Background Direct Loan Program Education administers federal student financial aid programs, including  the William D. Ford Federal Direct Loan (Direct Loan) program, through  the Office of Federal Student Aid. Education issues several types of  loans under the Direct Loan program, including subsidized and  unsubsidized loans. Prospective borrowers apply and are approved for  loans through Education, which then disburses the loan through the  borrowers’ school. Upon disbursement of funds, Education assigns each  loan to a contracted loan servicer responsible for communicating  information to borrowers while they are in school and when they enter  repayment. Borrowers receive additional information about their loans  and related rights and responsibilities through their loan’s promissory  note, Education’s website, and mandatory entrance and exit counseling  provided by their school. When borrowers enter repayment, generally 6  months after leaving school, they make payments directly to the assigned  servicer. Federal Student Loan  Repayment and  Postponement Options Education offers a variety of repayment plan options that can help Direct  Loan borrowers avoid delinquency and default, including Standard,  Graduated, Extended, and Income-Driven. Income-Driven Repayment  plans can ease repayment by setting loan payment amounts as a  percentage of a borrower’s income and extending the repayment period  up to 25 years. Unlike Standard, Graduated, and Extended repayment  plans, Income-Driven Repayment plans offer loan forgiveness at the end  of the repayment term and monthly payments may be as low as $0 for  some borrowers. Extending the repayment period may also result in  some borrowers paying more interest over the life of the loan than they  would under 10-year Standard repayment. In addition to making monthly  payments more manageable and offering the potential for loan  forgiveness, Income-Driven Repayment plans may also reduce the risk of  default. For example, in 2015, we reported that borrowers in two such  plans had substantially lower default rates than borrowers in the Standard  repayment plan. Eligible borrowers may also temporarily postpone loan payments through  deferment or forbearance. Several different types of deferment are  currently available to borrowers, each with their own eligibility criteria.  Under deferment, the interest generally does not accrue on subsidized  loans, but it continues to accrue on unsubsidized loans. Eligible  borrowers can also postpone or reduce loan payments through either a  general or mandatory forbearance; however, interest on the loan  continues to accrue in each type (see table 1). Most borrowers choose  general forbearance, which, unlike most types of mandatory forbearance  and deferment, can be issued over the phone with no supporting  documentation. 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. Cohort Default Rate  Calculation Education computes CDRs each year for all schools that enroll students  who receive funds through the Direct Loan program. To compute a  school’s CDR, Education divides the number of student loan borrowers in  a CDR cohort—those entering repayment in the same fiscal year—who  have defaulted on their loans in the initial 3 years of repayment by the  total number of a school’s student loan borrowers in that CDR cohort (see  fig. 1). The CDR does not hold schools accountable for borrowers who  default after the 3-year period. Borrowers in deferment and forbearance  are considered to be “in repayment” and current on their loans for the  purpose of calculating a school’s CDR, even though borrowers in these  loan statuses are not expected to make any monthly payments. For the 2014 CDR cohort, the national 3-year CDR was 11.5 percent,  meaning 11.5 percent of borrowers who first entered repayment in fiscal  year 2014 had defaulted on one or more loans by the end of fiscal year  2016. The national CDR has changed over time, peaking at 22.4 percent  for the 1990 CDR cohort and declining to a historic low of 4.5 percent for  the 2003 CDR cohort (see fig. 2). Beginning with the 2009 CDR cohort,  Education switched from a 2-year measurement to a 3-year measurement  as required by the Higher Education Opportunity Act. According to Education officials, there are several possible explanations  for the general decrease in the national CDR from the 1990 cohort to the  2003 cohort. They include: 1) Education’s efforts to provide schools with  default prevention training; 2) the loss of eligibility to participate in federal  student aid programs and subsequent closure of many schools with  chronically high CDRs in the early 1990s; 3) enactment of legislation in  1998 that increased the length of time a loan can go unpaid before being  considered in default, which decreased the likelihood that a borrower  would default within the CDR period; and 4) an increase in borrowers  consolidating their loans while in school, an option that was eliminated in  2006. Use of the Cohort Default  Rate to Hold Schools  Accountable Schools with high CDRs may lose eligibility to participate in federal  student aid programs. Specifically, Education generally excludes schools  from participation in the Direct Loan program if their CDR is above 40  percent for a single year and from participation in the Direct Loan and  Federal Pell Grant programs if their CDRs are 30 percent or greater for 3  consecutive years. Schools potentially subject to these sanctions can  pursue an appeal. The CDR is the only borrower outcome measure  used to determine eligibility for participation in federal student aid  programs for all schools. Schools with high CDRs that do not cross these thresholds may also be  subject to additional oversight. For example, schools are certified for up to  6 years to maintain eligibility to participate in federal student aid, but  schools with high CDRs may only be granted certification for 2 years,  according to Education policy. Education policy also prioritizes selection  of schools with high CDRs for program review. Further, schools whose  CDRs are equal to or exceed 30 percent for any cohort are required to  create a Default Prevention Taskforce that develops and submits a  default prevention plan to Education to reduce defaults, among other  things. Consequences of Student  Loan Defaults When borrowers do not make payments on their federal student loans,  and the loans are in default, the federal government and taxpayers are  left with the costs. Borrowers also face severe financial burdens when  their federal student loans go into default. For example, upon default the  entire unpaid balance of the loan and any accrued interest is immediately  due. The amount owed may increase due to late fees, additional interest,  and costs associated with the collection process, including court costs,  collection fees, and attorney’s fees. The federal government also has  tools to collect on defaulted student loans. For example, under the  Treasury Offset Program, the federal