Direct Student Loan Program
Management Actions Could Enhance Customer Service Gao ID: GAO-04-107 November 20, 2003In 1993, Congress authorized the William D. Ford Federal Direct Loan Program as an alternative to the Federal Family Education Loan Program (FFELP). While the Direct Loan Program was originally mandated to replace FFELP, Congress revised the law allowing both loan programs to continue. Since that time, competition between the programs has been credited with improving borrower benefits and service for schools. The Department of Education's (Education) Office of Federal Student Aid (FSA) and its contractors administer the Direct Loan Program, and one of its goals is to improve customer service. In light of the upcoming reauthorization of the Higher Education Act (HEA), which authorizes the loan programs, this report examines the extent to which schools participate in the Direct Loan Program, factors that influenced schools' decision to begin--and for some schools end--participation, and steps that FSA has taken to increase the userfriendliness of the program.
Of schools that provided federal loans in every year since 1994-95, approximately 1,200 postsecondary schools--or 29 percent--have provided loans through the Direct Loan Program, and most continued to participate in school year 2001-02. The Direct Loan Program's share of total new loan volume has steadily decreased from its peak of 34 percent in 1998-99 to 28 percent in 2001-02, and the number of schools that have joined the program is much smaller than the number of school that have stopped participating. Four factors--(1) streamlined loan delivery, (2) greater control over loan processes, (3) timely delivery of money to students, and (4) ease of tracking loans over time--were extremely or very important in influencing schools' decision to participate in the Direct Loan Program. Schools that joined and subsequently left the Direct Loan Program reported a number of factors that influenced their decision, including difficulties fulfilling certain program requirements and reduced or no loan origination fees offered by FFELP lenders. Education has reduced origination fees for Direct Loan borrowers, but its regulatory authority to do so has been challenged. FSA does not systematically collect information from schools about the reasons why they stop participating in the Direct Loan Program, although this information could be used to identify needed program improvements. FSA has taken a number of steps to increase the user-friendliness of the program, such as using Web sites to disseminate and collect information and forms. Many Direct Loan schools reported that FSA's Web sites are effective in helping them administer the program and have simplified the process for Direct Loan borrowers, but it is challenging to navigate among multiple Web sites. FSA officials are aware of schools' concerns and are developing a plan to redesign its Web sites. FSA has also implemented a new information system that originates and disburses Direct Loans to students faster, and 72 percent of Direct Loan schools were generally or very satisfied with this system.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-04-107, Direct Student Loan Program: Management Actions Could Enhance Customer Service
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Report to the Ranking Minority Member, Committee on Health, Education,
Labor, and Pensions, U.S. Senate:
United States General Accounting Office:
GAO:
November 2003:
DIRECT STUDENT LOAN PROGRAM:
Management Actions Could Enhance Customer Service:
Direct Student Loan Program:
GAO-04-107:
GAO Highlights:
Highlights of GAO-04-107, a report to the Ranking Minority Member,
Committee on Health, Education, Labor, and Pensions, U.S. Senate
Why GAO Did This Study:
In 1993, Congress authorized the William D. Ford Federal Direct Loan
Program as an alternative to the Federal Family Education Loan Program
(FFELP). While the Direct Loan Program was originally mandated to
replace FFELP, Congress revised the law allowing both loan programs to
continue. Since that time, competition between the programs has been
credited with improving borrower benefits and service for schools. The
Department of Education‘s (Education) Office of Federal Student Aid
(FSA) and its contractors administer the Direct Loan Program, and one
of its goals is to improve customer service. In light of the upcoming
reauthorization of the Higher Education Act (HEA), which authorizes
the loan programs, this report examines the extent to which schools
participate in the Direct Loan Program, factors that influenced
schools‘ decision to begin”and for some schools end”participation, and
steps that FSA has taken to increase the user-friendliness of the
program.
What GAO Found:
Of schools that provided federal loans in every year since 1994-95,
approximately 1,200 postsecondary schools”or 29 percent”have provided
loans through the Direct Loan Program, and most continued to
participate in school year 2001-02. The Direct Loan Program‘s share of
total new loan volume has steadily decreased from its peak of 34
percent in 1998-99 to 28 percent in 2001-02, and the number of schools
that have joined the program is much smaller than the number of school
that have stopped participating.
Four factors”(1) streamlined loan delivery, (2) greater control over
loan processes, (3) timely delivery of money to students, and (4) ease
of tracking loans over time”were extremely or very important in
influencing schools‘ decision to participate in the Direct Loan
Program. Schools that joined and subsequently left the Direct Loan
Program reported a number of factors that influenced their decision,
including difficulties fulfilling certain program requirements and
reduced or no loan origination fees offered by FFELP lenders.
Education has reduced origination fees for Direct Loan borrowers, but
its regulatory authority to do so has been challenged. FSA does not
systematically collect information from schools about the reasons why
they stop participating in the Direct Loan Program, although this
information could be used to identify needed program improvements.
FSA has taken a number of steps to increase the user-friendliness of
the program, such as using Web sites to disseminate and collect
information and forms. Many Direct Loan schools reported that FSA‘s
Web sites are effective in helping them administer the program and
have simplified the process for Direct Loan borrowers, but it is
challenging to navigate among multiple Web sites. FSA officials are
aware of schools‘ concerns and are developing a plan to redesign its
Web sites. FSA has also implemented a new information system that
originates and disburses Direct Loans to students faster, and 72
percent of Direct Loan schools were generally or very satisfied with
this system.
What GAO Recommends:
Congress should consider clarifying whether Education may regulate the
fees charged to borrowers under the Direct Loan Program.
We are also recommending that FSA collect information from schools
that could be used to make improvements to the Direct Loan Program.
Education agreed with our recommendation.
www.gao.gov/cgi-bin/getrpt?GAO-04-107.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Cornelia Ashby (202)
512-8403.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
About One-Third of Postsecondary Schools That Provided Federal Loans
since 1994-95 Have Participated in the Direct Loan Program:
Similar Factors Influenced a Majority of Schools' Decision to
Participate in the Program but the Factors That Influenced Schools'
Decision to End Participation Varied:
Direct Loan Schools Are Satisfied with Steps Taken by FSA to Make the
Program User-Friendly but Identified Opportunities for FSA to Improve
These Services:
Conclusions:
Matters for Congressional Consideration:
Recommendation for Executive Action:
Agency Comments:
Appendix I: Scope and Methodology:
Analyzing Loan Volume and Identifying Schools That Participated in the
Direct Loan Program and FFELP:
Survey of Schools That Have Participated in the Direct Loan Program:
Analysis of Benefits Offered by FFELP Lenders:
Site Visits:
Telephone Interviews:
Appendix II: Comments from the Department of Education:
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Tables:
Table 1: Comparison of Responsibilities for Schools That Participate in
the Direct Loan Program and FFELP:
Table 2: Fees and Repayment Incentives Available to Borrowers in the
Direct Loan Program and Selected FFELP Lenders in 2003:
Table 3: Estimated Percentages of Direct Loan Schools' Opinions about
FSA Web Sites for Schools:
Table 4: Response Rates of Schools That Participated in the Direct Loan
Program in 2001-02:
Table 5: Characteristics of Schools Selected for Site Visits and
Interviews:
Figures:
Figure 1: Number of Direct Loan Schools and Direct Loan Volume (in
billions of dollars) in School Year 2001-02, by School Type:
Figure 2: Number of Schools Beginning and Ending Participation in Each
School Year between 1996-97 and 2001-02:
Figure 3: Factors That Were Extremely or Very Important in Schools'
Decision to Join the Direct Loan Program:
Figure 4: Estimated Percentages of Schools for Which the Availability
of Lenders Willing to Lend to Their Students Was an Extremely or Very
Important Factor in Influencing Schools' decision to Join Direct Loan
Program, by School Type:
Figure 5: Estimated Percentages of Direct Loan Schools' Usage of
Certain FSA Web Sites:
Figure 6: Estimated Percentages of Direct Loan Schools That Refer Their
Students to Certain FSA Web Sites:
United States General Accounting Office:
Washington, DC 20548:
November 20, 2003:
The Honorable Edward M. Kennedy:
Ranking Minority Member:
Committee on Health, Education, Labor, and Pensions:
United States Senate:
Dear Senator Kennedy:
In 1993, Congress authorized the William D. Ford Federal Direct Loan
Program (Direct Loan Program) as an alternative to the Federal Family
Education Loan Program (FFELP). The original legislation authorizing
the Direct Loan Program specified that it would gradually expand and
replace FFELP, but in 1998 Congress removed those provisions. In the
ensuing years, competition between the two loan programs has been
credited with improving service for schools and benefits for borrowers.
Postsecondary schools may participate in one or both loan programs.
Regardless of which program schools use, students and families are
eligible for the same types of loans. In school year 2002-03, students
and their families borrowed an estimated $12 billion in new loans
through the Direct Loan Program and $30 billion through FFELP.
