[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]




                               before the


                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION


                             JUNE 17, 1999


                           Serial No. 106-103


       Printed for the use of the Committee on Government Reform


63-517                     WASHINGTON : 2000

  Available via the World Wide Web: http://www.gpo.gov/congress/house



                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
    Carolina                         ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
JOHN T. DOOLITTLE, California            (Independent)

                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
           David A. Kass, Deputy Counsel and Parliamentarian
                      Carla J. Martin, Chief Clerk
                 Phil Schiliro, Minority Staff Director

   Subcommittee on Criminal Justice, Drug Policy, and Human Resources

                    JOHN L. MICA, Florida, Chairman
BOB BARR, Georgia                    PATSY T. MINK, Hawaii
MARK E. SOUDER, Indiana              ROD R. BLAGOJEVICH, Illinois
STEVEN C. LaTOURETTE, Ohio           JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
DOUG OSE, California

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
                Sharon Pinkerton, Deputy Staff Director
                Mason Alinger, Professional Staff Member
                         Andrew Greeley, Clerk
                    Cherri Branson, Minority Counsel

                            C O N T E N T S

Hearing held on June 17, 1999....................................     1
Statement of:
    Berthoud, John, president, National Taxpayers Union; Thomas 
      A. Butts, National Direct Student Loan Coalition; Fred J. 
      Galloway, former director, direct loan program evaluation, 
      Macro International, Inc.; and Steven A. McNamara, 
      Assistant Inspector General for Audit, Office of Inspector 
      General, Department of Education...........................    12
    Smith, Marshall S., Acting Deputy Secretary, Department of 
      Education; and Greg Woods, Chief Operating Officer, Office 
      of Student Financial Assistance Programs, Department of 
      Education..................................................   126
Letters, statements, et cetera, submitted for the record by:
    Berthoud, John, president, National Taxpayers Union, prepared 
      statement of...............................................    15
    Butts, Thomas A., National Direct Student Loan Coalition:
        Information concerning loan reconciliations..............   113
        Prepared statement of....................................    23
    Cummings, Hon. Elijah E., a Representative in Congress from 
      the State of Maryland, prepared statement of...............     9
    Galloway, Fred J., former director, direct loan program 
      evaluation, Macro International, Inc., prepared statement 
      of.........................................................    37
    Gilman, Hon. Benjamin A., a Representative in Congress from 
      the State of New York, prepared statement of...............    47
    Kucinich, Hon. Dennis J., a Representative in Congress from 
      the State of Ohio, prepared statement of...................   161
    McNamara, Steven A., Assistant Inspector General for Audit, 
      Office of Inspector General, Department of Education, 
      prepared statement of......................................    52
    Mica, Hon. John L., a Representative in Congress from the 
      State of Florida:
        Prepared statement of....................................     5
        U.S. Department of Education's Study of Cost Issues......    60
    Mink, Hon. Patsy T., a Representative in Congress from the 
      State of Hawaii, letter dated September 20, 1991...........   119
    Smith, Marshall S., Acting Deputy Secretary, Department of 
      Education, prepared statement of...........................   129
    Woods, Greg, Chief Operating Officer, Office of Student 
      Financial Assistance Programs, Department of Education, 
      prepared statement of......................................   141



