Trustee Arrangements Represent Nearly One- Fifth of Outstanding Loans and Share Several Characteristics

The Department of Education reports that approximately 125 trustee arrangements exist between eligible and ineligible lenders. These arrangements account for $25.3 billion in outstanding loans— approximately 19 percent of the outstanding balance of all FFELP loans as of December 1999.The 125 arrangements represent liaisons between 16 eligible lender trustees and 31 ineligible lenders. Costs of trustee arrangements fall into two categories—payments to initiate the agreement and annual fees to maintain it. The trustee arrangements we reviewed shared several characteristics. Trustees and ineligible lenders reported similar (1) criteria used by trustees to evaluate ineligibles before they entered into arrangements, (2) elements in trustee arrangement contracts, (3) amounts of review performed of ineligible lenders, and (4) amounts of day-to-day interaction between the trustee and the ineligible lender. The trustee arrangements we reviewed were also similar in the requirements placed on the ineligible lender and the amount of monitoring the trustee performed. Trustee Arrangements Come With Some Protections for Federal Investment in Student Loan Program

Trustee arrangements come with some protections to ensure the federal government’s investment in FFELP is secure while allowing ineligible lenders to participate in the program. When these problems occur, the federal government will not reimburse the guarantor or the lender for the associated dollar loss. First, most financial institutions that serve as eligible lender trustees are subject to federal (and in many instances, state) oversight. Education officials stated that because ineligible lenders are generally not subject to financial safety and soundness reviews by government agencies, Education lacks assurance that these lenders would be able to meet their financial obligations in the program. Second, because most eligible lender trustees also hold student loans in their own name and receive regular FFELP- related payments from the government for those loans, the federal government has additional sources from which to recover any repayments due the government on ineligible lenders’ loans that lose their guarantee. For example, both participant groups believe that market participation and loan availability are positively affected since trustee arrangements allow lenders that do not meet HEA’s eligible lender definition to make and hold loans, thus increasing the amount of loan capital available to students. Further, we obtained information through interviews about the impact of the 1998 amendments to HEA on the number of eligible lenders willing to serve as trustees and on the costs of trustee arrangements. To determine the effects of trustee arrangements on participation in the student loan market and the availability of student loans, we interviewed eligible and ineligible lenders, secondary markets, guaranty agencies, servicers, Education officials, and other student loan market participants.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on student loan trustee arrangements, focusing on the: (1) number and cost of trustee arrangements and their shared characteristics; (2) benefits and protections afforded the federal government through use of trustee arrangements; and (3) effect of trustee arrangements on market participation and the availability of student loans.

What GAO Found

GAO noted that: (1) the Department of Education reports that approximately 125 trustee arrangements exist between 16 eligible lender trustees and 31 ineligible lenders for the purpose of originating or purchasing student loans; (2) these arrangements account for $25.3 billion in outstanding loans--approximately 19 percent of the outstanding balance of all Federal Family Education Loan Program (FFELP) loans as of December 1999; (3) costs of trustee arrangements fall into two categories--costs to initiate the arrangement and annual costs to maintain it; (4) ineligible lenders GAO interviewed said that the costs did not prohibit them from conducting business in the student loan market; (5) the amount charged by an eligible lender for its trustee services varied and was based on the volume of loans the ineligible lender was anticipated to originate and on the number and kind of other services the trustee provided; (6) both eligible and ineligible lenders reported little, if any, change in the availability of lenders to serve as trustees or the costs of these arrangements since 1998; (7) several characteristics were common among the trustee arrangements GAO reviewed, including the criteria used by trustees to evaluate ineligible lenders before they entered into trustee arrangements, the various elements of the trustee arrangement contracts, and the day-to-day interaction between the trustee and the ineligible lender; (8) trustee arrangements come with some protections to ensure the federal government's investment in FFELP is secure while allowing ineligible lenders to participate in the program; (9) most financial institutions that serve as eligible lender trustees are subject to federal oversight; (10) because most eligible lender trustees also hold student loans in their own name and receive regular FFELP-related payments from the government for those loans, the federal government has recourse for recovering any repayments due the government on ineligible lenders' loans that lose the federal guarantee; (11) Education officials stated that because ineligible lenders are generally not subject to financial safety and soundness reviews by government agencies, Education lacks assurance that these lenders would be able to meet their financial obligations in the program; and (12) both eligible and ineligible lenders said they believe that market participation and loan availability are positively affected by trustee arrangements which allow lenders to make and hold loans.