government can withhold certain  federal or state payments to borrowers, including federal or state income  tax refunds and some Social Security benefits, to collect on defaulted  student loans. The federal government can generally also garnish up to  15 percent of a defaulted borrower’s disposable pay and apply those  funds toward the defaulted loan. There is no limit on how long the  government can attempt to collect on defaulted student loans, and  student loans are more difficult to eliminate in bankruptcy proceedings  than other types of consumer debt. Default Management  Consultants Some schools hire default management consultants to help them reduce  their CDRs. Education classifies default management consultants as  “third-party servicers” and generally has the authority to oversee the  services they provide to schools and their students. Schools are  required to notify Education when they enter into, modify, or terminate a  contract with a third-party servicer. Based on concerns that a significant  number of schools had not reported information on the third-party  servicers they use as required, Education issued guidance to remind  schools of the requirement in January 2015. In addition, Education  requires third-party servicers to submit information about the services  they provide to schools. As of June 2017, Education reported that it had  information on 187 third-party servicers, including 48 that reported  providing default management services. Schools must ensure that their  third-party servicers, including default management consultants, comply  with relevant federal regulations and program requirements. Education  also requires third-party servicers to submit an annual compliance audit  report that covers the administration of the federal student aid related  services they perform to determine compliance with applicable statutes,  regulations, and policies. 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. The nine default  management consultants we selected, which served over 1,300 schools,  used various methods to contact borrowers and attempted to connect  them with their loan servicer for assistance (see fig. 3). Seven of the nine  participated in three-way conference calls with the borrower and the loan  servicer. Further, one consultant visited past-due borrowers at their home  to provide in-person loan counseling and connect them to their loan  servicer. Income-Driven Repayment Plans May Be  Better Options for Some Struggling  Borrowers   According to Education, postponing payments  through forbearance may be appropriate for  some borrowers who face temporary  hardships. On the other hand, Income-Driven  Repayment plans may be a better option for  borrowers who are having difficulty repaying  their loans for an extended period of time.  These plans base monthly payments on  income and family size, and payments may be  as low as $0 for those who qualify. Income- Driven Repayment plans also feature the  potential for forgiveness of remaining loan  balances after 20 or 25 years of repayment.   Interest generally continues to accrue on  loans in both forbearance and Income-Driven  Repayment. Under forbearance, accumulated  interest that is not paid during the forbearance  period will generally be added to the loan  balance, resulting in higher monthly payments  when forbearance ends. In contrast, the  federal government does not charge the  unpaid interest for up to 3 years for some  borrowers repaying their loans on Income- Driven Repayment plans, and struggling  borrowers on these plans are not generally  expected to make higher monthly payments  until their financial situation improves.  In addition, GAO’s past work found that  borrowers in Income-Driven Repayment had  substantially lower rates of default than those  in Standard repayment.   GAO previously found that it is difficult for  Education to estimate which borrowers have  incomes low enough to benefit from or be  eligible for Income-Driven Repayment plans  because only borrowers who apply for these  plans are required to submit income  information to Education. Four consultants sent borrowers who were past due on their loans  unsolicited emails and letters that included only a forbearance  application and instructed borrowers to return the application to them  instead of their loan servicer. Representatives of one consultant said  that this practice was to ensure that borrowers completed the forms  accurately. According to Education, the application provides an  opportunity for borrowers to learn about other repayment and  postponement options and the potential costs of forbearance. The  application includes a statement informing borrowers about the option  to request a deferment or Income-Driven Repayment plan and  examples of the additional costs borrowers may incur as a result of  interest that continues to accrue during forbearance. While this is  correct, the application does not include details about these options;  instead, it directs borrowers to Education’s website for more  information. Borrowers who only receive a forbearance application  may inaccurately assume that forbearance is their only or preferred  option. Moreover, borrowers may miss the opportunity to learn about  other, potentially more favorable repayment and postponement  options from Education’s loan servicers, who are responsible for  counseling borrowers and approving forbearance requests. One consultant included an inaccurate statement in letters it sent to  borrowers who were past due on their loans. This consultant sent  past-due borrowers forbearance applications with letters that  inaccurately stated that the federal government can take away  Supplemental Nutrition Assistance Program and Supplemental  Security Income benefits when borrowers default on a federal student  loan. Inaccurate information about the consequences of default  could cause a borrower who depends on these benefits to feel undue  pressure to choose forbearance, even when eligible for more  favorable repayment and postponement options. Further, this  consultant’s script for its representatives to use when calling  borrowers who are past due on their loans referred exclusively to  postponing loan payments. The script instructed representatives to tell  borrowers “I am now going to conference you in with your loan  servicer and they will process your forbearance over the phone.”  Borrowers who hear such statements may feel undue pressure to  choose forbearance. The script also instructed representatives to tell  the loan servicer that the borrower they were about to speak with was  requesting a forbearance. Further, representatives from this  consultant were also instructed to tell borrowers to “stick to their guns”  on the option they have selected before connecting the borrower with  their loan servicer on a three-way call. One consultant previously offered borrowers gift cards as an incentive  to put their loans in forbearance. Education has also previously  identified the use of gift cards to steer borrowers toward forbearance  over other available options. An internal review that Education  conducted in 2012 and 2013 found that a chain of schools used gift  cards to promote forbearance for purposes of lowering its CDR.  