In a letter to House Education Committee Chairman George Miller (D-CA) yesterday, the Government Accountability Office (GAO) stated that the "exceptional performer" status some lenders receive, and the financial benefits that come along with it, should be eliminated. Currently 18 loan providers meet federal requirements to be designated as exceptional performers, allowing them to receive increased reimbursements from the government on defaulted student loans. But according to the GAO study, eliminating the exceptional performer status would save the government substantial sums of money without harming current loan servicing standards.
Miller commissioned the GAO to conduct an investigation into whether the exceptional performer program actually improved loan servicing and lowered defaults. He also asked the GAO for costs associated with the program.
All FFELP lenders are required to meet certain minimum requirements when servicing a loan. Some of those requirements include establishing accurate borrower repayment dates and attempts to contact delinquent borrowers prior to default. Loan providers that demonstrate compliance with those requirements on at least 97 percent of their loans can receive "exceptional performer" status, which entitles them to receive a 99 percent reimbursement from the Department on any outstanding principal and interest on a defaulted student loan. Normal reimbursement is currently at 97 percent of a loan’s total outstanding balance.
The exceptional performance designation was introduced to encourage lenders to increase their loan servicing accuracy and to decrease student loan default.
But according to the report, default rates have not decreased since the first exceptional performer designation was given in 2004. In fact, representatives from various loan providers told the GAO that "they did not make substantive changes to their loan servicing to obtain the designation." The GAO believes that technological advancements made prior to the introduction of the designation had already made most lenders able to comply with minimum due diligence requirements.
By eliminating the exceptional performance program, the GAO estimates that the government will save $1 billion over the next 5 years. The 18 organizations that currently receive exceptional performance status hold about 90 percent of all FFELP loans, according to the report.
The GAO believes that the risk of having default claims rejected already provides enough incentive for lenders to ensure they are meeting minimum loan servicing requirements.
Both the House and the Senate have passed legislation that would eliminate the exceptional performer program. But if those bills fail to become law, the GAO recommends that the Secretary or Education use her existing authority to eliminate the program.
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By Justin Draeger
NASFAA Assistant Director for Communications
Posted 07/27/07 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.
