As of September 2017, $69.9 billion in outstanding  Direct Loans was in general forbearance compared to $6.3 billion in  mandatory forbearance, according to Education data. Some Schools’ Consultants Encourage Borrowers to Postpone Loan Payments, Which Can Lower Cohort Default Rates and Increase Borrowers’ Loan Costs Some Schools’ Consultants Encourage Borrowers to Postpone Loan Payments When Better Borrower Options May be Available

To help manage their default rates, some schools hired default  management consultants that encouraged borrowers with past-due  student loans to postpone loan payments through forbearance, even  when better borrower options may be available. Schools have a financial interest in preventing borrowers from defaulting  within the first 3 years of repayment to ensure that their CDRs remain low  enough to meet Education’s requirements for participating in federal  student aid programs. Postponing Loan Payments Can Increase Borrowers’ Loan Costs and Reduce the Usefulness of the Cohort Default Rate to Hold Schools Accountable

While forbearance can be a useful tool for helping borrowers avoid  defaulting on their loans in the short term, it increases their costs over  time and reduces the usefulness of the CDR to hold schools accountable. Spending all 3 years of the CDR period in forbearance would cost that  borrower an additional $6,742, a 17 percent increase over spending no  time in forbearance. Specifically, 9.4 percent of these borrowers in the 2013 CDR period  defaulted in the year following the CDR period, while only 1.7 percent  defaulted in the first 3 years of repayment, suggesting that long-term  forbearance may have delayed, not prevented, default for these  borrowers. Actions Needed to Improve Education’s Oversight of Default Management Strategies and Public Reporting of CDR Sanctions Requirements Needed to Oversee How Schools and their Consultants Communicate Loan Options to Borrowers in Repayment

Education’s ability to oversee the strategies that schools and their  consultants use to manage CDRs is limited because there are no  requirements governing the interactions that schools and their consultants  have with borrowers once they leave school. However, because Education  asserts that it lacks explicit statutory authority to establish requirements  regarding the information that schools and consultants provide to  borrowers after they leave school, Education does not hold them  accountable for providing accurate and complete information about  repayment and postponement options. Yet, Education’s practice of reporting the  number of schools potentially subject to sanction without reporting the  number of schools ultimately sanctioned following the appeals process  limits transparency about the CDR’s usefulness for Congress and the  public. (Matter 1)
Congress should consider requiring that schools and default management  consultants that choose to contact borrowers about their federal student  loan repayment and postponement options after they leave school  present them with accurate and complete information. Education agreed with our recommendation to increase transparency of  school sanction data. Our draft report included a recommendation for Education to seek  legislation to strengthen schools’ accountability for student loan defaults. To determine how schools work with borrowers to  manage their CDRs, we reviewed the practices of a nongeneralizable  sample of nine default management consultants that served over 1,300  schools. GAO staff who made key contributions to this  report are listed in appendix V.

Appendix I: Objectives, Scope, and Methodology

This appendix discusses in detail our methodology for addressing (1) how  schools work with borrowers to manage schools’ cohort default rates  (CDR), and how these strategies affect borrowers and schools’  accountability for defaults; and (2) the extent to which the Department of  Education (Education) oversees the strategies schools and their default  management consultants use to manage schools’ CDRs and informs the  public about its efforts to hold schools accountable. These 9 companies served over 1,300  schools. The 2013 cohort was the most recent CDR available at the time of  our analysis. For the population of 4,138 schools that had a CDR calculated for 2013  and a subset of 364 schools that had CDR decreases of 10 or more  percentage points from the 2009 to 2013 cohorts, we analyzed  cohort default rates (cohorts 2009-2013);  the percentage of borrowers who were in forbearance for any length  of time during their first 3 years in repayment (cohorts 2009-2013);  the percentage of borrowers who were in forbearance for 18 or more  months during their first 3 years in repayment (cohorts 2009-2013);  the percentage of borrowers who paid down at least $1 of the  principal loan amount during the first 3 years of repayment (cohorts  2009-2013); and  the percentage of borrowers who were in forbearance for varying  lengths of time during their first 3 years in repayment and then  defaulted in the year following the CDR period (2013 cohort).
Why GAO Did This Study

As of September 2017, $149 billion of nearly $1.4 trillion in outstanding federal student loan debt was in default. GAO was asked to examine schools' strategies to prevent students from defaulting and Education's oversight of these efforts.
This report examines (1) how schools work with borrowers to manage default rates and how these strategies affect borrowers and schools' accountability for defaults; and (2) the extent to which Education oversees the strategies schools and their default management consultants use to manage schools' default rates. GAO analyzed Education data on student loans that entered repayment from fiscal years 2009–2013, the most recent data at the time of this analysis; reviewed documentation from Education and a nongeneralizable sample of nine default management consultants selected based on the number of schools served (about 1,300 schools as of March 2017); reviewed relevant federal laws and regulations; and interviewed Education officials.

What GAO Found

According to federal law, schools may lose their ability to participate in federal student aid programs if a significant percentage of their borrowers default on their student loans within the first 3 years of repayment. To manage these 3-year default rates, some schools hired consultants that encouraged borrowers with past-due payments to put their loans in forbearance, an option that allows borrowers to temporarily postpone payments. While forbearance can help borrowers avoid default in the short-term, it increases their costs over time and reduces the usefulness of the 3-year default rate as a tool to hold schools accountable. At five of the nine selected default management consultants (that served about 800 of 1,300 schools), GAO identified examples when forbearance was encouraged over other potentially more beneficial options for helping borrowers avoid default, such as repayment plans that base monthly payments on income. Based on a review of consultants' communications, GAO found four of these consultants provided inaccurate or incomplete information to borrowers about their repayment options in some instances. A typical borrower with $30,000 in loans who spends the first 3 years of repayment in forbearance would pay an additional $6,742 in interest, a 17 percent increase. GAO's analysis of Department of Education (Education) data found that 68 percent of borrowers who began repaying their loans in 2013 had loans in forbearance for some portion of the first 3 years, including 20 percent that had loans in forbearance for 18 months or more (see figure). Borrowers in long-term forbearance defaulted more often in the fourth year of repayment, when schools are not accountable for defaults, suggesting it may have delayed—not prevented—default. Statutory changes to strengthen schools' accountability for defaults could help further protect borrowers and taxpayers.
Education's ability to oversee the strategies that schools and their consultants use to manage their default rates is limited. Education's strategic plan calls for protecting borrowers from unfair and deceptive practices; however, Education states it does not have explicit statutory authority to require that the information schools or their consultants provide to borrowers after they leave school regarding loan repayment and postponement be accurate and complete. As a result, schools and consultants may not always provide accurate and complete information to borrowers. Further, Education does not report the number of schools sanctioned for high default rates, which limits transparency about the 3-year default rate's usefulness for Congress and the public.

What GAO Recommends

Congress should consider strengthening schools' accountability for student loan defaults and requiring that the information schools and consultants provide to borrowers about loan repayment and postponement options be accurate and complete. GAO recommends that Education increase transparency of reporting on default rate sanctions. Education agreed with our recommendation.