	Background

In fiscal year 2004, students received over $84 billion in federal loans to  finance postsecondary education. FFELP Lending by Schools—Mostly Private Nonprofit Schools—Has Increased Significantly in the Last Five Years

FFELP lending by schools—chiefly private nonprofit schools providing  Stafford loans to their graduate and professional students—has increased  significantly between school years 1993–1994 and 2003–2004 rising from  $155 million to $1.5 billion. Several  schools we interviewed reported that a primary reason to become a  FFELP lender was to generate more revenue for the school. School Lenders Contract with Other FFELP Participants to Provide Student Loans and Later Sell Them to Receive Money, Which May Be Used to Lower Students’ Borrowing Costs

Generally school lenders contracted with other FFELP organizations to  administer their loan programs and subsequently sold their loans to  receive revenue. About a third of  the school lenders we interviewed used their own money to finance the  loans they made, while the others obtained a line of credit, in some cases  from the same organization that eventually purchased the loans originated  by the school lender. Most of the school lenders interviewed reported that they  used or plan to use premium money for student financial aid. However,  they differed in how they allocated the money. Several Statutory and Regulatory Provisions Applicable to All Lenders and Schools, and Some Applicable Only to School Lenders, Exist to Protect the Interests of Taxpayers and Borrowers

To protect the interests of taxpayers and borrowers, a number of statutory  and regulatory provisions exist regarding, among other things, application  processes and audit requirements for schools and lenders; these also  provide FSA and guaranty agencies the authority to review lenders and  schools. Additionally, under the HEA, all FFELP lenders that originate or hold more  than $5 million in FFELP loans must have an independent annual  compliance audit, which examines the lender’s compliance with the HEA  and relevant regulations as well as its financial management of FFELP  activities. FSA Has Little Information about How School Lenders Are Complying with Laws and Regulations because It Has Not Provided Timely and Adequate Oversight of School Lenders

FSA has minimal information about how school lenders are complying  with laws and regulations, and until this year, FSA had not used its  authority to conduct program reviews of school lenders to assess  compliance with regulations specific to them. As a result, FSA did not realize, until September 2004,  that 10 of 29 school lenders had failed to submit required compliance  audits for fiscal year 2002. However, during the course of our review, three regional  offices asked 31 school lenders about their compliance with the regulation  pertaining to the use of interest income and special allowance payments  for need-based grants. To assess the extent to which schools have participated in the  Federal Family Education Loan Program (FFELP) as lenders, we obtained  a list from Education of schools approved to be FFELP lenders and then,  using data in the National Student Loan Data System (NSLDS), we  analyzed the dollar amount of FFELP loans made by each school lender in  each school year from 1993–1994 to 2003–2004.
Why GAO Did This Study

In fiscal year 2004, lenders made about $65 billion in loans through the Federal Family Education Loan Program (FFELP) to assist students in paying for postsecondary education. The Higher Education Act (HEA), which authorizes FFELP, broadly defined eligible lenders--including schools. The Department of Education's (Education) Office of Federal Student Aid (FSA) is responsible for ensuring that lenders comply with FFELP laws and regulations. Recently, schools have become increasingly interested in becoming lenders, and this has raised concerns about whether it is appropriate for schools to become lenders given that they both determine students' eligibility for loans and in some cases set the price of attendance. In light of these concerns we determined (1) the extent to which schools have participated as FFELP lenders and their characteristics, (2) how schools have structured lending operations and benefits for borrowers and schools, and (3) statutory and regulatory safeguards designed to protect taxpayers' and borrowers' interests.

What GAO Found

Between school years 1993-1994 and 2003-2004, lending by schools has increased significantly from 22 school lenders disbursing about $155 million to 64 schools disbursing $1.5 billion in FFELP loans. Several schools we interviewed reported that a primary reason to become a FFELP lender was to generate more revenue for the school. About 80 percent of school lenders in school year 2003-2004 were private nonprofit schools, and almost all of them had graduate and professional programs in medicine, law, or business. Most school lenders have contracted with other FFELP organizations to administer their loan programs and subsequently have sold their loans to earn revenue, but school lenders differed in terms of how they financed the loans made and when they sold their loans. About a third of the school lenders we interviewed used their own money to finance the loans they made, while the others obtained lines of credit from a bank or secondary market lender, in some cases from the same organization that eventually purchased the loans disbursed by the school lender. Most schools we interviewed reported using or planning to use revenues earned from the sale of loans to lower student borrowing costs or provide need-based aid. A number of statutory and regulatory provisions applicable to all lenders and schools, and some applicable only to school lenders, exist to safeguard the interests of taxpayers and borrowers. FSA, however, has little information about how school lenders' have complied with FFELP regulations. Under the HEA, FFELP lenders that originate or hold more than $5 million in FFELP loans must submit annually audited financial statements and compliance audits. In October 2004, FSA discovered that 10 of 29 school lenders required to submit an audit for fiscal year 2002 had not done so. Moreover, FSA has not conducted program reviews of school lenders. However, during the course of our review, three regional offices asked 31 school lenders about their compliance with the regulation pertaining to the use of interest income and special allowance payments for need-based grants.