appropriate. 

We are sending copies of this report to relevant congressional 
committees, the Secretary of Education, and other interested parties. 
We will also make copies available to others upon request. In addition, 
this report will be available at no charge on GAO's Web site at 
[hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-7215 or ScottG@gao.gov. Contact points for our 
Congressional Relations and Public Affairs offices may be found on the 
last page of this report. Other major contributors to this report are 
listed in appendix IV. 

Signed by:

George A. Scott: 
Director, Education, Workforce,: 
and Income Security Issues: 

Appendix I: Briefing Slides

Briefing to Congressional Staff:
June 29, 2007:

Federal Family Education Loan Program:
Increased Department of Education Oversight of Lender and School
Activities Needed to Help Ensure Program Compliance

Overview:

Introduction:
Research Questions:
Scope and Methodology:
Summary of Key Findings:
Background:
Findings:
Conclusions:
Recommendations:

Introduction:

Investigations have revealed that some student loan lenders were paying 
schools to promote their loans, and some schools were limiting 
students� choice of lenders. 

Recent state, congressional, and other investigations have highlighted 
several improper lending practices with regard to student loans: 

* Lenders paying inducements or gifts to schools and financial aid 
officials in exchange for being placed on schools� 損referred lender� 
lists, which suggest particular financial institutions from which to 
borrow.

* Schools otherwise limiting borrower choice of lender, such as by 
refusing to process loan applications. 

Inducements and limited borrower choice can hinder a borrower抯 ability 
to benefit from the competition among lenders that can result in such 
outcomes as lower interest rates and fee reimbursements. 

Introduction:

Concern has been raised about the Department of Education抯 oversight, 
guidance, and enforcement of the largest federal student loan program.

The primary source of student loans for postsecondary education is the 
Federal Family Education Loan Program (FFELP). 

* In FY2006, $46.2 billion in new student loans were disbursed for 
postsecondary education under FFELP. 

Under FFELP, lending institutions梥uch as banks and state or nonprofit 
agencies梡rovide loans to students, which are then guaranteed and, in 
some cases, subsidized by the federal government. 

Concern has been raised about the degree to which the Department of 
Education (Education) investigates questionable lending practices and 
enforces current federal prohibitions for federal student loans in 
FFELP.

* In an effort to address concerns about the operation of the program, 
both the House and Senate are considering legislation that would 
address rules for lender and school participation in the program, as 
well as other program requirements.* 

* Student Loan Sunshine Act, H.R. 890, and Higher Education Amendments 
of 2007, S. 1642. The House _ passed H.R. 890 on May 9, 2007, and the 
Senate passed S. 1642 on July 24, 2007.

Introduction: 

Existing federal laws prohibit lenders from providing inducements to 
increase loan volume and schools from limiting borrower choice within 
FFELP.

Education is required to monitor FFELP participants to assess program 
compliance with federal laws that prohibit lenders from using 
inducements to increase loan volume and schools from limiting borrower 
choice of lender.

* The Higher Education Act of 1965, as amended (HEA), prohibits lenders 
from offering 損oints, premiums, payments, or other inducements� to 
individuals or institutions 搃n order to secure applicants� for FFELP 
loans.* For example, Education has determined an inducement to be 
prohibited in a case where a lender provided a gift to a potential 
borrower contingent on the successful processing of that person抯 loan. 

* Schools are prohibited from engaging 搃n any pattern or practice that 
results in a denial of the borrower抯 access to FFEL loans because of 
the borrower抯卻election of a particular lender�.�** 

* ~,. 20 U.S.C. �85(d)(5)(A). This prohibition was added to the HEA 
in 1986.
** 34 C.F.R. �2.603(e)(3).

Research Questions:

In response to a congressional request, GAO developed three research 
questions on Education抯 use of its authority under FFELP.

1. To what extent has Education conducted oversight to help ensure 
compliance with prohibitions on improper inducements and limitations on 
borrower choice within FFELP?

2. To what extent has Education provided guidance to address concerns 
about improper inducements and limitations on borrower choice within 
FFELP?

3. To what extent has Education used its enforcement authority to help 
ensure compliance with prohibitions on improper inducements and 
limitations on borrower choice within FFELP? 

Scope and Methodology: 

To answer these questions, we interviewed Education and industry group 
staff and reviewed applicable federal laws and department documents.*

To assess Education抯 oversight, guidance, and enforcement activities, 
we interviewed Education officials and student loan industry 
representatives, and we reviewed applicable federal laws and department 
documents, including:

* Complaints and requests for guidance submitted by FFELP participants 
and Education抯 responses to them. 

* Education抯 audit guides and guidance. 

We conducted our work in accordance with generally accepted government 
auditing standards from February 2007 to June 2007.

* A detailed scope and methodology section is contained in appendix II. 

Summary of Key Findings:

While Education has been limited in its oversight, guidance, and 
enforcement activities related to inducements and borrower choice, it 
is working to improve its oversight and offer guidance.

