Since 1999, the Department of Education (Education) has offered a 0.25 percent interest rate reduction to borrowers who agree to an electronic debit (EDA) program. Borrowers pay a lower interest rate, while the federal government receives fewer late payments. Any revenue loss to the federal government from a reduced interest rate would be more than offset by a gain in revenue because some EDA borrowers who had previously paid by check would stop making periodic payments in excess of their scheduled amount due. By ceasing to make these prepayments, these borrowers would not pay off their loans as soon as they would have without signing up for EDA and, therefore, incur additional interest costs over the life of their loans. Although actual EDA enrollments have exceeded original estimates, Education lacks data on prepayment patterns after borrowers enroll in the program. Education has not informed borrowers of the cost implications of EDA participation, nor has it systematically informed borrowers of their prepayment options. GAO estimates that Education saved $1.5 million in administrative costs in fiscal year 2001 because it did not have to mail bills to EDA borrowers.
Recommendations for Executive Action
|Department of Education||To better publicize EDA and help Education achieve additional administrative cost savings, the Secretary of Education should update the Exit Counseling Guide for Borrowers to reflect the repayment incentives for direct loan borrowers who repay their loans through EDA as well as borrowers' prepayment options.|
|Department of Education||To address concerns that borrowers may unknowingly pay more total interest over the life of their loans by not making prepayments if they make their loan payments through EDA, the Secretary of Education should take steps to inform EDA borrowers about steps they can take to prepay their loans. Such steps could include modifying EDA applications to allow borrowers interested in prepaying their loans to designate withdrawal amounts in excess of their scheduled payments when they initially complete the EDA application.|
|Department of Education||To ensure that the fees Education pays for servicing delinquent accounts appropriately reflect current collection activity practices, the Secretary of Education should consider renegotiating the fee provision in its contract with the direct loan servicer to eliminate the servicing fee for accounts with payments less than seven days late.|