U.S. Plans Crackdown on Student Loans : Education: Report finds fraud, abuse and defaults totaling $2.7 billion. Reforms include weeding out some schools, wide managerial changes.

In an effort to cut down on the growing number of student loan defaults, the Administration on Monday announced a new plan to restructure the Education Department’s student financial aid programs.

The management reforms include ensuring that only legitimate institutions participate in the student aid programs and monitoring lenders and guarantee agencies more closely.

The recommendations were suggested in a report by an Education Department and Office of Management and Budget team, which found that poor managerial practices in the Guaranteed Student Loan program have resulted in high loan default rates, fraud and abuse. Loan defaults will total about $2.7 billion in 1991, up from $151 million in 1981.

Some schools that abuse the federal programs advertise for students, promising to help them obtain government-financed student loans to pay for their educations. The students--many of whom either drop out before finishing or are unable to obtain employment after inadequate training programs--often cannot repay the government loans.

The team found that too many schools with high default rates, including many trade and vocational schools, participate in the student aid programs.

Secretary of Education Lamar Alexander “intends to implement each and every one of the recommendations contained in the report,” Ted Sanders, education deputy secretary, said at a press conference. Already, he said, the department has taken “emergency action” against more than 40 institutions with large default rates and ended their participation in federal student loan programs.

“We are serious, and we are aggressive,” Sanders said.

In addition, the report found that the Education Department has not sufficiently monitored lenders and guarantee agencies such as the Higher Education Assistance Foundation, whose recent failure cost the government $30 million.

The department suffers also from poor financial management and inadequate data collection and analysis, the report said. For example, the Office of Postsecondary Education does not have enough qualified financial analysts to sufficiently audit the programs and enforce regulations. The report recommends reorganizing and enlarging the postsecondary office and organizing a team to ensure that the department’s reforms are carried out.

“We applaud what the secretary has done here today,” said Frank Hodsol, OMB executive associate director. He added that the suggested changes “will result in real progress in the student loan program.”

The Education Department estimates that 300 schools in 1989 had default rates above 35%, the level at which an institution can be legally barred from participation in the program. Sanders said that he would like to see the legal limit reduced to 25%.

Trade and vocational schools had the highest default rates, with an average of 26.9% for 1988. Public and private four-year institutions, by contrast, had rates around 6%.

All student aid operations will be centralized under Michael Farrell, a businessman from New Hampshire, appointed deputy assistant secretary for student financial aid by Alexander. Farrell will be in charge of carrying out the reforms and will report directly to the secretary. As many as 150 new staff members will be hired by the department.

Hodsol said that the plan is part of “an overall administrative effort” to improve management in federal government agencies.