While Education has some processes in place to oversee general 
compliance within FFELP, the department has not developed any oversight 
tools designed to proactively identify potential instances of improper 
inducements or limitations on borrower choice. 

* However, Education recently began reviewing schools and lenders 
identified by external investigators for potential use of inducements 
to assess the range of inducements offered. 

* Education is also considering updating its audit guides to better 
detect these prohibited lending activities. 

The department has not established comprehensive guidance on 
inducements since 1989, despite requests for more guidance. 

* In June 2007, the department issued proposed regulations 
regarding梐mong other things梡rohibited inducements and preferred 
lender lists.

The department has either sanctioned or attempted to sanction only two 
FFELP participants in the past 20 years for offering prohibited 
inducements.

Background � FFELP:

Under FFELP, after a student selects a lender, the lender provides 
funds to the school, and the school disburses the loan. 

[See PDF for image.]

Source: GAO analysis of FFELP structure and operation; icons provided 
by Art Explosion. 

Note: Guaranty agencies provide insurance to lenders for at least 97% 
of the unpaid principal of defaulted loans disbursed on or after July 
1, 2006. The federal government then reinsures the guaranty agencies.

[End of figure]

Background � Private Educational Loans: 

Students may also use private educational loans, which Education is not 
responsible for overseeing.

Loan Source: Federal Program*;
Borrower eligibility: Determined by financial need;
Interest Rates: Fixed**: Limited by statute***;
Federal oversight responsibility for student lending activities: 
Education;

Loan Source: Private Lenders;
Borrower eligibility: Determined, in part, by credit history;
Interest Rates: Variable: Market-based: Frequently higher than FFELP 
interest rates;
Federal oversight responsibility for student lending activities: 
Various Banking Regulatory Agencies: Federal Trade Commission;

* Federal student loans can be provided by lending institutions under 
FFELP or directly from the federal government through the William D. 
Ford Federal Direct Loan Program (FDLP). Schools can individually 
decide whether to participate in FFELP or FDLP, or both. The loan terms 
provided through the two programs are, by law, very similar.

** Interest rates are fixed for all FFELP loans disbursed on or after 
July 1, 2006. FFELP loans disbursed before July 1, 2006, have variable 
interest rates.

*** FFELP lenders can offer loans with interest rates and fees equal to 
or lower than what is specified by law. 

Background - Oversight Authority: 

Education is required to monitor FFELP participants to assess program 
compliance.

Education must ensure that FFELP lenders and schools undergo required 
financial and compliance audits.

* The audits are performed to determine the extent to which lenders and 
schools comply with federal statutes and rules and regulations 
prescribed by the Secretary.

Education is also required to perform program reviews of schools on a 
systematic basis.

* These are used to assess schools� compliance with FFELP requirements 
and to assess school financial statements.

Background - Guidance Authority: 

Education can issue regulations and provide guidance.

Education can issue regulations that prescribe rules with which program 
participants must comply.

Education can also publish departmental guidance梖or example, through 
Dear Colleague Letters (DCL)梩hat provide further information to 
program participants. DCLs can:

* Provide operational guidance to participants in programs operated by 
Education.

* Provide advice and insight into how Education will enforce statutory 
and regulatory provisions.

* Serve as Education抯 interim interpretation of law when a law has 
gone into effect but the associated regulations have not yet been 
finalized.

Background - Enforcement Authority: 

In cases of program non-compliance, Education can employ sanctions.

Education can impose civil penalties of up to $27,500 for each 
prohibited practice by a lender and each instance of non-compliance by 
a school.

* To impose such penalties against a lender, Education must 
demonstrate, among other things, that the lender knew or should have 
known that its actions violated relevant federal laws or regulations 
regarding the program.

* However, Education is not required to establish that a school knew or 
should have known that its actions violated federal laws or regulations 
in order to assess civil penalties against it.

Education can limit, suspend, or terminate the participation of lenders 
and schools in FFELP.**

Finding One (Oversight) � Overview Education primarily uses complaints 
to identify non-compliance with prohibitions on inducements and 
limiting borrower choice. 

*For actions a lender has taken before being notified of its improper 
activities, Education can fine $27,500 for its cumulative violations 
that occurred until the notification of non-compliance. However, if the 
lender takes corrective action before Education notifies the lender of 
non-compliance, Education cannot impose sanctions on the lender. See 20 
U.S.C. � 1082(g) and 20 U.S.C. � 1094(c)(3)(B).

**See 20 U.S.C. � 1082(h).

Background - Enforcement Authority: 

Education can also, in certain situations, take immediate emergency 
action to limit, suspend, or terminate the participation of lenders in 
FFELP.

Education may also take emergency action against a lender when all of 
the following are met:

* Reliable information is received regarding violations of applicable 
laws or regulations;

* Education determines that immediate action is necessary to prevent 
the misuse of federal funds or substantial losses by borrowers; and:

* Education determines that the likelihood of financial loss by 
borrowers or the federal government exceeds the importance of following 
the procedures otherwise required to limit, suspend, or terminate the 
participation of a lender in FFELP.