The federal governmentís role in financing and administering these two
loan programs differs significantly. Under FFELP, private lenders, such
as banks, provide loan capital and the federal government guarantees
FFELP lenders a minimum rate of return on the loans they make and
repayment if borrowers default[Footnote 1] Additionally, state-
designated guaranty agencies perform a variety of administrative
functions in FFELP. Under the Direct Loan Program, federal funds are
used as loan capital and are provided through participating schools.
The Department of Educationís Office of Federal Student Aid (FSA) and
its private-sector contractors jointly administer the program. FSA is
responsible for delivering funds to schools that provide Direct Loans,
monitoring its contracts, and facilitating interactions between schools
providing Direct Loans and the contractors.In 1998, Congress
established FSA as a performance-based organization with specific
purposes, including improving customer service and the information
systems FSA uses to administer student loan and other financial aid
programs. .
As part of the upcoming reauthorization of the Higher Education Act
(HEA), you asked us to review the status of the Direct Loan Program by
answering the following questions: (1) To what extent have schools
participated in the Direct Loan Program? (2) What factors influenced
schoolsí decision to participate in the Direct Loan Program, and if
applicable, what factors influenced schoolsí decision to stop
participating? (3) What steps has FSA taken to increase the user-
friendliness of the Direct Loan Program for schools and students?
To address the first question, we analyzed data from three Education
databases and identified schools that provided loans through either the
Direct Loan Program or FFELP in each school year from 1994-95 to 2001-
02. To address the second question, we surveyed financial aid officials
at schools that participated in the Direct Loan Program in 2001-02, of
whom 57 percent responded to our survey. [Footnote 2] We also surveyed
schools that had participated in the program for at least one school
year from 1994-95 to 2000-01 but did not participate in 2001-02.
Twenty-three percent of these schools responded to our survey, and
because of their low response rate we do not provide estimates for this
group. We conducted site visits and telephone interviews with 20 Direct
Loan public and private, 4-year, 2-year, and less-than-2-year schools
located in the Boston, New York, San Francisco, and Washington, D.C.,
metropolitan areas. These schools were selected on the basis of school
type and loan volume. We also interviewed financial aid officials at
three schools that had once participated in the Direct Loan Program but
were no longer doing so. To learn about benefits available to
borrowers, we reviewed the terms of loans provided through the Direct
Loan Program as well as the terms of loans provided through selected
FFELP lenders. To address the third question, we gathered information
about schools' experiences through our survey and site visits at Direct
Loan schools. In addition, we interviewed FSA staff at headquarters and
three regional offices. We also reviewed the Higher Education Act of
1965, as amended, and related regulations; contracts for FSA's
information systems; FSA planning documents; and FSA Web sites. We
conducted our work from February through October 2003 in accordance
with generally accepted government auditing standards.
Results in Brief:
Of the schools that provided federal student loans in each year since
1994-95, approximately 1,200óor 29 percentóprovided loans through the
Direct Loan Program, and most of those schools continued to participate
in the Direct Loan Program in school year 2001-02. In 2001-02, public
4-year schools provided the largest share of Direct Loan volume, about
$6.9 billion, or 67 percent, although roughly equal numbers of public
4-year, private 4-year, 2-year, and less-than-2-year schools
participate The Direct Loan Programís share of total new loan volume
has steadily decreased from its peak of 34 percent in 1998-99 to 28
percent in 2001-02. During this period, only 34 schools began
participating in the program, while 166 schools have stopped.d.
Similar factors influenced a large majority of schools' decision to
participate in the Direct Loan Program, whereas the factors that led
schools to leave the program varied. Four factors--(1) streamlined loan
delivery, (2) greater control over loan processes, (3) timely delivery
of money to students, and (4) ease of tracking loans over time--were
extremely or very important in influencing 70 percent of Direct Loan
schools' decision to participate in the program. While recognizing that
improvements have since occurred in FFELP, financial aid officials at
Direct Loan schools we visited explained that prior to joining the
Direct Loan Program, they had to follow separate and distinct loan
processes for each of the many FFELP lenders and guaranty agencies used
by their students. In contrast, Direct Loan schools have only one
lenderóthe federal governmentóand one process to follow. The factors
that led many schools to end their participation in the Direct Loan
Program varied. For example, some experienced difficulties meeting the
Direct Loan Program requirement that they match the schoolís loan
records with the loan origination and disbursement contractorís records
and resolve any discrepancies. Other schools stopped participating
because some FFELP lenders offered better loan terms for borrowers. For
example, some FFELP lenders did not charge borrowers loan origination
fees and offered interest rate reductions that were unavailable to the
schoolsí students under the Direct Loan Prog Ed[Footnote 3]ucation has
reduced the origination fees for Direct Loan borrowers, but a coalition
of FFELP lenders has challenged its regulatory authority to do so and
the case is still pending in court. Financial aid officials at Direct
Loan schools we visited expressed concern about the continued viability
of the Direct Loan Program in light of FFELP lendersí ability to offer
more attractive terms to borrowers. The extent to which FFELP lenders
will continue to offer such benefits is unknown. FSA does not
systematically collect information from schools about the reasons why
they stop participating in the Direct Loan Program, although this
information could be used to identify needed program improvements.ram.
FSA has made the Direct Loan Program more user-friendly for schools and
students by (1) using Web sites to disseminate and collect information
and forms, (2) implementing a new information system that originates
and disburses Direct Loans to students faster, and (3) providing staff
in regional offices to assist Direct Loan schools. Direct Loan schools
indicated that FSAís Web sites are effective in helping them administer
the program and have simplified the process for Direct Loan borrowers.
For example, Direct Loan borrowers are able to complete and sign their
loan applications online and view information about their loans when
they enter repayment. Despite schoolsí satisfaction with FSAís Web
sites, they reported that it is challenging to navigate among multiple
Web sitesFSA officials stated that they are aware of the challenges
facing schools and are in the early stages of redesigning their Web
sites. Seventy-two percent of Direct Loan schools were generally or
very satisfied with FSAís new information system, which originates and
disburses loans faster. However, many schools commented that customer
service representatives-contractors hired to provide technical
assistance to schools-do not know all of the Direct Loan Programís
requirements and thus are typically unable to answer their questions.
FSA officials reported that they are taking steps to address this
issue, such as temporarily reassigning FSA staff to answer telephone
inquiries. More three-quarters of Direct Loan schools were very or
generally satisfied with the quality of service provided by the
regional office staff. Direct Loan schools commented that training
provided by the regional office staff helped them administer the
program.than.
In this report we are suggesting that Congress consider clarifying
whether Education may regulate loan origination fees charged to
borrowers under the Direct Loan Program. In addition, we are
recommending that FSAís Chief Operating Officer take actions to collect
information from schools that have left the Direct Loan Program about
the factors that influenced this decision, information that could be
used to make improvements to the Direct Loan Program, thereby helping
FSA meet its goal of improving customer service.
We provided Education with a copy of our draft report for review and
comment. In written comments on our draft report, Education generally
agreed with our reported findings and recommendation. Educationís
written comments appear in appendix II. Education also provided
technical clarification, which we incorporated where appropriate.
Background:
Title IV of HEA authorizes federal student aid programs, including the
Direct Loan Program and FFELP. FFELP originated in the HEA of 1965,
while the Direct Loan Program was created in 1993. Originally, the
Direct Loan Program was expected to replace FFELP over a 5-year period
with the amount of loans provided through the Direct Loan Program
rising from 5 percent in 1994-95 to 60 percent in 1998-99. In
reauthorizing HEA in 1998, Congress removed the provisions that called
for the phase-in of the program, thus keeping two federal loan
programs. In the ensuing years, competition between the two loan
programs has been credited with improving service to schools and
benefits for borrowers.
Under the Direct Loan Program, students and families borrow through one
lenderóthe federal governmentówhich also provides repayment services to
borrowers. In contrast, students and families can borrow through
thousands of FFELP lenders, who may or may not continue to provide
repayment services to students and families. FFELP lenders may receive
a subsidy, called a special allowance payment, from the federal
government to ensure that they receive a guaranteed rate of return on
the student loans they make. Additionally, under FFELP, state-
designated guaranty agencies perform a variety of administrative
functions and guarantee payment to lenders if borrowers fail to repay
their loans; the federal government subsequently reimburses guaranty
agencies for these payments to lenders.
Borrower and School Benefits:
Both the Direct Loan Program and FFELP offer the same loans to students
and their families: unsubsidized and subsidized Stafford and PLUS
loans, but the loan origination fees and repayment options can differ
under each program.[Footnote 4] HEA specifies loan origination fees of
4 percent in the Direct Loan Program and up to 3 percent under FFELP.
Prior to 1998, FFELP lenders had the flexibility to reduce origination
fees for subsidized loan borrowers; in 1998, Congress expanded this
flexibility to unsubsidized loan borrowers. Although lenders may reduce
the fees they charge borrowers, they must still pay the full amount of
the fee to the federal government. Under HEA, guaranty agencies also
have the option of waiving a 1 percent loan insurance fee charged to
borrowers that is used to compensate guaranty agencies for default
costs and other claims. Borrowers in the Direct Loan Program and FFELP
can choose from three similar repayment plans, including:
* Standard repaymentóborrowers pay a fixed monthly amount of at least
$50 up to 10 years;
* Graduated repaymentóborrowers pay smaller monthly amounts initially
and in later years the monthly amount is larger;
* Extended repaymentóborrowers pay a fixed monthly amount that can be
repaid over a time period as long as 25 years under FFEL and 30 years
under the Direct Loan Program[Footnote 5].
