Medical Students’ Defaults Imperil U.S. Loan Program

Medical and dental students, eligible for up to $80,000 in government-backed school loans, have used the program to pay for new cars, divorce lawyers and even a trip to Europe while soaring default rates threaten the program with bankruptcy, auditors said Wednesday.

The internal audit by the inspector general of the Health and Human Services Department said that, unlike most loan programs, the medical program has treated the loans as virtually an absolute right of students, with little regard for where the money is going, whether it is needed or whether it is likely to be repaid.

Audit Urges Reforms

The program has suffered abuses as a result, the audit said. Although an emergency increase in insurance premiums averted bankruptcy this year, the audit report said, more changes must be made “to prevent the deficiencies from crippling the program and undermining program integrity.”

The audit by Inspector General Richard P. Kusserow covered the Health Education Assistance Loan Program.

Medical and dental students may borrow up to $20,000 a year for four years at market rates, with the government guaranteeing to the lender that it will pay if the student defaults.

The program now insures about $500 million in outstanding loans, the audit said. But the loans are quickly becoming more popular, the audit said, and may total $3 billion by the early 1990s.

Default Rate Climbing

Meantime, Kusserow said, the default rate is climbing. At the end of February, 1984, he said, the program had paid claims for $3.6 million--29 bankruptcies, 17 deaths, one disability and 206 defaults--although the program, as established, assumed loans would be repaid and no federal money would be spent.

The program could have gone bankrupt this year and left the government with a $100-million debt over the next five years if the Public Health Service had not raised the insurance premium on the loans during the audit, he said.

That premium had been set to cover a default rate of 2%, he said, although the actual default rate was 8% and default rates of 10% to 15% are expected.