Summary

The federal government guarantees loans in the Federal Family Education Loan program (FFELP) so that private lenders that participate in the program will be reimbursed if a borrower defaults, and about $4.6 billion was spent in fiscal year 2006 to repay lenders for defaulted loans. To retain the guarantee on their loans, all FFELP lenders must comply with minimum due diligence requirements for servicing loans, including establishing a borrower's first repayment due date and making a certain number of attempts to contact delinquent borrowers. Lenders that adhere to these requirements are eligible to receive at least a standard reimbursement rate of 97 percent of the outstanding principal and accrued interest for defaults. However, pursuant to a provision of the Higher Education Amendments of 1992, the Secretary of Education has the authority to designate lenders and loan servicers as "exceptional performers" in servicing FFELP loans, and loans serviced by those with the exceptional performer designation qualify for a 99 percent reimbursement rate. The amendments also provided authority to the Secretary of Education to terminate the exceptional performer program following a GAO study, if such termination is in the fiscal interest of the United States. To obtain the exceptional performer designation, loan servicers have to obtain an initial audit, by independent auditors, demonstrating at least 97 percent compliance with due diligence requirements for a random sample of loans they service, and they must continue to demonstrate compliance through quarterly and annual audits to maintain the designation. The first exceptional performer designation that Education granted took effect in January 2004, and 18 organizations that service about 90 percent of all FFELP loans currently have the exceptional performer designation. Congress asked us to conduct a review of the exceptional performer program to answer the following questions: (1) To what extent is the exceptional performer program meeting its objectives of improving loan servicing and decreasing defaults? (2) What are the costs and benefits of the exceptional performer program?

In summary, we reported the following findings. The exceptional performer program has not materially affected loan servicing, and default claims have not declined in the years following the first exceptional performer designation. Specifically, representatives from each of the exceptional performers we interviewed told us they did not make substantive changes to their loan servicing to obtain the designation, and technological advances made prior to the first exceptional performer designation automated much of loan servicing, which simplified compliance with due diligence requirements. Additionally, both the number and dollar amount of default claims relative to all out-of-school FFELP loans increased from fiscal years 2004 to 2006. The federal government incurs substantial costs, while lenders receive most of the benefits for the exceptional performer program. The Congressional Budget Office estimates that the federal government will spend $1 billion during the next 5 years on the extra 2 percent reimbursement for default claims on loans serviced by exceptional performers. Providing an extra 2 percent reimbursement rate for default claims serviced by exceptional performers is not in the fiscal interest of the federal government because lenders are being paid a premium to perform due diligence activities that are already required of all lenders. The risk of having default claims rejected already provides lenders with sufficient incentive to comply with due diligence requirements. Further, the criteria established in 1992 for the exceptional performer designation do not indicate exceptional performance today because technological advances have made it easier for lenders to meet these criteria. Congress has included language to eliminate the exceptional performer designation as part of proposed legislation on federal student aid. The House and Senate each passed different versions of this legislation that would eliminate the provision, and action is pending on final legislation. On the basis of our findings, we agree that the exceptional performer program should be eliminated. If the proposed legislation is not enacted by the end of the current session of Congress, we recommend that the Secretary of Education use her existing authority to eliminate the exceptional performer program.