*20 U.S.C. � 1082(j) and 34 C.F.R. � 682.704.

Finding One (Oversight) - Overview:

 primarily uses complaints to identify non-compliance with prohibitions 
on inducements and limiting borrower choice.

While Education has processes to oversee general compliance in FFELP, 
it has no oversight tools in place designed to proactively detect 
potential instances of improper inducements or limitations on borrower 
choice.

Education primarily depends on external complaints to identify 
potential non-compliance. Until recently, Education did not process 
complaints in a systematic manner. 

Education is conducting lender and school reviews to gather information 
on inducements, and it is considering updating its audit guides to 
begin detecting potential instances of improper inducements. 16
Finding One (Oversight) � Processes in Place Education conducts various 
oversight activities to monitor the general program compliance of FFELP 
participants. 

Finding One (Oversight) - Processes in Place:

Education conducts various oversight activities to monitor the general 
program compliance of FFELP participants.

Education reviews annual financial and compliance audits of lenders and 
schools.

* Lenders and schools hire independent contractors to conduct these 
audits.

* Audits include assessing whether lenders charged the correct interest 
rate to borrowers and whether lenders maintain accurate and complete 
records of loans.

Education is required to perform program reviews of schools on a 
systematic basis to assess their compliance with FFELP and other 
requirements.

* For example, Education staff analyze school data to identify outliers 
or potential weaknesses in a school抯 administration of Education funds.
17

Education抯 oversight tools cannot proactively detect potential 
instances of improper inducements or limitations on borrower choice.

Education抯 process for reviewing lender and school financial and 
compliance audits and conducting program reviews of schools does not 
include measures to detect potential instances of improper inducements 
or limitations on borrower choice. 

Education searches audit and program review data for anomalies, but can 
only verify improper inducements or limitations on borrower choice with 
further investigation.

* For example, Education plans to write letters to schools where 
evidence suggests that borrower choice may be limited. However, further 
examination of these schools is not currently planned.* 

In addition, Education抯 Inspector General identified weaknesses in 
some of the tools to oversee lenders in September 2006. 

* For example, Education did not have processes for reviewing the 
quality or effectiveness of program reviews. 

* On June 29, 2007, Education sent letters and e-mails to 921 schools 
that had at least 80 percent of their FFELP loan volume for the 2006-
2007 academic year disbursed by a single lender. The correspondences 
,reminded the schools of a borrower抯 right to choose any eligible 
lender and included a copy of the March 2007 DCL on this subject. 
Education also plans to send letters to associated lenders to remind 
them of applicable rules and regulations. 

Finding One (Oversight) � Complaints: 

Before October 2006, Education primarily detected inducements and 
limitations of borrower choice from external complaints processed 
through multiple offices. 

[See PDF for image]

Source: GAO analysis of Department of Education structures and 
processes. 

[End of figure]

Acronyms: 

FSA: Federal Student Aid: (processes federal student aid and enforces 
rules and regulations): 
OIG: Office of Inspector General (conducts independent audits of 
Education抯 programs): 
OPE: Office of Postsecondary Education (develops federal policy and 
legislative proposals) 

Complaints to Education have primarily focused on practices used by 
lenders and schools.

Lender inducements to potential borrowers. 

* For example, $300 gift cards to borrowers for taking out a loan from 
a particular lender.

Lender inducements to schools.

* For example, gifts received by a financial aid administrator. 

School restrictions of borrower choice of lender. 

* For example, a school preventing a student from borrowing from the 
lender of their choice by refusing to process the loan. 

Education抯 process for documenting complaints has not been systematic 
until recently.

The number and nature of all complaints made before October 2006 are 
unknown, since complaint processing was not overseen by any one group, 
and Education did not record all complaints and document its responses.

Education reviewed 26 complaints between 2001 and 2006. 

* Twenty-two were submitted by a lender that originally submitted 600 
complaints. Education narrowed the number of complaints to review by 
performing data analysis on the schools named. 

We found that Education抯 documentation demonstrates: 

* Determinations of compliance for 10 parties. 

* Determinations of non-compliance for 2 parties � Education issued a 
letter to each party asking them to cease prohibited activities. 

* No determination on compliance for the remaining 14 parties. 

Education officials stated that many complaints do not contain enough 
information梥uch as the names of the accused parties梩o initiate a 
review. 

Education抯 complaint-driven approach does not identify all cases of 
improper inducements and limitations on borrower choice.

State and congressional investigations identified improper arrangements 
between lenders and schools that Education had not yet investigated.

* For example, a financial aid administrator at one university was 
found to have a financial interest in one of the school抯 preferred 
lenders. The administrator owned stock in the FFELP lender抯 parent 
company and profited more than $100,000 from the sale of the stock.

