Direct Student Loans

The consolidation of student loans allows borrowers to combine separate loans, including those made under the Federal Direct Loan Program (FDLP) and those guaranteed under the Federal Family Education Loan Program (FFELP), into a single new loan. Consolidation loans allow borrowers to extend their repayment periods and make single monthly payments that are lower then the total of payments on their loans if made separately. The FDLP consolidation process was plagued by problems that led to a three-month shutdown during which new applications were not being accepted. In the FDLP consolidation process, if any FFELP loans are among those being consolidated, the federal government, through its contractor Electronic Data Systems (EDS), pays off lenders for the borrower's underlying loans and makes a new consolidation loan to the borrower. Some of the program's problems affected FFELP lenders, who (1) were required to complete a loan verification certificate and send it to EDS, to verify the accuracy of borrowers' loan amounts to be consolidated, and (2) were then paid the amount due on these loans by EDS. Some lenders complained that EDS' and the Education Department's handling of this process was prone to error and problematic for them. This report answers the following questions: What are the nature and the source of problems that FFELP lenders have encountered in the direct loan consolidation program? How have these problems affected lenders? What steps are Education and EDS taking to correct these problems?

GAO noted that: (1) lenders said their problems came primarily at two stages in the consolidation process--verifying loan data EDS provided and receiving payments for the loans being consolidated; (2) these problems occurred, in part, because borrowers provided poor information or EDS used inaccurate Education-provided data to identify lenders' addresses for loan verification requests; (3) regarding the payments lenders received, in some examples EDS sent inaccurate payments to lenders for loans being consolidated; (4) some lenders received overpayments because EDS paid for the same loan more than once; (5) other examples GAO analyzed had more serious problems, such as several instances in which EDS charged one borrower for a second borrower's loans; (6) however, lenders also received underpayments on occasion, which occurred because not all loans a borrower owed and wanted to consolidate were paid off; (7) in addition to the two problems lenders raised about the process, GAO found a flaw in the transfer of data from EDS to the FDLP servicing system; (8) GAO found that refunds that lenders made for overpayments were not always credited to a borrower's new consolidation loan account; (9) lenders' representatives said that problems associated with FDLP consolidations adversely affected their operations; (10) lenders said that their staffs had to repeatedly complete verification requests or call EDS to explain that a completed certificate had previously been returned; (11) lenders' officials also said that it took time for their staffs to resolve inaccurate payments; (12) in general, however, lenders could not quantify their costs of resolving FDLP consolidation problems; (13) both Education and EDS recognized that the consolidation process had problems prior to a 3-month shutdown during which new applications were not accepted; (14) officials from both Education and EDS said that they have taken new steps to improve FDLP consolidation processing; (15) some of the changes were made during the shutdown, others went into effect as GAO was conducting its study, when EDS again began accepting new applications, and others are still being implemented; (16) EDS has devoted more resources and made system changes to improve data quality throughout the process, it has started a pilot program for electronic loan data exchange with lenders, and it has begun a review of the first 1,000 post startup applications with the goal of detecting remaining problems; and (17) lenders' representatives GAO talked with had mixed opinions about the effectiveness of these changes and said it was too early to evaluate them.