According to Education’s findings, a borrower who had attended one  of the schools stated that she was current in her payments but was  offered a $25 gift card to apply for forbearance. Multiple borrowers  included in Education’s review expressed the view that they were  pressured or forced to apply for forbearance and were not made  aware of other options, such as deferment or Income-Driven  Repayment plans. Indeed, offering gift cards may steer borrowers  toward forbearance over other available options. While the consultant  that offered gift cards to borrowers to lower schools’ CDRs has  discontinued this practice, and the school Education reviewed has  since closed, these practices may have affected reported CDRs and  could be used by other consultants and schools. 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. Consultants also have a financial interest in  preventing borrowers from defaulting during the 3-year CDR period. Eight  of the nine consultants we selected did not have any school clients that  paid them to contact borrowers who were past due on their loans outside  the 3-year CDR period. In addition, four of the nine selected consultants  were paid by their client schools based on the number of past-due  borrowers they brought current on their loans during the CDR period, and  representatives’ salaries or incentives at two of these consultants were  calculated based on this as well. Some consultants have an incentive to encourage forbearance in  particular as a strategy to prevent borrowers from defaulting within the 3- year CDR period in an effort to lower their client schools’ CDRs. This is  because forbearance applications can be processed more quickly than  other repayment or postponement options. Loan servicers can grant  general forbearance based on a request from borrowers over the phone  because there are no documentation requirements, whereas borrowers  seeking deferment or an Income-Driven Repayment plan generally must  submit a written application. According to Education officials, loan  servicers are required to process Income-Driven Repayment plan  applications within 15 business days. One consultant sent borrowers a  letter that stated it could process a verbal forbearance in 5 minutes. The  president of one school that contracted with a consultant that is paid  based on the number of borrowers brought current told us that he did not  care whether the consultant encouraged the use of forbearance as long  as borrowers did not default within the 3-year CDR period and the  consultant followed federal regulations. According to Education data,  nearly 90 percent of the school’s borrowers were in forbearance during  the 2013 CDR period. Consultant payment structures, as well as the  difference in processing requirements between forbearance, deferment,  and Income-Driven Repayment plans may create incentives for  consultants to encourage forbearance over other repayment and  postponement options. 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.  To understand the potential financial impact of forbearance during the first  3 years of repayment (the CDR period), we calculated the cost for a  borrower with $30,000 in loan debt over 10 years in the Standard  repayment plan with varying lengths of time in forbearance (see fig. 4). A borrower on the 10-year Standard repayment plan who did not spend  any time in forbearance would pay $39,427 over the life of the loan.  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. One borrower we spoke with who took out $34,700 in  loans and opted for forbearance accrued about $10,000 in interest in just  over 3 years, an amount that the borrower said she would be paying off  “for the rest of my days.” Further, the unpaid interest that accrues while a  borrower’s loans are in forbearance may result in higher future monthly  payments when the forbearance period ends. Borrowers who cannot  make these higher monthly payments may eventually default. If schools’  consultants continue to encourage forbearance over other options that  may be more beneficial, such as Income-Driven Repayment plans, some  borrowers will continue to be at risk of incurring additional costs without  any long-term benefits. Education officials and student loan experts we spoke with said that  forbearance is intended to be a short-term option for borrowers facing  financial difficulties lasting a few months to a year, such as unexpected  medical expenses. Longer periods of forbearance, while not typically  advantageous to borrowers, can be an effective strategy for schools to  manage their CDRs. Specifically, spending 18 months or more—at least  half of the CDR period—in forbearance reduces the potential for  borrowers to default within the 3-year period (see fig. 5). This is because  forbearance keeps borrowers current on their loans, and borrowers would  not go into default until they had made no payments for an additional 360  days after the forbearance period ended. Indeed, according to our  analysis of Education’s data for the 2013 CDR period, only 1.7 percent of  borrowers who were in forbearance for 18 months or more defaulted  within the 3-year CDR period, compared to 8.7 percent of borrowers who  were in forbearance up to 18 months during this period, and 20.3 percent  of borrowers who were not in forbearance during this period. Borrowers  who default outside the 3-year CDR period will not negatively affect a  school’s CDR. In an online presentation, representatives from one  consultant highlighted that forbearance can be a tool for reducing a  school’s CDR and stated that borrowers who postponed payments  defaulted less often during the CDR period than other past-due borrowers  based on a case study they conducted. According to our analysis of Education’s data, the percentage of  borrowers whose loans were in forbearance for 18 months or more during  the 3-year CDR period increased each year during the 5 cohorts we  reviewed, doubling from 10 percent in the 2009 CDR cohort to 20 percent  in the 2013 CDR cohort. During the same time period, the percentage of  borrowers whose loans were in forbearance for any amount of time  increased from 39 percent to 68 percent (see fig. 6). Further, borrowers  in forbearance for 18 months or more defaulted in the year after the 3- year CDR period more often than they did during the CDR period.  