* For example, a director of student financial aid at another 
university was found to have negotiated with a FFELP lender to place 
the lender on the school抯 preferred lender list in return for benefits 
to the director and his staff, such as events and meals paid for by the 
lender.

* For example, one FFELP lender paid more than $70,000 for a cruise for 
select financial aid officers attending a financial aid conference. 

Education recently formed an inducement workgroup to review complaints.

A Prohibited Inducement Workgroup comprised of multiple Education 
offices was formed in October 2006 to review complaints and inquiries 
related to improper inducements and to track the nature of concerns 
systematically.

The Workgroup meets twice a month, logs new complaints, directs them to 
the relevant office, and monitors follow-up activity. 

The Workgroup had reviewed 21 cases and issued 2 letters to lenders 
reminding them of the prohibitions on improper inducements and 
limitation of borrower choice, as of June 18, 2007.* The other cases 
either have been closed or are still currently under review.

* These cases do not overlap with the complaints discussed on slide 20. 

Finding One (Oversight) � New Processes: 

As of June 1, 2007, Education had conducted 2 reviews and had plans to 
conduct at least another 68 reviews to gather information on 
inducements.

In April 2007, Education selected 44 schools and 26 lenders for 
reviews.* They include:

* All schools and lenders named in the media as being under suspicion 
by the New York Attorney General抯 Office. 

* Schools with a large proportion of their students borrowing from the 
same lender.

As of June 1, 2007, site visits for 2 reviews had been performed and 
will serve as pilots for future reviews.** Education will later 
determine how many of its remaining reviews will involve site visits. 

According to Education officials, the reviews contain two stages: 

* Staff collect information to learn more about the use of inducements.

* If non-compliance is found, staff may issue sanctions in some of 
these cases. However, it is unclear what criteria Education will use to 
determine the need for sanctions. 

* As of July 23, 2007, Education had selected another 4 schools and 
lenders to review.
** s of July 23, 2007, Education had conducted site visits for another 
3 reviews, yielding a total of 5 completed site visits.

Education is considering updating its audit guides to begin detecting 
potential inducements.

Education staff are considering updating the department抯 current audit 
review processes to include measures to detect possible improper 
inducements.

* For example, Education staff are considering including reviews of 
agreements between schools and lenders in the audit guides. However, no 
timeline has been set for revising these audit guides. 

Finding Two (Guidance) � Overview: 

Despite requests, Education has not implemented comprehensive guidance 
on inducements in almost 20 years. 

The department has not updated formal comprehensive guidance on 
inducements since 1989, but it issued proposed regulations in June 2007 
that could be effective in July 2008 at the earliest. 

Education has responded informally to individual queries from the 
student loan community regarding allowable practices. 

The department抯 Inspector General recommended in 2003梐nd members of 
the student loan community we interviewed have previously 
requested梩hat Education issue more guidance. 

Finding Two (Guidance) � Formal Guidance: 

The most recent comprehensive guidance on inducements was implemented 
in 1989, but updated guidance on borrower choice was published in 2007.

Inducements � A 1989 DCL described allowable and improper activities 
and included examples of improper lending activities. 

* However, the letter is not available on Education抯 Web site. 

* A 1995 DCL and Education抯 annual Student Financial Aid Handbooks do 
not provide examples of improper activities and restate much of the 
same information as the 1989 letter. 

Borrower Choice � Education published DCLs in 1990, 1991, and 2007 
related to school responsibilities regarding loan processing and a 
student抯 choice to borrow from any eligible lender. 

* This information was also presented at fall 2006 Federal Student Aid 
Conferences.

Education has issued proposed regulations on inducements and issues 
related to limitations on borrower choice. 

The Secretary of Education issued proposed regulations on prohibited 
inducements and preferred lender lists in June 2007, and these 
regulations will become effective July 1, 2008, at the earliest.* 

* The proposed regulations include a list of examples of prohibited 
inducements and activities and a list of all permissible activities. 

* They also specify the requirements schools must meet if they choose 
to provide preferred lender lists. 

* Education officials told us that they plan to issue the final 
regulations by November 1, 2007. If the department meets this goal, the 
final rule would take effect on July 1, 2008.**

* I. 72 Fed. Reg. 32, 410 (June 12, 2007) (to be codified at pt. 682).
** 20 U.S.C. � 1089(c)(1).

Finding Two (Guidance) � Inquiries: 

Since 1990, Education has received at least 58 inquiries from schools, 
lenders, industry groups, and others about whether certain activities 
are permissible. 

Queries asked whether proposed inducements were permitted and included 
such things as the advertising and provision of benefits to potential 
borrowers and schools. Of 58 inquiries, Education identified improper 
activities more than 1/3 of the time. 

* The department primarily responded in writing to the inquiring party, 
but did not make its response publicly available. 

* Education抯 documentation does not demonstrate that a determination 
was made for at least 9 inquiries. 

* These 58 do not include other requests to Education that were not 
submitted in writing or that Education did not document. 

