Federal Web-based Tool on Private Loans Would Pose Implementation Challenges and May Be Unnecessary
GAO-10-990: Published: Sep 29, 2010. Publicly Released: Sep 29, 2010.
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Student loans play a key role in ensuring postsecondary access for millions of students each year. In fiscal year 2009, students and their families borrowed $90 billion in federal student loans to help pay the cost of postsecondary education. Traditionally, these loans have been available through two programs: the William D. Ford Federal Direct Loan Program (Direct Loan), in which the federal government provides loans directly to students through their schools, and the Federal Family Education Loan Program (FFEL), in which private lenders provide loans guaranteed by the federal government. However, the Health Care and Education Reconciliation Act of 2010 terminated the authority to make new FFEL loans after June 30, 2010, and all federally guaranteed loans are now originated under the Direct Loan Program. While private lenders no longer provide federally guaranteed student loans, they may continue to provide private loans--estimated at nearly $12 billion in 2008-2009--which are not federally subsidized. Although federal loans comprise the majority of loans used to defray educational expenses, private student loans serve as a source of supplemental or alternative funding. For example, in 2007-2008, an estimated 14 percent of undergraduates obtained private student loans. Unlike federal loans, which have statutorily fixed interest rates and flexible repayment terms, interest rates for private loans vary based upon factors such as a borrower's credit score. These loans typically offer borrowers fewer protections and benefits than federal loans. Given the variety of options available, some observers have questioned whether borrowers have sufficient information to help them make informed decisions about student loans. In this report, we respond to a mandate in the Higher Education Opportunity Act requiring GAO to study the feasibility of developing a national clearinghouse of federal and private student loans on the Department of Education's (Education) Web site. We addressed the following questions: (1) What are some options for establishing a tool on Education's Web site that provides real-time information on federal and private student loans, and what is the perceived need for such a tool? (2) What challenges would Education need to address in implementing such a tool?
Education has a range of options for providing prospective borrowers with a Web-based tool containing real-time information--such as interest rates and loan terms--on federal and private student loans, but such a tool may be unnecessary. Providing information on private student loans also may not align with Education's role in administering and promoting federal student aid. To implement such a tool, Education would have to address several challenges--including securing a high rate of lender participation and ensuring completeness, accuracy, and objectivity of information presented--to avoid the appearance of bias or endorsement. Furthermore, minimizing costs to the federal government would be challenging because developing a tool would require a considerable investment, and many stakeholders ruled out a system funded by lenders. While it would be feasible for Education to establish a student loan tool on its Web site, the need for such a new source of information is questionable. Since all federal student loans are now originated through the Direct Loan Program, students no longer have to choose a lender for federal loans. In addition, information on both federal and private loans is already available from resources such as financial aid offices and existing Web-based loan comparison tools. Furthermore, any perceived need for a federal tool must be weighed against the investment required of Education and the considerable challenges inherent in implementation.