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. Reducing the number of borrowers in long-term forbearance  and directing them toward other repayment or postponement options  could help reduce the number of borrowers that later default and save the  government money. For example, Education estimates that it will not  recover a certain percentage of defaulted Direct Loan dollars even if  repayment resumes. Specifically, for Direct Loans issued in fiscal year  2018, Education estimates that it will not recover over 20 percent of  defaulted loans. These unrecovered defaulted loan amounts total an  estimated $4 billion, according to our analysis of Education’s budget  data. In addition to cost savings to the government, borrowers who  avoid default would not have to face severe consequences, such as  damaged credit ratings that may make it difficult to obtain credit,  employment, or housing. In addition, the percentage of borrowers who made progress in paying  down their loans during each CDR cohort—the repayment rate— decreased from 66 percent for the 2009 cohort to 46 percent for the 2013  cohort (see sidebar). We analyzed these data for a subset of schools with the largest CDR  decreases from the 2009 to 2013 cohorts and found that as these  schools’ CDRs improved, other borrower outcomes worsened (see app. II  for more information about these schools). Specifically, for this subset of  schools, the percentage of borrowers in long-term forbearance doubled,  and the percentage of borrowers who made progress in paying down their  loans during the CDR period decreased by half, suggesting that these  schools may be encouraging forbearance as a default management  strategy (see fig. 7). Education has acknowledged that when schools encourage borrowers to  postpone loan repayment until the 3-year CDR period ends, it can have a  distorting effect on the CDR. Borrowers who have postponed their  payments through forbearance or deferment are considered to be “in  repayment” for the purpose of calculating the CDR, even though they are  not expected to make any payments on their loans while in these  statuses. As a result, an increased use of forbearance, particularly long- term forbearance, could result in lower CDRs, and therefore fewer  schools being sanctioned due to high CDRs. In July 1999, we reported  that the CDR understates the actual number of borrowers who default.  We suggested that Congress may wish to consider amending the Higher  Education Act of 1965 to exclude borrowers with loans in deferment or  forbearance at the end of the CDR period from schools’ CDR calculation  and include these borrowers in a future CDR cohort after they have  resumed making payments on their loans. Education’s Office of  Inspector General made a recommendation to the agency to support  similar amendments to the law in December 2003. For this report, we examined the impact that removing borrowers in long- term forbearance from the CDR calculation would have on schools’  reported CDRs. For the 2013 cohort, 35 schools from our population  had CDRs of 30 percent or higher. When we excluded from our  population borrowers who spent 18 months or more in forbearance and  did not default within the 2013 CDR period, we found 265 additional  schools that would potentially have had a CDR of 30 percent or higher  (see app. II for more information about these schools). Schools with  CDRs at this level for 3 consecutive years may lose eligibility to offer their  students Direct Loans and Pell Grants. Further, 21 of the 265 schools  would potentially have had a CDR greater than 40 percent, making them  potentially subject to immediately losing eligibility to offer Direct Loans. Of  the 265 schools that would have potentially been subject to sanctions  based on our alternative calculation, 261 received a combined $2.7 billion  in Direct Loans and Pell Grants in academic year 2016-2017. The CDR is a key tool for holding schools accountable for borrower  outcomes and protecting borrowers and the federal government from the  costs associated with default. The substantial growth in the percentage of  borrowers spending at least half of the CDR period in forbearance  reduces the CDR’s usefulness to hold schools accountable. This presents  risks to the federal government and taxpayers, who are responsible for  the costs associated with high rates of default, and to borrowers who may  benefit from other repayment or postponement options. Since the way the  CDR is calculated is specified in federal law, any changes to its  calculation would require legislation to be enacted amending the law.  Strengthening the usefulness of the CDR in holding schools accountable,  such as by revising the CDR calculation or using other accountability  measures to complement or replace the CDR, could help further protect  both borrowers and the billions of dollars of federal student aid funds the  government distributes each year. 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. Education requires that  schools provide certain information to borrowers about their student loans  when they begin and finish school but does not oversee schools’ or their  consultants’ communications with borrowers after they leave school.  According to Education, the Higher Education Act does not contain  explicit provisions that would allow it to impose requirements governing  communications that schools and their consultants may have with  borrowers who have left school. As noted earlier, we found that some default management consultants, in  seeking to help schools lower their CDRs, provided borrowers inaccurate  or incomplete information or offered gift cards to encourage forbearance  over other repayment or postponement options that may be more  beneficial to the borrower. According to Education officials, borrowers are  protected from such practices because loan servicers are required to  inform borrowers of all available repayment options upon processing a  forbearance. Education officials also said that performance-based  contracts provide loan servicers an incentive to keep borrowers in  repayment. However, a Consumer Financial Protection Bureau report  found that borrowers may not be informed about the availability of other  repayment plans and instead may be encouraged by their loan servicers  to postpone payments through forbearance, which may not be in  borrowers’ best interests. Further, some consultant practices we  identified, such as instructing borrowers to return the forbearance  application to the consultant and remaining on three-way calls with the  loan servicer and the borrower, may undermine the role of the loan  servicer. Education officials also said that borrowers should be aware of  their repayment options because schools are required to inform  borrowers of these options through exit counseling when they leave  school. However, in 2015 we found gaps in borrowers’ awareness of  repayment options. Education’s Office of Federal Student Aid has a  strategic goal to help protect borrowers and families from unfair,  deceptive, or fraudulent practices in the student loan marketplace.  Without clear requirements regarding the information that schools and  their consultants provide to borrowers after leaving school, Education  cannot effectively oversee schools’ default management strategies.  