Last, borrowers in both loan programs have the option of choosing a
repayment plan that is adjusted according to the borrowerís income, but
under the Direct Loan Program borrowers have a longer period of time to
repay, and after 25 years of repayment, any remaining amount owed on
the loan is discharged.
Another difference between FFELP and the Direct Loan Program is that
HEA includes a provision that allows a school to become a FFELP lender
to its graduate students.[Footnote 6] A school may use its own funds to
lend to students or, according to one FFELP guaranty agency, the school
may receive a line of credit from another FFELP lender and pay interest
on the funds as they are used. Under the law, proceeds earned from the
special allowance payment and interest payments associated with these
loans can be used for need-based grants or administrative expenses.
Schools also sell their loans to secondary markets.[Footnote 7]
Schoolsí Administrative Responsibilities:
Schools choose which federal loan program they will offer to their
students and can participate in both. Although a school may provide
loans through both the Direct Loan Program and FFELP, the
administrative processes are different under each program, with Direct
Loan schools assuming additional responsibilities. Under both
processes, schools collect and provide data on whether borrowers are
eligible to receive loans. Also, schools in both loan programs must
counsel students on the responsibilities of borrowing and can use
either written materials, an audiovisual presentation, or a Web site.
In the Direct Loan Program, schools are responsible for completing all
tasks to originate and disburse loans to students.[Footnote 8]
Furthermore, schools that originate loans in the Direct Loan Program
are responsible for completing a monthly loan reconciliation by
comparing their internal Direct Loan records with the cash balance
reported by FSA's loan origination and disbursement contractor and
resolving all differences between the contractor's report and the
school's internal records. Schools must also reconcile on a yearly
basis. In comparison, as shown in table 1, schools that participate in
FFELP share some administrative tasks with lenders and are not required
to perform reconciliation.
Table 1: Comparison of Responsibilities for Schools That Participate in
the Direct Loan Program and FFELP:
Administrative task: Determine studentsí eligibility for federal loan;
Who's responsible in: Direct Loan Program: School; Who's responsible
in: FFELP: School.
Administrative task: Obtain completed promissory note from borrower;
Who's responsible in: Direct Loan Program: School; Who's responsible
in: FFELP: Lender.
Administrative task: Provide entrance and exit counseling to borrowers;
Who's responsible in: Direct Loan Program: School; Who's responsible
in: FFELP: School.
Administrative task: Disburse money to students; Who's responsible in:
Direct Loan Program: School; Who's responsible in: FFELP: Lender and
school.
Administrative task: Perform monthly loan reconciliation; Who's
responsible in: Direct Loan Program: School; Who's responsible in:
FFELP: Not required.
Source: GAO analysis of FSA and Congressional Research Service
documents.
[End of table]
About One-Third of Postsecondary Schools That Provided Federal Loans
since 1994-95 Have Participated in the Direct Loan Program:
Of the schools that provided federal student loans in each year since
1994-95, approximately 1,200óor 29 percentóprovided loans through the
Direct Loan Program, and most of those schools continued to participate
in the Direct Loan Program in school year 2001-02. Since 1998-99, the
Direct Loan Programís share of total new loan volume has steadily
decreased from its peak of 34 percent to 28 percent in 2001-02. During
this same time period, the number of schools that began to participate
in the program was smaller than the number of schools that stopped
participating.
Among Schools That Participated in the Direct Loan Program during
School Year 2001-02, Public 4-Year Schools Provided Most of the
Programís Loan Volume:
Of the 941 schools that were still participating in the Direct Loan
Program in school year 2001-02, public 4-year schools provided most of
the programís loan volume. About an equal number of public and private
4-year, 2-year, and less-than-2-year schools participated in the Direct
Loan Program in 2001-02, with many schools beginning participation in
the early years of the Direct Loan Program. Public 4-year schools
provided the largest share of Direct Loan volume, about $6.9 billion,
or 67 percent of total 2001-02 Direct Loan volume (see figure 1).
Figure 1: Number of Direct Loan Schools and Direct Loan Volume (in
billions of dollars) in School Year 2001-02, by School Type:
[See PDF for image]
[End of figure]
Since 1998-99, More Schools Have Stopped Participating in the Direct
Loan Program than Have Joined:
Since 1998-99, the number of schools that stopped participating in the
Direct Loan Program is greater than the number that have joined. During
this same time, the programís share of total new loan volume has
decreased, despite annual increases in total Direct Loan volume. As
shown in figure 2, 166 schools have stopped participating in the
program since 1998-99, while only 34 began participating.
Figure 2: Number of Schools Beginning and Ending Participation in Each
School Year between 1996-97 and 2001-02:
[See PDF for image]
[End of figure]
The small number of schools entering the program after 1998 coincided
with a number of changes that occurred at FSA and in FFELP. FSA
officials reported that in 1998 they instituted a policy of not
marketing the Direct Loan Program and ended activities they designed to
promote the Direct Loan Program, such as holding sessions at
conferences or visiting financial aid officials to discuss the benefits
of the Direct Loan Program. FSA officials reported that at a Direct
Loan school's request, they send information detailing how the Direct
Loan Program benefits the school's students, and they visit campuses
considering leaving the Direct Loan Program to make presentations about
the program's benefits. FFELP lenders have continued to market their
services to Direct Loan schools. Their efforts include sending mailings
to students and inviting financial aid staff to attend information
sessions to learn more about switching from the Direct Loan Program to
FFELP.
Similar Factors Influenced a Majority of Schools' Decision to
Participate in the Program but the Factors That Influenced Schools'
Decision to End Participation Varied:
Similar factors influenced a large majority of schools' decision to
participate in the Direct Loan Program, whereas the factors that led
schools to leave the program varied. Four factors--(1) streamlined loan
delivery, (2) greater control over loan processes, (3) timely delivery
of money to students, and (4) ease of tracking loans over time--were
extremely or very important in influencing 70 percent of Direct Loan
schools' decision to participate in the Direct Loan Program. The
factors that led many schools to end their participation in the Direct
Loan Program varied and included, for example, difficulties meeting
program requirements, the availability of lower loan origination fees
under FFELP, and repayment incentives offered by FFELP lenders, which
were unavailable to Direct Loan Program borrowers. FSA does not collect
information on reasons why schools stop participating in the Direct
Loan Program; thus it may be unaware of improvements that could be made
to better serve schools and borrowers.
Four Factors Were Very Important in Influencing Schools' Decision to
Participate in the Program:
A substantial majority of schools reported that four factors were
extremely or very important in influencing their decision to
participate in the Direct Loan Program. Figure 3 shows, for each of
these factors, the percentage of schools that reported them as very or
extremely important.
Figure 3: Factors That Were Extremely or Very Important in Schools'
Decision to Join the Direct Loan Program:
[See PDF for image]
[End of figure]
Although financial aid officials at Direct Loan schools we visited
acknowledged improvements in FFELP, they commented that prior to
joining the Direct Loan Program, they had to learn and follow separate
and distinct loan processes for each lender and guaranty agency that
was used by their students and their parents. In contrast, the loan
delivery process under the Direct Loan Program is streamlined: there is
only one lender--the federal government--and a uniform process.
Financial aid officials also noted that under FFELP, students often did
not receive their loans in a timely matter, in some cases waiting 6
weeks after school began to receive funds. Under the Direct Loan
Program, they said, students received their loans quickly. Once again,
financial aid officials noted that FFELP lenders have improved in this
area as well. Financial aid officials at Direct Loan schools also told
us that a third factor--greater control over loan processes--was
important because in the Direct Loan Program schools were directly
responsible for ensuring that an eligible student received a loan,
whereas in FFELP, schools were dependent on lenders or guaranty
agencies to approve a student's loan before a student could receive the
money. Moreover, school financial aid officials said that under the
Direct Loan Program they were also able to easily change the amount of
a loan if needed. For example, schools can adjust the amount of a
Direct Loan to reflect changes in students' courseload or increases in
grant and scholarship aid--events that could affect the loan amount
available to borrowers. The fourth factor--ease of tracking student
loans over time--was important because the Direct Loan Program improved
the loan process for students. Under the Direct Loan Program, for
example, student borrowers could easily track their loans because the
same lender held the loans through repayment, which was often not the
case under FFELP. Financial aid officials at a few schools associated
students' ease of tracking loans with reductions in default rates on
their campuses.
While another factor--the availability of lenders willing to lend to a
school's students--was reported by about 36 percent of Direct Loan
schools as extremely or very important, responses varied by school
type. In particular, as shown in figure 4, for a higher percentage of
2-year and less-than-2-year schools the factor was extremely or very
important.