Some issues were raised in multiple queries, such as the prohibited 
provision of a gift to a potential borrower in return for a completed 
loan application.

Two industry group representatives said their members� inquiries to 
Education sometimes go unanswered. 

Finding Two (Guidance) � More Requested: 

Education抯 Inspector General recommended梐nd industry groups have 
requested梩hat Education issue more guidance on inducements.

Education抯 Inspector General interviewed lenders and industry groups 
as part of a 2003 investigation and concluded that the department 
should be more proactive in issuing guidance. 

Despite industry抯 attempt to self-regulate by issuing guidance and 
voluntary codes of conduct, student loan industry group officials we 
interviewed said that more guidance is needed from Education. 

* Members of the student loan industry repeatedly seek advice from 
industry groups, their own lawyers, and Education on allowable 
activities.

Finding Three (Enforcement) � Overview: 

Education has rarely used sanctions to enforce prohibitions on improper 
inducements or limitations on borrower choice. 

The department has sanctioned one FFELP participant and has attempted 
to use its authority to sanction one other FFELP participant in the 
past 20 years.

* Besides these two instances, Education has not imposed any sanctions 
against any FFELP participant based on improper inducements or limited 
borrower choice of lender. 

When it responds to instances of non-compliance, the department more 
commonly sends a letter to the offending party requesting that the 
activity cease.

* Education has not routinely assessed the effectiveness of these 
letters.

Finding Three (Enforcement) � Sanction Attempts: 

Education has sanctioned one lender and attempted to limit the 
participation of another lender as a result of non-compliance. 

In 1988, Education disqualified one student loan lender from FFELP. 
That lender was found to be using misleading advertising and providing 
inducements to borrowers. 

In 1995, the department initiated proceedings to limit the 
participation of student loan lender Sallie Mae in light of what it had 
determined to be an improper inducement involving the Dr. William M. 
Scholl College of Medicine.

* On appeal, the U.S. District Court for the District of Columbia held 
that there was no violation, in part, because the school rather than 
Sallie Mae was the originating lender.*

* Student Loan Marketing Assoc. v. Riley, 112 F. Supp. 2d 38 (D.D.C. 
2000). 

Finding Three (Enforcement) � Responses: 

Education has primarily used letters to respond to cases of non- 
compliance.

When Education does respond to instances of non-compliance, the 
department has commonly sent letters to offending parties noting the 
prohibited activity and requesting they cease the activity, but has not 
imposed sanctions. * For example:

* For two lenders that were found offering rebates to loan applicants, 
Education sent letters asking them to cease the activity and to return 
pending applications to applicants. 

* For one school that was denying its students the ability to take 
loans from a particular lender, Education sent a letter requesting that 
the school cease the activity. 

* Education plans to send a letter to lenders offering gift cards or 
music players to borrowers who complete loans with them. 

Education has not established a protocol for how to best respond to non-
compliance梬hether in a letter or with a sanction梟or has it routinely 
assessed the effectiveness of these actions in stopping prohibited 
activities.

* An official from Education's Office of General Counsel stated that 
the department does not consider the of letters to lenders and schools 
an enforcement action. 

Conclusions: 

Although Education has recently taken steps to improve its coordination 
across offices, it has continued to be reactive in its examination of 
questionable lending practices. 

Education抯 recent development of the Prohibited Inducement Workgroup 
could result in increased coordination across department offices in 
addressing improper inducements and limited borrower choice.

However, to date, Education has been reactive in its oversight and 
examination of these prohibited lending practices. This has limited the 
ability of the department to identify and verify occurrences of program 
non-compliance.

* For example, Education only pursues examination of possible instances 
of non-compliance after complaints are received. 

* It is unknown when audit guides will be updated to address these 
prohibited activities.

Education provided limited guidance updates until recently and does not 
have a formalized process for determining the need for sanctions.

Education has taken limited actions to update its guidance on 
inducements, despite requests to Education for more guidance. 

* This has resulted in the student loan industry being the main 
contributor to defining industry best practices. 

* Until the new regulations are finalized and go into effect, the 
industry will continue to operate under outdated guidance. 

Education抯 limited enforcement efforts regarding prohibited 
inducements and limitations on borrower choice may have resulted in 
some students taking loans with higher interest rates or fewer borrower 
benefits.

* The department has not established a process to determine the level 
of response appropriate for a given case of non-compliance. 

* The department has also not reviewed the effectiveness of its letters 
and sanctions to inform future enforcement decisions. 

Recommendations: 

Education should be more proactive in its oversight activity to help 
ensure FFELP program compliance and to protect borrowers.

Education should:

* Update its oversight tools梥uch as audit and program review 
guidance梩o identify possible instances of improper inducements and 
limitations on borrower choice. 

* Be more proactive in examining situations involving possible improper 
inducements and limitations on borrower choice, such as exploring how 
schools generate preferred lender lists to determine if improper 
inducements have occurred. 