Further, without such requirements, Education cannot ensure that schools  and consultants are providing borrowers with the information they need to  make informed decisions to manage their loan costs and avoid future  default. Education’s Public  Reporting of Cohort  Default Rate Sanctions  Lacks Transparency The limited information Education reports annually to the public about  schools that face sanctions for high CDRs overstates the extent to which  schools are held accountable for their default rates. Specifically,  Education does not report the number of schools that successfully  appealed CDR sanctions or the number of schools ultimately  sanctioned. For example, with the release of the 2013 CDRs in 2016,  Education publicly reported that 10 schools were subject to sanctions, but  did not publicly report that 9 schools appealed their sanctions and 8 were  successful in their appeals and were thereby not sanctioned (see fig. 8). Office of Management and Budget guidelines call for federal agencies to  ensure and maximize the usefulness of information they disseminate to  the public. Federal internal control standards call for effective  communication with external stakeholders. The number of schools  subject to sanction has declined over time—from a high of 1,028 schools  in fiscal year 1994 to 10 schools in fiscal year 2017 (see app. III). In  addition, unpublished sanction data reveal that a small fraction of  borrowers who defaulted on student loans attended schools that have  been sanctioned. For example, two schools were ultimately sanctioned in  2016 and accounted for 67 of the nearly 590,000 borrowers whose  defaulted loans were included in schools’ 2013 CDRs. By reporting only  the number of schools subject to sanction and not those actually  sanctioned, Education’s data make it difficult for Congress and the public  to assess the CDR’s usefulness in holding schools accountable. Conclusions Preventing student loan defaults is an important goal, given the serious  financial risks default poses to borrowers, taxpayers, and the federal  government. The CDR, which is specified in federal law, is intended to  hold schools accountable when significant numbers of their borrowers  default on their student loans during the first 3 years of repayment.  However, the metric in its current form creates incentives for schools that  may result in unintended consequences for some borrowers. Schools  have an interest in preventing their students from defaulting during the  CDR period to ensure that they can continue to participate in federal  student aid programs, and some schools contract with private consultants  to work with borrowers who have fallen behind on their loan payments.  Although some of these consultants have recently changed their  communications to borrowers, others continue to provide inaccurate or  incomplete information to encourage past-due borrowers to choose  forbearance over other repayment options. While postponing payments  through forbearance may help struggling borrowers avoid default in the  near term, it increases borrowers’ ultimate repayment costs and does not  necessarily put borrowers on a path to repaying their loans. Moreover,  including borrowers who spend 18 months or more in forbearance in the  CDR calculation reduces the CDR’s ability to hold schools accountable  for high default rates since long periods of forbearance appear to delay—not prevent—default for some borrowers. Absent a statutory change,  schools and their consultants seeking to keep CDRs below allowable  thresholds will continue to have an incentive to promote forbearance over  other solutions that could be more beneficial to borrowers and less costly  to the federal government and its taxpayers. Education plays an important role in overseeing schools and their default  management consultants to ensure that they are held accountable and  student loan borrowers are protected. 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. In addition, public information on  CDR sanctions is important for assessing the usefulness of the CDR to  hold schools accountable. 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. Matters for  Congressional  Consideration We are making the following two matters for congressional consideration:   Congress should consider strengthening schools’ accountability for  student loan defaults, for example, by 1) revising the cohort default rate  (CDR) calculation to account for the effect of borrowers spending long  periods of time in forbearance during the 3-year CDR period, 2)  specifying additional accountability measures to complement the CDR, for  example, a repayment rate, or 3) replacing the CDR with a different  accountability measure. (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. (Matter 2) Recommendation for  Executive Action The Chief Operating Officer of the Office of Federal Student Aid should  increase the transparency of the data Education publicly reports on  school sanctions by adding information on the number of schools that are  annually sanctioned and the frequency and success rate of appeals.  (Recommendation 1) Agency Comments  and Our Evaluation We provided a draft of this product to the Department of Education for  review and comment. Education’s comments are reproduced in appendix  IV. We also provided relevant report sections to the Consumer Financial  Protection Bureau and the nine default management consultants for  technical comment. The Consumer Financial Protection Bureau provided  technical comments, which we incorporated as appropriate. Education agreed with our recommendation to increase transparency of  school sanction data. In its response, Education stated that it makes a  significant amount of CDR data publicly available on its website. For  example, Education posts CDRs and underlying data for each school for  which the rates are calculated and lists schools subject to sanctions as a  result of their CDRs. Education also stated that beginning with the release  of fiscal year 2015 CDRs, it would provide additional information on its  website indicating whether schools subject to sanctions have submitted  appeals and the disposition of such appeals. As we recommended in our  draft report, Education should also publicly report the number of schools  ultimately sanctioned each year. Our draft report included a recommendation for Education to seek  legislation to strengthen schools’ accountability for student loan defaults.  