Figure 4: Estimated Percentages of Schools for Which the Availability
of Lenders Willing to Lend to Their Students Was an Extremely or Very
Important Factor in Influencing Schools' decision to Join Direct Loan
Program, by School Type:
[See PDF for image]
Note: The 95-percent confidence interval for the estimated percentage
of less-than-2-year schools is from 56 to 69 percent.
[End of figure]
According to financial aid officials at 2-year and less-than-2-year
schools we visited, prior to the Direct Loan Program, some FFELP
lenders refused to lend to students at their schools because some of
their graduates did not repay their loans on time. In contrast,
financial aid officials at public and private 4-year schools we visited
said that they did not have any problems finding lenders to serve their
students, and FFELP lenders actively marketed their products to them
and their students.
Thirty-nine percent of schools that participated in the Direct Loan
Program in 2001-02 also participated in FFELP and provided a number of
reasons for doing so. Some schools participated in FFELP, in addition
to the Direct Loan Program, to provide PLUS loans to parents. Some
financial aid officials reported that parents receive better terms for
PLUS loans through FFELP. For 57 percent of schools that participated
in both loan programs, maintaining relationships with lenders was an
extremely or very important factor in influencing this decision.
Through our site visits we learned that some schools do this to
establish relationships with lenders in order to allow students access
to alternative loans and make the transition to FFELP smoother in case
the Direct Loan Program is eliminated. Finally, some schools provided
most of their loans through FFELP but wanted to allow students that
transferred to their school with a Direct Loan the option of continuing
to borrow through the Direct Loan Program.
A Variety of Factors Influenced Schools' Decision to End Participation
in the Direct Loan Program:
A number of schools that joined the Direct Loan Program but
subsequently stopped participating reported that different factors
influenced their decision to do so. Some of these factors were related
to schools' experiences meeting Direct Loan Program reconciliation
requirements or having staff with technical expertise to administer the
program. For example, over half of the 61 former Direct Loan schools
that responded to our survey reported that the amount of time spent on
loan reconciliation, a requirement only schools participating in the
Direct Loan Program must meet, was extremely or very important in
influencing their decision to leave the program. Schools reported that
complying with the requirement to reconcile schools' records with
contractors' records was challenging because sometimes the contractor
had incorrect information and resolving those differences was time-
consuming and frustrating. Although many schools reported that the loan
reconciliation process was challenging, we learned during our site
visits and from FSA officials that schools that established internal
"checks and balances" and meticulously organized their loan information
could more easily complete the loan reconciliation process.
Another important factor for leaving the program reported by former
Direct Loan schools responding to our survey and through our interviews
was that some FFELP lenders offered better loan terms for their
students and parents in 2003 than those offered by the Direct Loan
Program. For example, many FFELP lenders offered loans with reduced or
no origination fees and the potential for interest rate reductions that
were unavailable to the schools' students under the Direct Loan
Program. For both loan programs, borrower interest rates are variable
and change annually based on prevailing market rates, in accordance
with the law.[Footnote 9] Lenders have the flexibility, however, to
offer borrowers lower rates. Moreover, all but two guaranty agencies
did not charge student borrowers the loan insurance fee, thus lowering
costs for almost all borrowers in FFELP. As shown in table 2, financial
benefits available to borrowers may vary by program and lender.
Table 2: Fees and Repayment Incentives Available to Borrowers in the
Direct Loan Program and Selected FFELP Lenders in 2003:
Lender: Department of Education (Direct Loan Program); Origination fee:
3%; (Stafford loan); 4%; (PLUS loan); Repayment incentives: *
0.25% interest rate reduction for repaying electronically; * 1.5%
rebate of loan amount borrowed applied at the time loan is disbursed.
Borrowers must make 12 consecutive on-time payments or amount will be
added back to borrower's account..
Lender: FFELP lender A; Origination fee: 0%; (Stafford loan); 3%; (PLUS
loan)[A]; Repayment incentives: * 0.25% interest rate
reduction for repaying electronically; * PLUS loans interest-free for
the first year; * portion of loan debt cancelled when student graduates
with degree; amount varies by degree type; * 2% rate reduction for 48
consecutive on-time monthly payments.
Lender: FFELP lender B; Origination fee: 0%; (Stafford loan); 3%; (PLUS
loan)[A]; Repayment incentives: * 0.25 % interest rate
reduction for repaying electronically; * interest rate reduced to 0%
after 36 monthly on-time payment for Stafford or PLUS loans.
Lender: FFELP lender C; Origination fee: Up to 3%; (Stafford and PLUS
loans); Repayment incentives: * 0.25% interest rate reduction
on PLUS loans for repaying electronically if serviced by a specific
servicer; * 3.3% credit or cash rebate on principal balance of Stafford
loans if loans are serviced by a specified servicer, borrower agrees to
have account information available at a valid e-mail account, and
initial 33 payments are made on time.
Lender: FFELP lender D; Origination fee: 3%; (Stafford and PLUS loans);
[Empty]; Repayment incentives: * 0.25 % interest rate reduction for
repaying electronically; * credit on origination fees if Stafford loans
are owned and serviced by lender minus $250 after the first 24
consecutive payments; * 2% interest rate savings after first 48 months
of on-time payments if loan is owned and serviced by lender.
Source: GAO analysis of borrower benefits under the Direct Loan Program
and selected FFELP lenders.
[A] PLUS loan origination fees are credited back to the borrower's
account.
Note: FFELP lenders include banks and guaranty agencies that also serve
as lenders.
[End of table]
Although FFELP lenders can offer reduced fees and other benefits to
borrowers, they are not obligated to do so every year. FFELP lenders'
decision to offer such benefits to borrowers may depend on a variety of
factors, such as lenders' cost for each loan dollar and lenders'
ability to link the benefits to borrower behavior. For example, lenders
with relatively low costs for each loan dollar might decide to pass
these savings on to borrowers. FFELP lenders might also choose to offer
such benefits only to select borrowers that exhibit certain repayment
behavior, such as those who make consecutive on-time repayments.
According to some lenders, the number of borrowers who receive benefits
because they satisfy such repayment requirements may be low.
In order to compete with FFELP lenders, Education reduced its
origination fees in 1999 for Direct Loan borrowers and, as a repayment
incentive, offered an interest rate reduction for borrowers who repay
electronically, but its authority to lower origination fees has been
challenged. When taking these actions, Education cited an HEA provision
that states Direct Loan Program borrowers are to receive the same terms
and conditions as FFELP borrowers. A coalition of FFELP lenders filed a
lawsuit challenging Education's regulatory authority to reduce
origination fees because HEA also includes a provision that sets the
Direct Loan Program origination fee at 4 percent.[Footnote 10] At this
time, the case is still pending. Given the differences in fees and
other benefits offered to students through FFELP, financial aid
officials at Direct Loan schools we visited expressed concern about the
continued viability of the Direct Loan Program in light of FFELP
lendersí ability to offer more attractive loan terms to borrowers. Some
financial aid officials we interviewed suggested that Education further
reduce or eliminate loan origination fees for Direct Loan borrowers.
Because loan origination fees offset federal loan program costs, any
changes to the amount of origination fees charged to borrowers may
affect federal costs.[Footnote 11]
In addition, more recently some schools have switched from the Direct
Loan Program to FFELP in order to become lenders to the schools'
graduate students--an option not available under the Direct Loan
Program. A large public 4-year Direct Loan school in the Midwest
recently entered into such an agreement with a coalition of FFELP
lenders for school year 2003-04 in which it would end its participation
in the Direct Loan Program and the school would serve as a lender to
its graduate students. Under the agreement, the school agreed that the
lender coalition would be the preferred lender for its
undergraduates.[Footnote 12] In return, students pay no origination
fees and receive other repayment incentives. Financial aid officials at
several Direct Loan schools with graduate students reported that FFELP
lenders have contacted them and their schools' executive officers about
the financial benefits available to a school that becomes a lender to
its graduate students. Although these schools have not switched from
the Direct Loan Program to FFELP, they reported that they are
considering the opportunity to earn money as school lenders.
FSA Does Not Collect Information on the Factors Influencing Schools'
Decision to Stop Participating:
FSA does not systematically collect information about the factors that
influence schools' decision to stop participating in the Direct Loan
Program, although this information could be used to identify needed
program improvements. Current regulations require schools to notify the
Secretary of Education of their intent to leave the Direct Loan
Program, and after 60 days, or at an earlier time if the Secretary
agrees, they can stop participating. However, FSA officials reported
that they typically learn schools have stopped participating when
schools stop disbursing funds through the Direct Loan Program. Although
schools may send letters detailing why they have stopped participating,
such letters may not always be sent to the same office within FSA. FSA
may also learn about factors that influence some schools' decision to
stop participating in the Direct Loan Program from schools that provide
such feedback via regularly scheduled conferences and focus groups
convened by FSA, which, among other things, provide forums for schools
to provide suggestions for improving the program. However, FSA
officials reported that they neither routinely nor systematically
collect information on the specific reasons why schools decide to stop
participating in the program. As a result, FSA may not be aware of
improvements that could be made to the program, which, in turn, might
help FSA achieve its goal of improving customer service.