Education should be more proactive in its guidance and enforcement 
activity to help ensure FFELP program compliance and to protect 
borrowers.

Education should:

* Issue new guidance梖or example, through a DCL梤egarding inducements 
to guide the industry until the relevant proposed regulations become 
effective in 2008 at the earliest. 

* Establish a protocol for determining the level of response 
appropriate for different cases of non-compliance involving improper 
inducements or limitations on borrower choice梖rom writing letters to 
imposing fines to terminating participation梐nd assess the 
effectiveness of these actions to inform and improve this protocol.

[End of section]

Appendix II: Scope and Methodology: 

To understand the framework of Education抯 oversight, guidance, and 
enforcement authorities, we reviewed relevant laws, regulations, and 
cases pertaining to prohibited inducements and limitations on borrower 
choice of lender. 

To assess the extent of Education抯 oversight activities, we 
interviewed Education officials and reviewed departmental documents. In 
particular, we interviewed officials from the Office of Postsecondary 
Education, Federal Student Aid, Ombudsman Office, and Office of the 
Inspector General. With regard to documentation, we reviewed and 
catalogued complaints received by Education and documentation of the 
department抯 responses to those complaints. However, the complaints we 
received from Education may not represent all complaints submitted to 
the department because, prior to October 2006, Education did not record 
all the complaints received or document its responses. We also reviewed 
the department抯 audit guides and its evaluations of program 
performance. 

To determine the extent to which Education provided guidance to the 
student loan community, we interviewed Education officials and student 
loan industry representatives, and we reviewed departmental guidance. 
Within Education, we interviewed staff from the Office of Postsecondary 
Education, Federal Student Aid, Ombudsman Office, and Office of the 
Inspector General. Within the student loan industry, we interviewed 
representatives from the Consumer Bankers Association, Education 
Finance Council, National Council of Higher Education Loan Programs, 
and National Association of Student Financial Aid Administrators. We 
reviewed the department抯 various forms of guidance梚ncluding DCLs and 
individual letters to FFELP participants in response to their requests 
for guidance. We also documented Education抯 practices for making 
determinations concerning the alleged activity and catalogued the 
department抯 written responses to these concerns and inquiries. 
Education provided us all the requests for guidance made in writing 
since 1990 that it had on file. However, the requests we received from 
the department may not represent all requests submitted to the 
department for clarification since some could have been submitted by 
phone or not documented. 

To assess the extent of Education抯 enforcement activities, we 
interviewed Education officials and reviewed departmental documents and 
applicable federal laws. Specifically, within Education, we interviewed 
staff from the Office of Postsecondary Education, Federal Student Aid, 
Ombudsman Office, and Office of the Inspector General to examine 
actions taken to address inducement and borrower choice issues. 
Furthermore, we reviewed information used by Education to make 
determinations regarding alleged improper lending activities (e.g., 
lender marketing materials containing alleged inducements and lender 
inducements resulting in preferred placement on preferred lender 
lists). We also examined several Education offices� protocols for 
performing reviews in the context of program compliance. We conducted 
our work in accordance with generally accepted government auditing 
standards from February 2007 through June 2007.

[End of section]

Appendix III: Comments from the Department of Education: 

Chief Operating Officer: 
July 20, 2007:

Honorable David M. Walker: 
Comptroller General:
Government Accountability Office: 
441 G Street, NW:
Washington, DC 20548: 

Dear Mr. Walker: 

In accordance with 31 U.S.C. 720, I am writing to respond to 
recommendations made in the Government Accountability Office (GAO) 
report, "Federal Family Education Loan Program: Increased Department of 
Education Oversight of Lender and School Activities Needed to Help 
Ensure Program Compliance" (GAO-07-750). This report focused on two 
specific areas of lender and school oversight - improper inducements 
and the limitations on borrower choice of lender in the Federal Family 
Education Loan (FFEL) program. 

We appreciate this opportunity to respond to the GAO report. We are 
aware of the current concerns regarding lenders providing improper 
inducements and schools limiting borrower choice of lender. However, 
under existing law, the Department's authority to take action regarding 
some of these practices is limited. For example, the law includes a 
quid pro quo requirement for lender inducement violations, and current 
regulations do not include any specific limitations on the use of the 
preferred lender lists by schools. Given these limitations, while the 
activity is suspect, it may or may not violate the law. 

Background: 

In March 2006, the Department initiated a strategy to enhance its 
oversight of Title IV participants. To provide more efficient and 
effective oversight of Title IV participants, the Department's Federal 
Student Aid office consolidated all program compliance functions under 
one senior executive who reports directly to the Chief Operating 
Officer of Federal Student Aid. In August 2006, the Department began a 
negotiated rulemaking process to develop regulations to clarify and 
strengthen the regulations governing preferred lender list practices 
and improper inducements. After extensive negotiations with the student 
aid community, including representatives of lenders, guaranty agencies, 
and schools, a Notice of Proposed Rulemaking (NPRM) was published in 
the Federal Register on June 12, 2007. That NPRM included proposals 
that would significantly strengthen the rules regarding prohibited 
inducements and would specifically regulate the use of preferred lender 
lists. While final regulations resulting from the June 12, 2007, NPRM 
will not become effective until July 1, 2008, the Department has been 
conducting, and will continue to conduct, reviews of schools, lenders, 
and guaranty agencies to ensure compliance with current requirements. 