Education disagreed with this recommendation, asserting that from a  separation of powers perspective, it has a responsibility to implement,  and not draft, statutes. Education stated that if GAO believes such  legislation is needed, it would be best addressed as a matter to  Congress. We agree that, as an executive agency, Education is  responsible for implementing laws as enacted. However, it is important to  note that the President has the “undisputed authority” to recommend  legislation to the Congress and the Office of Management and Budget  within the Executive Office of the President has outlined procedures for  executive branch agencies to submit proposed legislation. Indeed, in  making this recommendation, we intended that Education seek legislation  through any of the practices used by executive branch agencies in  communicating with Congress. In a recent example, both the President’s  Budget Request and Education’s Congressional Budget Justification for  Fiscal Year 2019 seek a change in the statutory allocation formula for the  Federal Work-Study program to focus funds on institutions enrolling high  numbers of Pell Grant recipients. Nevertheless, in light of Education’s  disagreement with our draft recommendation, and the importance of  strengthening schools’ accountability for student loan defaults, we have  converted the recommendation into a Matter for Congressional  Consideration. Our draft report also included a recommendation for Education to require  that schools and default management consultants that contact borrowers  about repayment and postponement options after they leave school  present accurate and complete information. Education agreed that  institutions should provide accurate and complete information about all  repayment options. It also stated that institutions should allow the  borrower’s stated preference for any given repayment option to guide the  ultimate direction of the conversation, and that the information provided  should be free from financial incentive. However, Education asserted that  it “cannot impose requirements on schools and their consultants without  further authority.” Education clarified in a follow-up communication that  the Higher Education Act does not contain “explicit provisions” under  which it could require schools (and their consultants) to include specific  content in the information that they choose to provide to borrowers after  the borrowers leave school, but did not address whether there was any  other authority under which it could take action in this area. Instead,  Education noted that it could provide information to schools and their  consultants on best practices in this area. We continue to believe that  schools and their consultants should be required to ensure that any  information they present to borrowers about repayment and  postponement options after they leave school is accurate and complete.  As we stated in our draft report, without clear requirements in this area, Education cannot ensure that schools and consultants provide borrowers  with the information they need to make informed decisions to manage  their loan costs and avoid future default. In light of this, and Education’s  response to our draft recommendation, we have converted our  recommendation into a Matter for Congressional Consideration. In its comments, Education inaccurately asserted that our findings should  be viewed in light of a limited scope. As stated in the draft report, we  analyzed trends in forbearance, repayment, and default using national  data from Education for the five most recent CDR cohorts for a population  of over 4,000 schools. 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. These schools accounted for over 1.5 million borrowers in the  2013 CDR cohort. The five consultants that provided inaccurate or  incomplete information about forbearance or offered gift cards served  about 800 schools, which accounted for over 875,000 borrowers in the  2013 CDR cohort. For each of the consultants, as stated in our draft  report, we reviewed documentation including training materials, internal  policies and procedures, and examples of correspondence they send to  borrowers. Finally, Education inaccurately asserted that we based our  findings on a small sample of interviews with 11 borrowers and officials  from 3 schools and 4 consultants. We conducted these interviews to  better understand borrowers’ loan experiences and the strategies that  schools and their consultants use to manage the CDR, and the illustrative  interview examples we include in our report do not form the basis of any  of our findings or recommendations. In addition, Education commented that the report did not consider the  extent to which borrowers enter Income-Driven Repayment plans during  the 3-year CDR period or the substantial growth in borrowers participating  in these plans over the past several years. Education suggested that such  data would be important to consider in determining whether there has  been an overreliance on forbearance in the past, and if so, whether any  problems in this area are being remedied by the availability of Income- Driven Repayment plans. We have incorporated additional information  regarding the increase in borrowers participating in Income-Driven  Repayment plans in response. As Education noted in its comments, our  draft report acknowledged that increased participation in these plans may  have been a factor in the observed increase in overall rates of  forbearance since it is common for loan servicers to place borrowers in  administrative forbearance while processing applications for Income- Driven Repayment plans. However, as explained in our draft report, since  administrative forbearance for this purpose should be for 60 days or less  it would not explain the twofold increase in the percentage of borrowers in  forbearance for 18 months or longer from CDR cohort years 2009 to  2013. Education also stated that while our report included an example of the  additional interest cost incurred by a borrower using forbearance, it did  not discuss the potential additional interest costs associated with other  repayment options, such as Income-Driven Repayment plans. Education  noted that these options could be more costly than forbearance in some  instances and all options have consequences for borrowers. We  acknowledged in our draft report that interest continues to accrue on  loans in Income-Driven Repayment and that the monthly payments of  some borrowers on these plans may not be high enough to pay down any  principal during the first 3 years of repayment. However, as stated in our  draft report, Income-Driven Repayment plans, unlike forbearance, offer  borrowers the potential for loan forgiveness after 20 or 25 years of  repayment. We have incorporated additional details about the potential  costs of these and other repayment plans based on Education’s  comments. The potential consequences that Education highlighted in its  comments further illustrate the importance of ensuring that borrowers  receive accurate and complete information to help them make informed  decisions to manage their loan costs and avoid default. In response to our findings regarding communication practices of some  default management consultants, Education stated that the draft report  did not acknowledge that the forbearance application that selected  consultants send to borrowers provides an opportunity for borrowers to  learn about other repayment options and the potential costs of  forbearance. We have incorporated additional information regarding the  information included on the application. Although the form mentions  