Direct Loan Schools Are Satisfied with Steps Taken by FSA to Make the
Program User-Friendly but Identified Opportunities for FSA to Improve
These Services:
FSA has made the Direct Loan Program more user-friendly for schools and
students by (1) using Web sites to disseminate and collect information
and forms, (2) implementing a new information system to originate and
disburse Direct Loans, and (3) designating regional staff to assist
Direct Loan schools. Direct Loan schools indicated that FSAís Web sites
are effective in helping them administer the progra, but that
navigating among the numerous Web sites can be difficult. FSA officials
stated that they are aware of schools' concerns and are developing a
strategy to redesign its Web sites. Direct Loan schools were also
generally satisfied with FSA's information system for originating and
disbursing loans, but they have encountered difficulties with customer
service representatives who are unable to help them resolve their
problems. Finally, FSA regional staff have provided training and
technical assistance to Direct Loan schools, and about three-quarters
of Direct Loan schools were very or generally satisfied with the
quality of service provided by the regional staff.m:
Direct Loan Schools Reported That FSA's Web Sites Have Helped Them
Administer the Program, but Navigating among Multiple Sites Can Be
Challenging:
Many Direct Loan schools reported on our survey that FSA's Web sites
helped them administer the Direct Loan Program but that navigating
among FSA's Web sites was challenging. Schools reported that the Web
sites were effective in that they helped them perform various
administrative functions, such as determining student eligibility for
Direct Loans. Figure 5 provides information about key Web sites FSA
developed for schools, the purpose of the Web sites, and the extent to
which Direct Loan schools reported using the Web sites very often or
often.
Figure 5: Estimated Percentages of Direct Loan Schools' Usage of
Certain FSA Web Sites:
[See PDF for image]
Note: During FSA's transition to a new loan origination and
disbursement system, there were two Web sites that schools could use to
process and view loan information; these results are related to the Web
site for FSA's newly implemented system--the Common Origination and
Disbursement (COD).
[End of figure]
The various school types reported Web site usage that differed. For
example, a larger percentage of 4-year public and private schools
reported that they used the NSLDS Web site very often or often than did
less-than-2-year schools. At a large public 4-year school with a number
of satellite campuses worldwide, financial aid officials stated that
the ability to use FSA's Web sites to verify that students have met
certain program requirements has been useful because many of its
students are unable to visit the financial aid office in person. Almost
64 percent of less-than-2-year schools[Footnote 13] reported that a
corporate office or a third party servicer[Footnote 14] handled the
administrative processes for the Direct Loan Program, thus they did not
need to use the Web sites. Furthermore, some schools were not aware of
all the FSA Web sites that provided information about the Direct Loan
Program.
Additionally, Direct Loan schools reported that FSA Web sites provided
relevant and timely information, answered their questions, and were
easy to understand. For example, as shown in table 3, 91 percent of
Direct Loan schools reported that the NSLDS Web site provided relevant
information.
Table 3: Estimated Percentages of Direct Loan Schools' Opinions about
FSA Web Sites for Schools:
FSA Web sites for schools: NSLDS: https://www.nsldsfap.ed.gov/secure/
logon.asp; Estimated percentage of Direct Loan schools that reported
Web sites were excellent or good in: Providing relevant information:
91; Estimated percentage of Direct Loan schools that reported Web sites
were excellent or good in: Providing timely information: 81; Estimated
percentage of Direct Loan schools that reported Web sites were
excellent or good in: Answering questions: 70; Estimated percentage of
Direct Loan schools that reported Web sites were excellent or good in:
Using language that is easy to understand: 86.
FSA Web sites for schools: Common Origination and Disbursement: https:/
/cod.ed.gov/cod/LoginPage; Direct Loan Servicing Online: https://
schools.dssonline.com/index.asp; Estimated percentage of Direct Loan
schools that reported Web sites were excellent or good in: Providing
relevant information: 73; Estimated percentage of Direct Loan schools
that reported Web sites were excellent or good in: Providing timely
information: 69; Estimated percentage of Direct Loan schools that
reported Web sites were excellent or good in: Answering questions: 63;
Estimated percentage of Direct Loan schools that reported Web sites
were excellent or good in: Using language that is easy to understand:
72.
FSA Web sites for schools: Direct Loan home page: http://www.ed.gov/
DirectLoan; Estimated percentage of Direct Loan schools that reported
Web sites were excellent or good in: Providing relevant information:
80; Estimated percentage of Direct Loan schools that reported Web sites
were excellent or good in: Providing timely information: 78; Estimated
percentage of Direct Loan schools that reported Web sites were
excellent or good in: Answering questions: 68; Estimated percentage of
Direct Loan schools that reported Web sites were excellent or good in:
Using language that is easy to understand: 84.
Source: GAO Survey of Postsecondary School Experiences with the Direct
Loan Program.
Note: We asked schools to evaluate the COD and Direct Loan Servicing
Online Web sites together.
[End of table]
Despite overall satisfaction with FSA's Web sites, many Direct Loan
schools reported during our site visits and through our survey that it
is challenging to navigate among multiple Web sites because many of the
sites require separate passwords. Almost 90 percent of Direct Loan
schools believe developing a single password to access all FSA Web
sites would have a generally or very positive effect on the Direct Loan
Program. Some schools we visited stated that in order to keep track of
the many passwords and different expiration dates associated with the
passwords, they have stored passwords on personal electronic devices or
created easily retrievable documents that list all passwords--actions
that could compromise the security of financial information. FSA
officials told us that they are aware of the challenges facing schools
and are in the early stages of redesigning how they use Web sites to
present information and services. This strategy will attempt to address
schools' concerns about multiple passwords as well as enhance security
by increasing FSA's ability to verify schools' access to and use of
data. Further, FSA officials reported that they will continue to
collect feedback from schools that submit comments at its Web sites as
well as those that attend sessions at FSA-sponsored conferences and
focus groups held to discuss their strategy. FSA expects to implement
its new Web site strategy by 2006. During the course of our review, FSA
developed interim measures linking two of its Web sites--Direct Loan
Servicing's Online School site and the Common Origination and
Disbursement (COD) site--with one password in an effort to improve
customer service.
In addition to developing Web sites geared to financial aid
administrators, FSA has also developed Web sites that students can use
to apply for financial aid, fulfill requirements for receiving a Direct
Loan, and monitor their loans from disbursement through repayment. For
example, students can access a Web site that allows them to
electronically sign a master promissory note, a legally binding
agreement between students and Education that outlines the terms and
conditions of a Direct Loan. As shown in figure 6, almost half of
Direct Loan schools referred their students often or very often to the
Direct Loan Servicing Online Web site.
Figure 6: Estimated Percentages of Direct Loan Schools That Refer Their
Students to Certain FSA Web Sites:
[See PDF for image]
[End of figure]
Schools that prefer to have their students complete many tasks with
paper materials reported a number of reasons for doing so. Financial
aid officials at two Direct Loan schools we visited told us that they
use paper master promissory notes because they believed it is important
for students to sign an actual piece of paper to emphasize the
responsibility associated with borrowing. Another school said that
their students did not have access to computers at home and the school
had a limited number of computers on campus, making it necessary for
students to complete paper forms to meet program requirements.
Despite the fact that some schools still rely on paper records, some
Direct Loan Program materials were sometimes unavailable. Additionally,
some financial aid officials told us that many Direct Loan-specific
publications, such as brochures used to describe the program to
students, have either been discontinued, or are available only online,
or have not been updated in several years. Moreover, several Direct
Loan schools reported that critical documents, such as the master
promissory note, were not available in time for the 2002-03 school
year. FSA officials reported that there were delays in distributing
paper master promissory notes to schools because the process needed to
obtain departmental approval is lengthy. These materials were ready for
the 2003-04 school year.
Direct Loan Schools Were Generally Satisfied with FSA's New Information
System, which Delivers Loans Faster to Students:
Seventy-four percent of Direct Loan schools were generally or very
satisfied with FSA's newly implemented information system, known as
COD, which delivers loan funds quicker to students.[Footnote 15] FSA
officials indicated that COD is able to process loans quicker than the
former loan origination system, with loans made available to schools
and borrowers the same day. During our site visits, some Direct Loan
schools agreed that they received loan funds faster under the COD
system and liked COD features that allowed them to make changes to
student loan amounts instantaneously. For example, a 4-year public
school in California commented that, due to the state's budget crisis,
tuition and fees charged to students will increase in school year 2003-
04 and with COD they will be able to make changes to students' loan
amounts that will allow students to pay their tuition bills on time.