In October 2006, the Department established a workgroup to review 
compliance issues with the prohibited inducement provisions of the 
Higher Education Act (HEA). The purpose of the workgroup is to provide 
a centralized process for the review of inducement and borrower choice 
issues ensuring consistent and appropriate review and follow-up. In 
April 2007, the Secretary convened an intra-departmental taskforce to 
review the proposals that came out of the negotiated rulemaking process 
discussed earlier and to make recommendations for the NPRM. Finally, in 
June 2007, Federal Student Aid created a workgroup to review and update 
school and lender review procedures regarding compliance with the 
borrower choice and improper inducements provisions. We believe that 
this multi-faceted strategy should strengthen program integrity, 
improve Departmental oversight, and ensure participant compliance. 

Response to Recommendations: 

The following addresses the recommendations in the report: 

Recommendation 1: Update the Department's oversight mechanisms to 
proactively identify possible instances of improper inducements and 
limitations on borrower choice. 

Action: We concur. In fact the Department has taken a number of steps 
to improve its processes and procedures for providing effective 
oversight of schools and lenders, including in the areas of improper 
inducements and limitations on borrower choice. 

On a strategic level, as noted earlier, in March 2006, our Federal 
Student Aid office consolidated all business areas with functional 
responsibility for oversight and monitoring under one senior executive 
reporting directly to Federal Student Aid's Chief Operating Officer. In 
October 2006, Federal Student Aid established a workgroup to review 
compliance with the prohibited inducement provisions of the HEA. In 
April 2007, the Secretary's intra- departmental taskforce began to 
review and recommend proposed regulations that were ultimately included 
in the June 12, 2007, NPRM. Those regulations, when finalized and 
effective, will require more disclosures of the arrangements between 
schools and lenders and schools and guaranty agencies. Finally, in June 
2007, Federal Student Aid created a workgroup to review and update 
school and lender compliance procedures around borrower choice and 
improper inducements. 

On a tactical level, in April 2007, we developed procedures to support 
reviews of both lender inducement and limitations on borrower choice 
and will incorporate those procedures into our general review process. 
We also made recommendations to the Department's Office of the 
Inspector General to include in the audit guides procedures for 
examining whether improper inducements or limitations on borrower 
choice exist. Finally, we notified guaranty agencies to incorporate 
improper inducement procedures in their lender reviews. 

Recommendation 2: Be more proactive in investigating situations 
involving possible instances of these prohibited activities. 

Action: We concur and as such are implementing new processes and 
procedures. In October 2006, as a result of complaints about 
restrictions on borrower choice, Federal Student Aid initiated borrower 
choice reviews at targeted schools. For example, we initiated program 
reviews at 11 institutions that allegedly were refusing to process loan 
applications submitted by students for a specific lender. Those reviews 
concluded with the one institution where evidence of such a denial was 
obtained being cited for the violation. The presidents of the remaining 
ten institutions received a letter reminding them of the regulatory 
requirements. Additionally, in April 2007, we initiated focused 
inducement and borrower choice reviews at targeted schools and lenders. 
These reviews are ongoing. 

In June 2007, we identified 921 schools that had at least 80% of their 
FFEL loan volume for the 2006-2007 academic year with a single lender. 
Although the fact that these schools had at least 80% of their loans 
with one lender does not necessarily mean there is a violation, we sent 
a letter to these schools reminding them of a borrower's right to use a 
lender of his or her choice. This letter was a follow-up to a March 29, 
2007, "Dear Colleague" letter on this subject. This was part of our 
ongoing efforts to ensure strict compliance and oversight of all our 
programs. We reminded these schools that the Department will impose 
fines or take other administrative actions for violating any statutory 
and regulatory requirements. Recently, we posted another letter to our 
Web site reminding all schools of the requirements. 

We will contact lenders to ensure their compliance with applicable 
rules and regulations. 

Recommendation 3: Issue new guidance regarding inducements to guide the 
student loan industry until the relevant proposed regulations are 
finalized and become effective. 

Action: As noted earlier, the NPRM published on June 12, 2007 would 
significantly strengthen and clarify the rules related to prohibited 
inducements and would, for the first time, regulate the use of 
preferred lender lists by schools. As circumstances dictate, we may 
determine that specific guidance regarding inducements is appropriate. 
As soon as the new regulations are finalized, we will continue our 
efforts to ensure that all parties (lenders, guaranty agencies, 
schools) are aware of the new requirements and how they are to be 
implemented and enforced. Also, when we publish (no later than November 
1, 2007) the final rules on prohibited inducements and preferred lender 
lists, we will strongly recommend that schools and lenders voluntarily 
implement the new rules prior to their official effective date of July 
1, 2008, as is provided in section 482(c)(2) of the HEA. 