deferment and Income-Driven Repayment, it does not describe these  options; instead, it directs borrowers to Education’s website for more  information. Therefore, we maintain that borrowers who only receive a  forbearance application may inaccurately assume that forbearance is the  only or preferred option. Further, Education commented that the draft report did not examine what  effect, if any, consultants may have had in encouraging borrowers to seek  consecutive forbearances since borrowers can remain in forbearance for  no longer than 12 months before they have to reapply. Education also  suggested that comparing the use of forbearance at schools that hired  consultants that encouraged borrowers to postpone payments with those  that did not would have provided a better understanding of the potential  impact of such practices. While these topics were beyond the scope of  our objectives for this report, Education may wish to explore them in  support of its goals to protect borrowers and mitigate risks in the federal  student aid programs. We are sending copies of this report to the appropriate congressional  committees, the Secretary of the Department of Education, the Director of  the Consumer Financial Protection Bureau, and other interested parties.  In addition, the report will be available at no charge on GAO’s website at  http://www.gao.gov. If you or your staff have any questions about this report, please contact  me at (617) 788-0534 or emreyarrasm@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. 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. We conducted this performance audit from May 2016 to April 2018, in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. Default Management  Consultants – Interviews  and Document Requests To determine how schools work with borrowers to manage their cohort  default rates, we examined the practices of companies that schools  contract with to help them lower their CDRs. Specifically, we selected a  nongeneralizable sample of 9 of the 48 default management consultants  on file with Education as of December 2016. To select the 9 consultants,  we obtained lists of client schools from Education and reviewed websites  for each of the 48 consultants to determine the services each company  offered. Some companies offered an array of services to schools, while  others focused exclusively on default management. We selected our  nongeneralizable sample of 9 consultants by prioritizing those with large  numbers of client schools, those with a specific focus on default  management, or those with unique default management practices based  on our review of their websites. These 9 companies served over 1,300  schools. These schools accounted for over 1.5 million borrowers in the  2013 CDR cohort. We reviewed documentation from the 9 consultants on the strategies they  use to reduce borrower defaults during the CDR period; their  organizational structure; products and services offered; current client  schools; internal training materials; contracts and agreements with  schools; methods of compensation for employees responsible for  outreach to student loan borrowers; internal policies and procedures; and  examples of correspondence (e.g., emails, letters, and repayment  applications) with borrowers. Based on the information received from  these consultants, we cannot determine how many borrowers were  contacted or received correspondence from these companies. However,  the consultants we spoke to generally indicated that the materials they  provided to us were used for all or most of their school clients. To learn more about the strategies schools and default management  consultants use to help schools manage their CDRs, we conducted  interviews with managers at 4 of the 9 consultants. We also interviewed  employees responsible for working with student loan borrowers to discuss  the procedures they use to contact or counsel borrowers on loan  repayment options. We selected these 4 consultants by prioritizing those  that provided default management services to large numbers of client  schools, or had unique default management practices based on website  reviews. Schools and Borrowers –  Interviews and Document  Requests To determine how schools work with borrowers to manage schools’ CDRs  we selected a nongeneralizable sample of 12 schools for review based on  data from Education that suggested that they had successfully lowered  their CDRs from the 2009 through 2013 cohorts through forbearance.  This sample informed our selection of borrowers. We emailed borrowers  who attended these 12 schools and requested interviews with them, and  selected 3 of the 12 schools for interviews with school officials and  document requests. To select the 12 schools, we analyzed CDRs for the 2009-2013 cohorts  from Education’s Cohort Default Rate Database; 3-year forbearance rates  for fiscal years 2009-2012 from Education’s Annual Risk Assessment  data; and 3-year repayment rates for fiscal years 2009-2014 from  Education’s College Scorecard data. We selected the 12 schools from  the population that had a CDR calculated for 2013. We excluded schools  whose 2013 CDR was calculated using a different formula that Education  uses for schools with fewer than 30 borrowers entering repayment in a  particular cohort. To be considered for selection, schools had to have  had CDRs of 25 percent or above for cohort years 2009-2013 and also be  in the following: 1) top 20 percent of year-to-year decreases in CDR; 2)  top 20 percent of year-to-year increases in 3-year forbearance rates; or 3)  top 20 percent of 3-year forbearances that resulted in default after the 3- year CDR period ended. This analysis resulted in a list of 312 schools,  which we randomized within strata based on combinations of institutional  control (public, nonprofit, and for-profit), maximum length of degree  programs offered (less than 4-year or 4-year and above), and school size  (fewer than 1,000 borrowers entering repayment in a given fiscal year and  1,000 or more borrowers entering repayment in a given fiscal year). We  removed schools that had fewer than 1,000 borrowers entering  repayment in a given fiscal year to mitigate the wide variations in  forbearance rates and CDRs that may occur at smaller schools. Finally,  we judgmentally selected a total of 12 schools from across the remaining  strata, choosing the schools from each stratum in the randomized order.  We conducted interviews with officials at 3 of these schools (public,  nonprofit, and for-profit) and reviewed documentation on the strategies  they use to reduce borrower defaults during the CDR period. To examine how default management strategies may affect borrowers,  we obtained record-level data from Education’s National Student Loan  Data System (NSLDS) related to the 12 schools we focused on in our  review, including data on all loans that entered repayment from fiscal  years 2011-2014 and contact information for the borrowers that took out  these loans. We weighted the sample toward borrowers whose loans  were in deferment, forbearance, or were consolidated during the CDR  period or defaulted after the CDR period. We then randomly selected  about 6,500 of these borrowers and emailed them a request to discuss  their student loan repayment experience with us. We received replies from 49 borrowers and interviewed 11 of them that we thought may have  been contacted by their school or a default management consultant. We  generally selected borrowers for interviews in the order they replied to us.  