Although schools are satisfied with COD, many reported that customer
service representatives designated to handle their questions are
typically unable to resolve their problems. FSA has contracted with a
private sector organization--Affiliated Computer Systems, Inc.--to
hire and manage customer service representatives.[Footnote 16] This is
the third time that FSA has changed contractors to operate the customer
service centers. Several Direct Loan schools reported that the customer
service representatives are friendly and responsive but typically lack
the knowledge of Direct Loan Program requirements needed to resolve
schools' issues. For instance, financial aid officials reported
difficulties in trying to resolve differences between school records
and COD data on whether students had completed the master promissory
note. In addition, several Direct Loan schools reported particular
problems performing monthly reconciliation of their Direct Loan
accounts. For example, one school mistakenly disbursed loan funds for
the same student twice, and the customer service representatives were
unable to help them correct this mistake. A previous study of the
Direct Loan Program in 1998 also highlighted schools' frustration with
customer service representatives during past transitions between
contractors.[Footnote 17]
FSA officials acknowledged that they may have to rethink their approach
to providing customer service for their loan origination and
disbursement systems in order to minimize problems schools encounter
when switching contractors. Moreover, FSA officials also acknowledged
that they may have underestimated the skills needed by representatives
hired to answer questions about COD. FSA officials have taken
additional steps to address schools' concerns about the customer
service representatives, including temporarily reassigning FSA
regional staff to answer telephone inquiries and providing additional
training to COD customer service representatives. As outlined in its
COD contract, FSA has surveyed schools to gather information about
their experiences with COD and will take further action once it has
analyzed data obtained in its survey.
FSA's Regional Offices Offer Direct Loan Schools Training, Technical
Assistance, and Other Services:
FSA staff in regional Direct Loan School Relations Offices (DLSRO) have
provided training, technical assistance and software support, and
answered queries. For about 43 percent of Direct Loan schools, the
major reason they contacted FSA regional office staff in school year
2001-02 was to receive technical assistance specific to Direct Loans.
Further, 82 percent of Direct Loan schools were very or generally
satisfied with DLSRO, and about three-quarters were very or generally
satisfied with the quality of service provided by the DLSRO staff. For
example, several financial aid officials at schools we visited reported
that the training offered by DLSRO staff is helpful and assists them in
administering the program.
According to DLSRO officials, the level of assistance that they provide
to schools can vary. A DLSRO official reported that over time, as some
schools have become more familiar with administering the Direct Loan
Program, they have tended to need less intensive services. Other DLSRO
officials stated that some schools require intensive assistance to
establish processes and systems so that they can meet Direct Loan
reconciliation requirements. Some DLSRO staff told us that in recent
years budget constraints have limited their ability to conduct on-site
visits with Direct Loan schools. To provide services to schools, DLSRO
staff organized training sessions at a location convenient for several
schools to attend, thus maximizing the efficiency of the training.
Although some schools have reported that they are more comfortable
administering the program, they continue to use DLSRO staff for
services, such as training and help reconciling their accounts. A few
Direct Loan schools that we visited reported that they often attend
training held at the regional office because they are unable to attend
FSA's national conferences. Moreover, one school told us that during
the transition to COD, DLSRO staff have been able to address many
questions related to the program that the contractor was not equipped
to handle because the contractor was unfamiliar with the issues
involved.
In July 2003, FSA reorganized its staff in headquarters and in the
regional offices to improve its program delivery and customer service.
Under the reorganization, DLSRO has been renamed the School Relations
Office, and its mission has been broadened from assisting Direct Loan
schools to assisting all schools participating in Title IV programs.
FSA officials reported that this change was made because the number of
schools participating in the Direct Loan Program has decreased and they
believed that schools in the Direct Loan Program no longer need
individual attention. To address agency needs, several former DLSRO
staff have been temporarily reassigned to other offices, where they
perform such tasks as providing training to COD contractor staff,
developing FSA program software, or working in FSA headquarters
operations. FSA officials reported that changes under the
reorganization would not adversely affect customer service provided to
Direct Loan schools.
Conclusions:
The creation of the Direct Loan Program as an alternative to FFELP has
provided schools with a choice of programs to provide federal loans to
their students. Many financial aid officials believe that competition
between the two loan programs has improved service for schools and
borrowers. While some schools have recently begun to participate in the
Direct Loan Program, others that began participating several years ago
have recently stopped. Some schools have stopped participating because
some FFELP lenders offered better loan terms--including reduced
origination fees and the potential for reduced interest rates--to their
students. Not all FFELP lenders offer these better terms nor are they
obligated to do so. Further, lenders' willingness and ability to offer
these better terms can be contingent on a number of economic factors,
including lender costs and the extent of competition in the
marketplace. Whether some lenders will continue to provide better loan
terms for students in the future is unknown. Nonetheless, schools that
remain in the Direct Loan Program have expressed concerns about the
continued viability of the program in light of the better benefits
offered by some FFELP lenders and the lack of clarity over whether
Education may offer similar benefits. In addition to the availability
of better loan terms for students under FFELP, schools have also
stopped participating in the Direct Loan Program for other reasons.
Because FSA does not routinely collect information about why schools
stop participating in the program, it is missing an important
opportunity to learn whether it could make changes or improvements to
the Direct Loan Program that would better serve its customers.
Matters for Congressional Consideration:
In light of questions about provisions in the HEA concerning Direct
Loan Program origination fees, Congress should consider clarifying the
extent to which Education may regulate the loan origination fees
charged to borrowers during its reauthorization of the HEA.
Recommendation for Executive Action:
To improve knowledge of its Direct Loan customers and meet its goal of
increasing customer satisfaction, we recommend that FSA's Chief
Operating Officer develop a process for collecting information from
schools that decide to stop participating in the Direct Loan Program
about the factors that influenced this decision and use this
information to make improvements to the program.
Agency Comments:
We provided a draft of this report to Education for review and comment.
In written comments on our draft report, Education generally agreed
with our reported findings and recommendation. Regarding our finding
that Education does not collect information from schools that have
stopped participating in the program, Education agreed but suggested we
acknowledge that Education does provide forums for schools to provide
suggestions for improving the Direct Loan Program. In response, we
noted on page 17 that conferences and focus groups convened by FSA
provide such forums. In response to our recommendation, Education
stated that in the future, it would conduct exit interviews of schools
leaving the Direct Loan Program and use the information as appropriate.
Education also provided technical clarification, which we incorporated
where appropriate. Education's written comments appear in appendix II.
We are sending copies of this report to the Secretary of Education,
appropriate congressional committees, and other interested parties. In
addition, the report will be available at no charge on GAO's Web site
at http://www.gao.gov.
If you or your staff have any questions about this report, please call
me on (202) 512-8403 or Jeff Appel on (202) 512-9915. Other contacts
and staff acknowledgments are listed in appendix III.
Sincerely yours,
Cornelia M. Ashby:
Director, Education, Workforce, and Income Security Issues:
Signed by Cornelia M. Ashby:
[End of section]
Appendix I: Scope and Methodology:
To address our research objectives, we analyzed loan volume data and
identified schools that participate in the Direct Loan Program or
Federal Family Education Loan Program (FFELP), surveyed financial aid
directors at schools that have participated in the Direct Loan Program,
analyzed information on financial benefits provided by lenders,
conducted site visits to Direct Loan schools that were selected based
on a variety of criteria, and interviewed by telephone financial aid
officials at schools that either were participating in or had
participated in the Direct Loan Program.
Analyzing Loan Volume and Identifying Schools That Participated in the
Direct Loan Program and FFELP:
To identify loan volume and schools that have provided loans through
the Direct Loan Program or FFELP, we analyzed institutional-level data
on loans in three Department of Education databases--(1) the Committed
Loan Volume Report, which includes loan data reported by schools and
contractors; (2) the National Student Loan Data System (NSLDS), a
national repository of information about federal loans and grants
awarded to students; and (3) the Integrated Postsecondary Education
Data System (IPEDS), a collection of information obtained from surveys
of all institutions whose primary purpose is to provide postsecondary
education and provides institutional-level data for a variety of
characteristics. The Committed Loan Volume Report was used to determine
the loan volume and schools in the Direct Loan Program for school years
1994-95 to 2001-02. NSLDS was used to determine the loan volume and
schools in FFELP. IPEDS was used to identify school characteristics. To
assess the reliability of the Committed Loan Volume Report, NSLDS, and
IPEDS, we reviewed existing information about the data, including
documentation produced by officials at Education. Education officials
also reported performing data accuracy, validity, and integrity tests
to ensure data are reliable. We performed validity tests of key
variables. We determined that the Direct Loan, NSLDS, and IPEDS data
were sufficiently reliable for our purposes.
We used Education's Office of Postsecondary Education's identification
number (OPEID) to match data in each database and excluded all foreign
schools. We also excluded schools that did not provide loans through
either program in any year between school years 1994-95 and 2001-02.
After applying our criteria, we identified 4,155 schools that provided
subsidized Stafford, unsubsidized Stafford, or PLUS loans through the
Direct Loan Program or FFELP from school years 1994-95 through 2001-02.
We classified schools into three categories:
* FFELP school--2,935 schools provided loans through FFELP and never
participated in the Direct Loan Program.
* Direct Loan school--941 schools participated in the Direct Loan
Program in school year 2001-02. Of schools in this category, 366 also
provided loans through FFELP in 2001-02.
