New GAO Report Underscores Administration’s Failures to Safeguard Federal Student Loan Program
Education Department Must Increase Oversight of Student Lenders

Wednesday, August 1, 2007

WASHINGTON, DC -- The U.S. Department of Education has failed to safeguard the nation’s federal student loan programs and should immediately increase its oversight of lenders and schools and fully enforce the law, government investigators concluded in a new report released today by leading Democratic lawmakers. Today’s report comes after months of congressional and state investigations have uncovered unethical financial relationships among lenders, school financial aid officers, and public officials responsible for overseeing the federal student loan program in the Department’s Office of Federal Student Aid.

Under current law, lenders participating in the federal loan program are prohibited from using inducements or gifts to curry favor with colleges or universities. The report, which was prepared by the Government Accountability Office at the request of Reps. George Miller (D-CA) and Dale E. Kildee (D-MI), and Senators Edward M. Kennedy (D-MA) and Dick Durbin (D-IL), found that the Department does not have a sufficient oversight program in place to identify and address questionable lender behavior, such as inducements.

In addition, the report found that despite repeated requests from lenders for the Department to provide direction on inducements, the Department had not updated its inducement guidelines in nearly 20 years and, in some cases, did not respond to lenders’ inquiries at all. In 2003, the Department’s Inspector General also urged the Department to issue a Dear Colleague letter to lenders and schools on its regulations regarding inducements and gifts.

The report also determined that the Department had a poor system for dealing with complaints of improper lender behavior. For example, out of 26 documented complaints received by the Department between 2001 and 2006, only two complaints prompted action by the Department, and 14 complaints were left unresolved.  In addition, the report found that the Department attempted to use its sanctioning authority against lenders accused of improper inducements only twice over the past twenty years.

“This report again underscores that the Department of Education completely defaulted on its responsibilities to protect the nation’s student loan programs,” said Miller, the chairman of the House Education and Labor Committee. “There is simply no excuse for this administration ignoring repeated warnings about potential lender abuses – both from independent agencies and even from lenders themselves. Earlier this year I called on the Secretary to take emergency actions to hold lenders and schools accountable and enforce the law. Today I again urge her to start doing the job she was entrusted with by immediately implementing this report’s recommendations.”

“Students and families should be deeply concerned that the Department of Education failed to enforce the laws designed to protect them from unscrupulous lender tactics for so long,” said Kennedy, the chairman of the Senate Committee on Health, Education, Labor and Pensions.  “The higher education bill passed unanimously by the Senate last week provides even more protections for borrowers, but they’ll only be effective with proper follow-through by the Department. I hope Secretary Spellings will do everything in her power to build on her recent efforts to increase enforcement of the current laws against improper lender inducements, and carefully consider the recommendations in this report.”  

“For those of us in the Congress who have been working to protect students from exploitation, today’s GAO report has confirmed our fears,” said Durbin.  “Lenders continue to take advantage of students entering college and the Department of Education is not doing enough to prevent it.  Parents and students have placed their trust in a Department that is not living up to its responsibility.  If Secretary Spellings ignores this grim report, more and more students will be saddled with avoidable debt for years to come.” 

“The Department’s failure to conduct even the most basic oversight is a great disservice to hard working students and their families,” said Kildee, the chairman of the Subcommittee on Early Childhood, Elementary, and Secondary Education.  “I hope that the Secretary finally will take this opportunity to rectify the results of this prior inaction.”

In May, U.S. Education Secretary Margaret Spellings appeared before the House Education and Labor Committee to testify about the Department’s role in conducting oversight of the federal student loan programs and the Reading First program – another education program that has been marred by conflicts of interest. In April, New York Attorney General Andrew Cuomo told the Committee that the Bush administration had been “asleep at the switch” when it came to providing oversight over the student loan programs.

Over the past several months, Miller and Kennedy have been conducting investigations into the student loan industry. Both chambers of Congress have passed legislation that would clean up the relationships between lenders and schools. In February, Miller and Kennedy introduced the bipartisan Student Loan Sunshine Act, which the House overwhelmingly passed in May.  Key provisions of the bill were incorporated into the Senate’s reauthorization of the Higher Education Act, the Higher Education Amendments of 2007.

To see a PDF copy of the GAO report, click here.

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