The Department of Education, after months of criticism for its lax oversight of the federal student loan program, still has no system to detect and uncover misconduct by lenders and protect student borrowers, a government report said yesterday.
The report, prepared by the General Accountability Office and released by congressional Democrats, found that the department "has no oversight tools" to see whether lenders are giving improper incentives to colleges to steer student borrowers their way and since 1989, the department has offered lenders no "comprehensive guidance" on what incentives might be forbidden.
In 20 years, the report found, the department has tried to sanction only two lenders for violating government rules.
The department does not even try to discover whether universities are improperly limiting students' choice of lenders, according to the GAO, the investigative arm of Congress.
The report, the agency's first since revelations of potential misconduct in student lending this year, said the department's lack of oversight of federal student loans "may have resulted in some students taking loans with higher interest rates or fewer borrower benefits."
Overall, the report portrays an agency that might at times react to outside complaints but does not "proactively detect" problems.
In a letter included with the GAO report, the department agreed with many of its findings, and in a statement issued yesterday, Katherine McLane, a spokeswoman for the Education Department, said, "Secretary of Education Margaret Spellings takes very seriously the department's oversight of schools and lenders. We have taken a number of steps to tighten our oversight responsibilities of federal student financial aid programs."
In its letter to the GAO, the department outlined these steps, including creating a "work group" to review lender compliance with the law. In June, the department proposed rules banning certain marketing practices by lenders.
But the GAO report noted that these rules will not take affect until July 2008, at the earliest, and called for the department to act sooner.
In recent months, the student loan industry has faced increasing scrutiny of its business practices as tuition has skyrocketed and more students have been forced into debt to finance their education. Last year, students took out more than $85 billion in federal and private loans to pay for college.
Inquiries by Congress, the news media and various state attorneys general have exposed tangled financial relationships between colleges or individual college officials and student lenders.
These investigations have revealed such practices as paying colleges commissions or bonuses in exchange for business and giving college officials free trips, meals and other perks to win spots on so-called preferred lender lists, on which students rely when selecting a loan company.
They have also found colleges at which financial aid administrators held stock in lenders they recommended to students.
In testimony before Congress in May, Spellings pointed to the removal of federal student aid programs in 2005 from the GAO's "high-risk list" for fraud, waste and abuse of as a sign that the Education Department was resolving "financial integrity and management issues."
But the GAO report, requested by members of Congress as part of their inquiries, undermines that earlier conclusion.