* Former Direct Loan school--279 schools participated in the Direct
Loan Program for at least one school year from 1994-95 to 2000-01 but
not in school year 2001-02. These schools provided loans through FFELP
in 2001-02.
Survey of Schools That Have Participated in the Direct Loan Program:
We administered a Web survey to financial aid officials at schools we
identified as participating in the Direct Loan Program from the 1994-95
to 2001-02 school years. These schools consisted of four school types:
4-year public, 4-year private, 2-year, and less-than-2-year schools. We
excluded a small number of schools from the population, and e-mailed
the survey to all remaining 1,196 schools in our study
population.[Footnote 18] We conducted the survey between June and
August of 2003.
Because most of our survey questions asked schools about their
experiences in the Direct Loan Program in 2001-02, we divided the study
population into two groups--Direct Loan and former Direct Loan schools.
We obtained responses from 57 percent of Direct Loan schools and 23
percent of the former Direct Loan schools. Because of the low response
rate of former Direct Loan schools, we do not produce estimates for
this group of schools in this report.[Footnote 19]
Table 4 summarizes the population size of and responses received from
Direct Loan schools, by school type.
Table 4: Response Rates of Schools That Participated in the Direct Loan
Program in 2001-02:
School type: 4-year public; Direct Loan school population: 210; Number
of Direct Loan schools that responded to survey: 141; Percentage of
schools responding: 67.1.
School type: 4-year private; Direct Loan school population: 240; Number
of Direct Loan schools that responded to survey: 133; Percentage of
schools responding: 55.4.
School type: 2-year; Direct Loan school population: 268; Number of
Direct Loan schools that responded to survey: 153; Percentage of
schools responding: 57.1.
School type: Less-than-2-year; Direct Loan school population: 217;
Number of Direct Loan schools that responded to survey: 110; Percentage
of schools responding: 50.7.
School type: Total; Direct Loan school population: 935; Number of
Direct Loan schools that responded to survey: 537; Percentage of
schools responding: 57.4.
Source: GAO Survey of Postsecondary School Experiences with the Direct
Loan Program:
[End of table]
Estimation:
We compared key characteristics of nonrespondents and respondents. We
performed an analysis to determine whether there were significant
differences between respondents and nonrespondents on several key
characteristics. Separately for respondents and nonrespondents, we
estimated the percentage of schools that participated in both the
Direct Loan Program and FFELP and the proportion of schools
participating in the Direct Loan Program for 6, 7, or 8 years. We
performed this analysis for all Direct Loan schools, and also
separately for each of our strata (school type). For most of the
comparisons, these characteristics were not significantly different
between the respondents and the nonrespondents. Additionally, we
estimated average loan volume and average enrollment for the
respondents and the nonrespondents. Although the results of this
estimate indicate that respondents have larger loan volume and
enrollments for some strata, survey estimates related to loan volume or
enrollment are not contained in this report.
Because our sample contained a large proportion of the total population
of schools, and because of the result of our comparison of respondent
and nonrespondent-based estimates, we chose to include the survey
results in our report and to project sample-based estimates for the
total population of schools in our study population.
All population estimates based on this survey are for the target
population defined as Direct Loan schools. Estimates of this target
population were computed using methods that are appropriate for a
stratified probability sample. Within each stratum, we formed estimates
by weighting the survey data by the ratio of the population size to the
sample size. This method of estimation assumes that the response for
this survey was equivalent to probability sampling within each stratum.
Sampling and Nonsampling Error:
As with all sample surveys, this survey is subject to both sampling and
nonsampling errors. The effects of sampling errors, due to the
selection of a sample from a larger population, can be expressed as
confidence intervals based on statistical theory. Sampling errors occur
because we use a sample to draw conclusions about a larger population.
As a result, the sample was only one of a large number of samples of
schools that might have been obtained from the population of all Direct
Loan schools. If a different sample had been taken, the results might
have been different. To recognize the possibility that other samples
might have yielded other results, we express our confidence in the
precision of our particular sample's results as a 95-percent confidence
interval. The 95-percent confidence interval is expected to include the
actual results for 95 percent of samples of this type. For percentage
estimates in this report, we are 95 percent confident that when
sampling error is considered, the results we obtained are within +/-6
percentage points of what we would have obtained if we had surveyed the
entire study population, unless otherwise noted. For example, we
estimate that 90 percent of the schools reported that streamlined loan
process was an extremely or very important factor in influencing the
decision to join the Direct Loan Program. The 95-percent confidence
interval for this estimate would be no wider than +/-6 percentage
points, or from 84 to 96 percent.
In addition to the reported sampling errors, the practical difficulties
of conducting any survey introduce other types of errors, commonly
referred to as nonsampling errors. For example, questions may be
misinterpreted, some people may be less likely than others to respond
to the survey, errors could be made in recording the questionnaire
responses, or the respondents' opinions may differ from those of
financial aid officials at schools that did not respond to our survey.
We took several steps to reduce these errors. Prior to fielding the
questionnaire, we pretested the data collection instrument with six
schools to ensure that respondents would understand the questions and
that answers could be provided. Because this was a Web survey, the
responses were directly entered by respondents and were not subject to
other data entry errors. Data edits and estimation programs were
independently verified to ensure that programming errors did not affect
our estimates. To reduce nonresponse, we sent two follow-up emails to
all schools that had not responded to the survey by our deadline.
Additionally, we conducted an intensive follow-up with a randomly
selected group of 100 nonrespondents that had participated in the
Direct Loan Program in 2001-02 and received responses from an
additional 35 schools that were included in our final survey results.
Analysis of Benefits Offered by FFELP Lenders:
In order to examine financial benefits available from different FFELP
lenders, we obtained information through the Web sites of the eight
FFEL lenders with the highest amount of loan originations in fiscal
year 2002--each made federal loans of more than a billion dollars--and
all 36 guaranty agencies. We also interviewed two FFELP lenders and an
organization that represents FFELP lenders.
Site Visits:
We conducted interviews with financial aid officials at 20 current
Direct Loan schools of various types that were located in the Boston,
New York City, San Francisco, and Washington, D.C., metropolitan areas.
We selected schools based on school type and loan volume. These schools
included 6 public 4-year schools, 6 private 4-year schools, 4 2-year
schools, 3 less-than-2-year schools, and 1 public university system
that includes 12 4-year and 5 2-year schools.[Footnote 20] At the time
of our visits, 13 of these schools participated only in the Direct Loan
Program and 7 participated in both the Direct Loan Program and FFELP.
See table 5.
Table 5: Characteristics of Schools Selected for Site Visits and
Interviews:
Name of school: Boston area, located in FSA Region I:
Name of school: Suffolk University; School type: 4-year private;
Student enrollment, fall 1998: 6,445; Direct Loan volume, 2001-02:
$15,791,907; FFELP volume, 2001-02: $27,789,571.
Name of school: Benjamin Franklin Institute of Technology; School type:
4-year public; Student enrollment, fall 1998: 279; Direct Loan volume,
2001-02: $1,166,773; FFELP volume, 2001-02: $0.
Name of school: Harvard University; School type: 4-year private;
Student enrollment, fall 1998: 24,373; Direct Loan volume, 2001-02:
$77,643,462; FFELP volume, 2001-02: $0.
Name of school: New England College of Optometry; School type: 4-year
private; Student enrollment, fall 1998: 422; Direct Loan volume, 2001-
02: $9,535,668; FFELP volume, 2001-02: $0.
Name of school: Porter and Chester Institute; School type: Less-than-2-
year; Student enrollment, fall 1998: 1,072; Direct Loan volume, 2001-
02: $5, 421,063; FFELP volume, 2001-02: $0.
Name of school: New York City, located in FSA Region II:
Name of school: City College of New York; School type: 4-year and 2-
year public; Student enrollment, fall 1998: 194,746 (total at 17
campuses); Direct Loan volume, 2001-02: $87,598,773 (total at 17
campuses); FFELP volume, 2001-02: $0.
Name of school: Cornell University Medical College; School type: 4-year
private; Student enrollment, fall 1998: 692; Direct Loan volume, 2001-
02: $6,966,706; FFELP volume, 2001-02: $200,931.
Name of school: Technical Career Institute; School type: 2-year
private; Student enrollment, fall 1998: 3,545; Direct Loan volume,
2001-02: $538,731; FFELP volume, 2001-02: $6,744,374.
Name of school: New York International Beauty School; School type:
Less-than-2-year; Student enrollment, fall 1998: 168; Direct Loan
volume, 2001-02: $528,310; FFELP volume, 2001-02: $25,282.
Name of school: DC Metro area, located in FSA Region III:
Name of school: Bowie State University; School type: 4-year public;
Student enrollment, fall 1998: 5,024; Direct Loan volume, 2001-02:
$14,789,515; FFELP volume, 2001-02: $0.
Name of school: University of Maryland, University College; School
type: 4-year public; Student enrollment, fall 1998: 14,142; Direct Loan
volume, 2001-02: $44,038,905; FFELP volume, 2001-02: $0.