                        THURSDAY, JUNE 17, 1999

                  House of Representatives,
Subcommittee on Criminal Justice, Drug Policy, and 
                                   Human Resources,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:10 a.m., in 
room 2154, Rayburn House Office Building, Hon. John L. Mica 
(chairman of the subcommittee) presiding.
    Present: Representatives Mica, Gilman, Souder, Ose, Mink, 
Cummings, Kucinich, and Tierney.
    Staff present: Sharon Pinkerton, deputy staff director; 
Steve Dilingham, special counsel; Andrew Greeley, clerk; Mason 
Alinger, professional staff member; Cherri Branson, minority 
counsel; and Jean Gosa, minority staff assistant.
    Mr. Mica. I'd like to call this meeting of the Subcommittee 
on Criminal Justice, Drug Policy, and Human Resources to order. 
We'll have other Members joining shortly, and with the consent 
of the minority, we're going to proceed because we have several 
full panels, and we don't want to keep our witnesses. We'll be 
able, I think, to proceed in good order as the Members arrive.
    I will read my opening statement, and then we'll submit 
others for the record, or, if the Members arrive, we will 
recognize them.
    This morning's hearing is entitled, The Department of 
Education's student loan programs, and it asks a question: Are 
Tax Dollars at Risk? Faced with staggering college costs, the 
American family is increasingly dependent on student aid to 
finance higher education. The cost of a 4-year public education 
has escalated to almost $12,000 annually, and private schools 
can cost almost twice as much, now averaging $21,000 a year. 
Today, more than ever, the Federal Government's role in this 
process must be examined to ensure that both the student and 
the taxpayer are being well served.
    As a subcommittee with oversight jurisdiction of the 
Department of Education, we have an important responsibility to 
see that the Office of Student Financial Assistance is 
operating with fiscal and managerial integrity. For almost 10 
successive years, the General Accounting Office has labeled the 
Education Department's student financial aid programs as, ``a 
high risk for fraud, waste, abuse, and mismanagement.'' The GAO 
tells us that the Department lacks the ability to provide basic 
information about whether a student is enrolled, even after a 
student loan is awarded and thousands of dollars in student aid 
have been given. In other words, many students who are not 
eligible could be, and often are, receiving funds.
    This kind of poor management not only hurts the taxpayer, 
but it ultimately takes away from funding from other eligible 
students. In an attempt to remedy some of these problems, the 
1998 Higher Education Act reauthorized a bipartisan agreement 
that included some much-needed reforms for managing our student 
aid programs. Congress created the first Federal sector 
performance-based organization [PBO], this was in the 1998 law, 
to accomplish some clear goals and try to make the operations 
of the student loan program more efficient. The goals outlined 
in that statute are clear, let me cite some of them: to improve 
service, reduce costs, integrate systems, and improve data 
accuracy and program integrity.
    We're here today to assess the PBO's progress to date. It's 
my understanding that we have some 1,200 plus people employed, 
and we're not sure how many contractors. We'd like to find out 
how many additional folks are involved in that process, in 
addition to full-time employees; how many contractors. We 
created these PBOs to initiate some of these changes, and 
today, we'll hear a little bit about what's taken place.
    By improving service, we mean we do not want a repeat 
performance of the 3-month shutdown of the loan consolidation 
program. Systems can be integrated and reliably enhanced by 
consolidating the existing 12 stovepipe systems into one system 
with accurate and immediately retrievable data. What progress 
has been made on this issue? I hope we can find answers to that 
question today.
    Now, I understand that the National Student Loan Data 
System [NSLDS], was created to improve the quality of student 
financial aid data and minimize fraud and abuse in these 
programs. However, according to a September 1998 GAO report, 
almost half of the schools are not using NSLDS's on-line 
functions. Is this data base working effectively? We also hope 
to find answers to that question.
    We'll hear today from the Inspector General's office that 
the administrative costs in the Department of Education's 
direct loan program are 31 percent higher than private sector 
costs. This is bad news for the taxpayers. I'm very concerned 
that spending for student loan administration has jumped from 
$137 million a year to $401 million a year from 1992 to 2000. 
This is a 193 percent increase despite the fact that the 
Department's award workload has only increased some 28 percent. 
This is even more bad news for the taxpayer.
    Qualified personnel should be in place to ensure that the 
programs are not subject to waste, fraud, and abuse. Since the 
Department has been repeatedly criticized for a lack of systems 
integration, are competent people in place to fix this problem? 
That's another question we hope to find an answer to today.
    In addition to examining the Student Financial Assistance 
Office's progress in achieving those goals, I have some other 
very specific concerns. It's absolutely astounding to me that 
over $109 million in Pell grant over-awards were made in 1996 
to students who fraudulently stated their income in order to be 
eligible for loans. The Higher Education Act of 1998 was 
supposed to fix this problem by authorizing the Department of 
Education to verify a student's income with the IRS. What has 
the Department done to implement this solution? Another 
question we hope to find an answer to today.
    As we delve into a recently released audit by the Inspector 
General's Office, even the most blase supporter of government 
bureaucracy has to be shocked by the fact that the Department 
has forgiven millions of dollars in loans to students on the 
basis of death or disability despite the fact that these 
students were neither dead nor disabled. In fact, in just one 
program that was examined, students went on to earn significant 
salaries after over $73 million in loans were forgiven for 
their supposed total and permanent disability. Some of the 
students, after having their loans forgiven, simply returned to 
school and received additional loans and grants.
    Perhaps the most astounding thing about this report is that 
over $3.8 million in loans was forgiven for students who 
claimed to be dead but were alive and well. In fact, some 
forgiven disabled and so-called deceased borrowers were 
discovered to be doing quite well and enjoying salaries of over 
$50,000 a year. But what's so unbelievable is that the 
Department does not even require presentation of a certified 
copy of a death certificate before a loan is forgiven, just a 
simple act like that.
    Once again, the taxpayer is fleeced by a loan program out 
of control. It really shocks, I think should shock, the 
conscience of every Member of Congress when we see this type of 
abuse within a system, particularly when there's so many of our 
students who are in need of financial assistance, and we have 
so many demands on education today.
    I'm also concerned about reports that there are a rapidly 
growing number of loans going to students who attend foreign 
universities and misuse the loan money. In 1998, $200 million 
in loans were awarded for tuition at foreign schools, and the 
Inspector General has been after the Department for several 
years to do something about these students who get their checks 
but never show up for school.
    I have a quote here from a former Assistant Inspector 
General in which she asserts that the Department had not moved 
aggressively to combat this fraud and that, in her opinion, 
``the Department could do more to deal with this problem if 
they just made it a priority,'' and that's taken from the 
Chronicle of Higher Education, January 15 of this year.
    In addition, while I understand that the default rate has 
come down slightly in recent years, I'm frankly troubled that 
there are still about $20 billion of loans that are in default. 
I'm also concerned that the default rate terminology and 
calculation can, in fact, be very misleading. It is defined 
generally by the Department to refer to the repayment of loans 
for a 2-year period, not whether the loan goes into actual 
default at a later date.
    Congress, for the first time in history, provided a 
performance-based organization. It now has some 1,200 employees 
and contract personnel. We provided the PBO with personnel and 
also gave them contracting flexibility to facilitate operation 
of the PBO's hoped-for achievement of important educational 
financing goals.
    Today, we'll ask many questions. We'll ask in particular 
how the Department has used those tools to do more, and 
efficiently, an effective management of our student loan 
programs. In a time when Congress is struggling to provide 
funds for students who are very much alive and classrooms and 
teachers who don't have adequate resources, it's absolutely 
outrageous that our Federal education bureaucracy would waste 
such an incredible amount of money.
    [The prepared statement of Hon. John L. Mica follows:]

