Oversight of Loan Guarantors Is Lacking, Audit Says

October 2, 2014

The U.S. Department of Education is not properly overseeing the entities it pays to administer and insure federally guaranteed student loans, according to an audit released this week by the agency's inspector general.

The department has been overestimating the financial strength of those entities, called guaranty agencies, which are required by federal law to meet certain financial standards, according to the report. In some cases, the department's improper calculations allowed guaranty agencies to meet the standard when they should have otherwise been identified as under possible financial stress.

Even though the federal government no longer guarantees private student loans -- it only lends directly to students -- the guaranty agencies are still responsible for the existing, albeit shrinking, portfolio of federally guaranteed student loans.

In response to the report, the Education Department admitted that it has not been complying with federal regulations in assessing the guaranty agency's financial strength and pledged to change that process starting this year. However, the department defended its oversight of the guaranty agencies in general, noting that it wasn't aware of any cases in which a guaranty agency's insolvency deprived loan borrowers of the services to which they are entitled.

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