Name of school: Johns Hopkins University; School type: 4-year private;
Student enrollment, fall 1998: 17,111; Direct Loan volume, 2001-02:
$37,382,682; FFELP volume, 2001-02: $4,702,746.
Name of school: Northern Virginia Community College; School type: 2-
year public; Student enrollment, fall 1998: 36,216; Direct Loan volume,
2001-02: $1,766,193; FFELP volume, 2001-02: $0.
Name of school: RETS Technical Training Center; School type: 2-year
private; Student enrollment, fall 1998: 476; Direct Loan volume, 2001-
02: $391,581; FFELP volume, 2001-02: $2,227,900.
Name of school: Sanz School; School type: Less-than-2-year; Student
enrollment, fall 1998: 611; Direct Loan volume, 2001-02: $1,895,126;
FFELP volume, 2001-02: $0.
Name of school: San Francisco area, located in FSA Region IX:
Name of school: San Francisco State University; School type: 4-year
public; Student enrollment, fall 1998: 27,446; Direct Loan volume,
2001-02: $57,413,020; FFELP volume, 2001-02: $3,817,165.
Name of school: Sonoma State University; School type: 4-year public;
Student enrollment, fall 1998: 7,003; Direct Loan volume, 2001-02:
$19,346,287; FFELP volume, 2001-02: $0.
Name of school: University of California, Berkeley; School type: 4-year
public; Student enrollment, fall 1998: 31,011; Direct Loan volume,
2001-02: $92,029,808; FFELP volume, 2001-02: $0.
Name of school: University of San Francisco; School type: 4-year
private; Student enrollment, fall 1998: 7,990; Direct Loan volume,
2001-02: $46,255,625; FFELP volume, 2001-02: $0.
Name of school: Napa Valley College; School type: 2-year public;
Student enrollment, fall 1998: 5,646; Direct Loan volume, 2001-02:
$348,260; FFELP volume, 2001-02: $0.
Source: GAO Analysis of Education data.
[End of table]
Telephone Interviews:
We also conducted telephone interviews with financial aid officials at
two Direct Loan schools--the University of Nebraska and the University
of Idaho--and financial aid officials at three former Direct Loan
schools--the University of Vermont, Michigan State University, and
Indiana University.
[End of section]
Appendix II: Comments from the Department of Education:
UNITED STATES DEPARTMENT OF EDUCATION:
Federal Student Aid Chief Operating Officer:
November 13, 2003:
Ms. Cornelia Ashby:
Director, Education, Workforce, and Income Security Issues General
Accounting Office Washington, D.C. 20548:
Dear Ms. Ashby:
Thank you for the opportunity to respond to your draft audit report
entitled, "Direct Student Loan Program -Management Actions Could
Enhance Customer Service" (GAO-04-107). I am responding on behalf of
the Department.
The William D. Ford Federal Direct Loan (Direct Loan) Program has
assisted millions of American students each year in attaining their
higher education goals. With the introduction of the Direct Loan
Program, benefits for borrowers, as well as customer service for
schools, improved in both the Direct Loan and Federal Family Education
Loan (FFEL) Programs.
The Department continuously seeks to improve delivery of services to
borrowers. For example, as noted in your report, the Department
implemented a new system, the Common Origination and Disbursement (COD)
system that originates and disburses Direct Loans to students faster,
but is also aimed at simplifying and improving the reconciliation
requirements of the program. We are pleased that you report, based on a
survey, that 72 percent of Direct Loan schools are generally satisfied
with COD. The Department will continue to find new ways to enhance the
user-friendliness of the new system.
While it is true that the Department has not collected information from
schools that have stopped participating in the Direct Loan Program, we
have supported a continuous program of soliciting information from
schools concerning program improvements. Each year, general sessions
are offered at our Electronic Access Conferences and at our Spring
Conference that invite schools to provide feedback on program
operations. In addition, focus groups are held with invited schools as
part of the annual system development process. Therefore, we suggest
that GAO acknowledge that the Department does provide a forum for
program improvement suggestions on a continual basis.
However, the Department concurs with your recommendation that FSA
systematically collect information from schools that could be used to
make improvements to the Direct Loan Program. In the future, the
Department will conduct exit interviews of schools that notify us when
they are
leaving the Direct Loan Program. As appropriate, we will incorporate
the results into requirements for the annual award year development
process.
Again, thank you for the opportunity to comment on this draft report.
We appreciate the professionalism of your staff as they worked on this
engagement. If you have any questions, please contact Ms. Kay Jacks at
(202) 377-4288.
Sincerely,
Theresa S. Shaw:
Signed by Theresa S. Shaw:
[End of section]
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Jeff Appel, Assistant Director (202) 512-9915:
Andrea Romich Sykes, Analyst-in-Charge (202) 512-9660:
Staff Acknowledgments:
In addition to those named above, the following people made significant
contributions to this report: Carla Craddock, Kathleen White, Margaret
Armen, Cynthia Decker, Luann Moy, Mimi Nguyen, Mark Ramage, Bonita
Vines, and Weili Shaw.
FOOTNOTES
[1] For loans disbursed on or after October 1, 1998, the government
pays 95 percent of the default costs plus certain administrative costs.
The percentage of default costs paid by the federal government
decreases if the guarantor's default claims are high compared with the
amount of loans in repayment.
[2] Because of the large proportion of the total population of schools
that responded to our survey and the result of our comparison of
respondent-and nonrespondent-based estimates, we chose to include the
survey results in our report and to project sample-based estimates for
the total population of schools in our study population. Percentage
estimates for Direct Loan schools are based on the "sample" and are
subject to sampling error. Unless otherwise noted, we are 95 percent
confident that the results we obtained are within +/-6 percentage
points of what we would have obtained if we had received responses from
the entire population. See appendix I for more details.
[3] Although FFELP lenders did not charge fees to borrowers, they still
paid the loan origination fees to the federal government.
[4] Subsidized Stafford loans are made to students who are enrolled at
least half-time and have demonstrated financial need, while
unsubsidized Stafford loans are made to any student enrolled at least
half-time, and PLUS loans are made to parents of undergraduate
students. Unsubsidized and PLUS loan borrowers must pay all loan
interest costs, whereas the federal government pays the interest cost
of subsidized loans while the student is in school.
[5] The monthly amount paid under the graduated plan and the criteria
for who qualifies under the extended plan vary between the Direct Loan
Program and FFELP.
[6] Schools can act as lenders generally to graduate students and with
some limitations to undergraduate students. HEA specifies that a school
can act as lender to its undergraduates as long as it does not lend to
more than 50 percent of its undergraduates and that it extends loans to
students who have previously received a loan from the school or have
been rejected by other lenders.
[7] Secondary market lenders include Sallie Mae, banks, and nonprofit
state agencies that purchase loans from originating lenders in order to
provide additional capital that originating lenders can then use to
make new loans.
[8] With the Secretary of Education's approval, schools may choose to
use a third-party servicer to administer the Direct Loan Program on
behalf of the school.
[9] Under the law, the maximum borrower rate for Stafford loans is
based on the 91-day Treasury-bill rate plus 1.7 percent while students
are in school or plus 2.3 percent if a student's loan is in repayment,
capped at 8.25 percent.
[10] Student Loan Finance et al. v Riley, Civ. A. No. 2660 (D.D.C.
2000). In response to a congressional request before the litigation was
filed, GAO issued an opinion finding that Education lacked authority to
reduce the 4 percent loan origination fee B-238717, Sept. 29, 1999.
[11] When Education lowered fees in 1999, Education officials reported
in its report Cost of the 1999 Reduction in Direct Loan Fees that the
fee reduction would increase the cost of the Direct Loan Program.
However they believed that the increase would be offset by the ability
to attract new borrowers to the Direct Loan Program who might otherwise
obtain loans from the more costly FFELP, whose lenders were offering
fee discounts to attract borrowers.
[12] Schools that participate in FFELP may designate one or more
lenders as a preferred lender from which students can borrow.
[13] The 95-percent confidence interval for this estimate is from 56 to
72 percent.
[14] A third party servicer is an individual, a state, or a private--
for-profit or nonprofit--organization that enters into a contract with
Title IV-eligible institutions to administer the school's Title IV
program.
[15] As part of its goal to integrate its systems, FSA has implemented
COD to combine two different information systems previously used to
originate and disburse Direct Loans and Pell Grants--federal grants
awarded based on students' financial need. All schools must be full
participants in COD by 2005-06.
[16] Another contractor, TSYS, is responsible for designing and
operating the COD system.
[17] Macro International, Inc., Direct Loan Program Administration:
1993-1998, (Washington, D.C. 1998).
[18] We did not include 24 schools in our survey because we could not
locate correct email addresses. Eighteen of the 24 schools no longer
participated in the program in 2001-02. The other 6 schools
participated in the program in 2001-02 but their omission does not
affect our findings.
[19] In some instances we report the number of former Direct Loan
schools responding to a question, but this should not be interpreted as
an estimate of the broader population.
[20] We visited a university official at the City University of New
York, because Direct Loan Program operations are centralized for its
campuses.
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