We also prioritized borrowers whose email responses included student  loan experiences that were relevant to our objectives, such as receiving  communication from their school about student loan repayment and  postponement options. We were not able to interview borrowers who did  not provide phone numbers or who provided phone numbers but did not  respond to our calls. Data Analysis To determine how schools’ default management strategies affect  borrowers and the CDR, we analyzed school-level data from Education  on borrowers with loans that were included in schools’ official CDR  calculations for the 2009 through 2013 cohorts. We selected the 2009  cohort because it was the first cohort held accountable for the 3-year  CDR. The 2013 cohort was the most recent CDR available at the time of  our analysis. We identified the year borrowers entered repayment using  the same logic that Education does for calculating the CDR. A borrower  with multiple loans from the same school whose loans enter repayment  during the same cohort fiscal year was included in the formula only once  for that cohort fiscal year. We excluded schools whose CDR was  calculated using a different formula that Education uses for schools with  fewer than 30 borrowers entering repayment in a particular cohort. 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). We also calculated an alternative CDR for each of these 4,138 schools, in  which we excluded borrowers who spent 18 or more months in  forbearance during the 2013 cohort and did not default during the CDR  period from their school’s CDR calculation. We analyzed how many  schools would have potentially exceeded the 30 percent and 40 percent  CDR thresholds for the 2013 cohort and calculated the total amount of  Direct Loans and Pell Grants that these schools received in academic  year 2016-2017. We did not estimate the number of schools that could  become ineligible to participate in federal loan programs under this  alternative methodology because such schools would be entitled to an  appeal and sanctionable thresholds may change with the advent of new  methodologies of calculating the CDR. Further, schools may change their  default management strategies in response to an alternative CDR. In  addition, we assessed the CDR against government standards for internal  control for identifying and responding to risks and goals and objectives in  the Office of Federal Student Aid’s Fiscal Year 2015-2019 Strategic Plan. Additionally, we analyzed data from Education’s Integrated  Postsecondary Education Data System on sector and program length for  these 4,138 schools, as well as for certain subsets of these schools (for  more information, see app. II). To assess the reliability of the data elements we analyzed for our study,  we (1) performed electronic testing of required data elements; (2)  reviewed existing information about the data and the systems that  produced them; and (3) interviewed agency officials knowledgeable about  the data. We determined that the data were sufficiently reliable for the  purposes of this report. Review of Education  Documents and Relevant  Federal Laws and  Regulations To determine the extent to which 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, we reviewed relevant federal laws, regulations, guidance,  and internal documentation from Education on how it oversees schools  and default management consultants practices as they relate to the CDR  and how it implements and reports CDR sanctions. To better understand  how CDRs are used in Education’s oversight of schools, we reviewed  relevant regulations and interviewed Education officials responsible for  administering program review, recertification for eligibility for federal  student aid, and oversight of the CDR including default prevention. We  assessed Education’s oversight activities against goals and objectives in  the Office of Federal Student Aid’s Fiscal Year 2015-2019 Strategic Plan,  government standards for internal control for communicating with  stakeholders, and Office of Management and Budget guidelines for  disseminating public information. Interviews with Experts  and Consumer Advocates To help us understand how the default management strategies used by  schools and default management consultants affect borrowers and  reported CDRs, we interviewed individuals with expertise on federal  student loans. Specifically, we interviewed experts from federal agencies  including the Consumer Financial Protection Bureau and Education’s  Office of Inspector General. We also interviewed experts from the  Association of Community College Trustees, the Career Education  Colleges and Universities, the Center for American Progress, The  Institute for College Access & Success, Harvard’s Project on Predatory  Student Lending, the Illinois Attorney General Office, and Young  Invincibles. Appendix II: Sector and Program Length of  Schools with Selected Characteristics Appendix II: Sector and Program Length of  Schools with Selected Characteristics Schools whose cohort default rates (CDR) were calculated using a different formula that Education  uses for schools with fewer than 30 borrowers entering repayment in a particular cohort were  excluded from this analysis.  Schools were included in this analysis if their CDR decreased by 10 percentage points or more from  the 2009 to 2013 CDR cohorts.  Foreign schools include schools that are eligible to participate in the Direct Loan program and are  located outside the United States. Appendix III: Number of Schools Subject to  Department of Education Cohort Default  Rate Sanctions, 1991-2017 Appendix IV: Comments from the U.S.  Department of Education Appendix V: GAO Contact and Staff  Acknowledgments GAO Contact Staff  Acknowledgments In addition to the contact named above, Kris Nguyen and Debra Prescott  (Assistant Directors), Brian Schwartz (Analyst-in-Charge), Alex Galuten,  Raheem Hanifa, John Karikari, Kirsten Lauber, Jeffrey G. Miller, John  Mingus, Jeff Tessin, Khristi Wilkins, and Stephen Yoder made key  contributions to this report. Additional assistance was provided by Susan  Aschoff, Rachel Beers, James Bennett, Deborah Bland, Jason Bromberg,  Alicia Cackley, Marcia Carlsen, David Chrisinger, William Colvin, Sheila  McCoy, Arthur Merriam, Jessica Orr, Ellen Phelps Ranen, Phillip Reiff,  Barbara Steel-Lowney, and Christopher Zbrozek.
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. 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.