Recommendation 4: Develop a protocol to determine the appropriate level 
of response for cases of non-compliance and assess the effectiveness of 
these actions to inform and improve this protocol. 

Action: The Department is currently updating procedures for lender and 
guaranty agency oversight. In September 2006, we updated our school 
review procedures. These procedures are comprehensive and ensure 
standardization and consistency in school oversight. The procedures 
include appropriate actions for various compliance findings, including 
possible administrative actions, i.e., fines, limitations, suspensions 
and terminations. 

As part of our current review procedures, schools, lenders, and 
guaranty agencies are required to submit evidence that any non-
compliance was corrected or to establish a corrective action plan, 
which we then verify. For example, the school cited for non- compliance 
in the October 2006 targeted review submitted a corrective action plan 
to the Department. We then verified the corrective action by reviewing 
the school's revisions to its Web site clarifying "borrower choice." 

The Department will continue to review and enhance our existing 
protocols for determining the appropriate level of response for cases 
of non-compliance. 

In addition to these responses to the report's recommendations, we are 
including, as an attachment to this letter, clarifications we propose 
to the briefing slides contained in Appendix I of the report. 

I appreciate the opportunity to respond to the GAO report. If you or 
your staff have any questions regarding our responses, please contact 
me or Marge White of my staff at (202) 377-3022.

Sincerely,

Signed by:
Lawrence A. Warder:

[End of Section]

Appendix IV: GAO Contact and Staff Acknowlegments:

GAO Contact: George Scott, Director, at (202) 512-7215 or Scott@gov.gov:

Staff Acknowledgements: Melissa Emrey-Arras, Assistant Director, and 
Jeffrey W. Weinstein, Analyst-in-Charge, managed this assignment. Other 
staff members who made key contributions to the assignment include 
Summer Pachman, Kenrick Isaac, Debra Prescott, Charlie Willson, Ramona 
Burton, and Lorin Obler. Sheila McCoy, Doreen S. Feldman, and Richard 
Burkard provided legal assistance. Luann Moy assisted with methodology. 
Karen Burke provided assistance with graphics and layout.

Related GAO Products: 

Federal Family Education Loan Program: More Oversight Is Needed for 
Schools That Are Lenders. GAO��4. Washington, D.C.: January 2005. 

Financial Regulation: Industry Changes Prompt Need to Reconsider U.S. 
Regulatory Structure. GAO��. Washington, D.C.: October 2004. 

Better Information Sharing among Financial Services Regulators Could 
Improve Protections for Consumers. GAO��2R. Washington, D.C.: June 
2004. 

Department of Education: Guaranteed Student Loan Program 
Vulnerabilities. GAO��8R. Washington, D.C.: November 2002. 

Federal Student Aid: Additional Management Improvements Would Clarify 
Strategic Direction and Enhance Accountability. GAO��5. Washington, 
D.C.: April 2002. 

Federal Student Loans: Flexible Agreements with Guaranty Agencies 
Warrant Careful Evaluation. GAO��4. Washington, D.C.: January 2002. 

Financial Management: Financial Management Challenges Remain at the 
Department of Education. T朅IMD��3. Washington, D.C.: September 
2000. 

Benefit and Loan Programs: Improved Data Sharing Could Enhance Program 
Integrity. HEHS��9. Washington, D.C.: September 2000. Financial 
Management: Education抯 Financial Management Problems Persist. 
T朅IMD��0. Washington, D.C.: May 2000. 

Financial Management: Education Faces Challenges in Achieving Financial 
Management Reform. T朅IMD��6. Washington, D.C.: March 2000. 

Department of Education: Information Needs Are at the Core of 
Management Challenges Facing the Department. T朒EHS��4. Washington, 
D.C.: March 1998. 

Department of Education: Multiple, Nonintegrated Systems Hamper 
Management of Student Financial Aid Programs. T朒EHS/AIMD��2. 
Washington, D.C.: May 1997.

Department of Education: Status of Actions to Improve the Management of 
Student Financial Aid. HEHS��3. Washington, D.C.: July 1996. 

Financial Regulation: Modernization of the Financial Services 
Regulatory System. T朑GD��1. Washington, D.C.: March 1995. 

Financial Management: Education抯 Student Loan Program Controls over 
Lenders Need Improvement. AIMD��. Washington, D.C.: September 1993. 

Financial Audit: Guaranteed Student Loan Program抯 Internal Controls 
and Structure Need Improvement. AFMD��. Washington, D.C.: March 
1993.

Footnotes:

[1] 20 U.S.C. � 1085(d)(5)(A).

[2] 34 C.F.R. � 682.603(e)(3).

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