    [GRAPHIC] [TIFF OMITTED] T3517.001
    [GRAPHIC] [TIFF OMITTED] T3517.002
    Mr. Mica. That concludes my opening statement. I'm pleased 
that we've been joined by our ranking member, the distinguished 
lady from Hawaii, Mrs. Mink, who is indeed one of the 
Congress's champions in education. I recognize her at this 
    Mrs. Mink. Thank you, Mr. Chairman. I apologize for being 
late and missing part of your opening statement.
    Mr. Mica. That's OK. I'll give you a copy right here.
    Mrs. Mink. Thank you.
    Creating opportunities for young people to go on to college 
is an enormous responsibility, not only of the Federal 
Government, but of the State and local agencies. It's been one 
of the very, very significant efforts on the part of the 
Federal Government to open up opportunities for higher 
education through loan programs which have enabled many, many 
students, not only the low-income students, to go on to 
college. It has afforded relief to many middle-income families 
as well, as the Congress moved to recognize that the Nation as 
a whole was dependent upon its ability to offer higher 
educational opportunities and that financial barriers should 
never be the reason for persons not being able to go on to 
higher education.
    I recognize the fact, Mr. Chairman, that there are always 
difficulties in the administration of any program and that 
there will be people who will attempt to sneak out the back 
door or indulge in fraud or misinformation. It is the 
responsibility of this subcommittee, I recognize, to 
investigate these matters, and for that reason I commend you 
for opening this hearing today. Perhaps it will lead us to ways 
in which we might tighten up the program, insist upon greater 
scrutiny and greater safeguards that the Federal funds invested 
in these programs are not wasted.
    I look forward to the testimony of all the witnesses that 
have been called for this subcommittee hearing and must 
apologize, Mr. Chairman, if I have to leave in midperiod of the 
hearing as we are in the juvenile justice floor debate, and the 
chairman of my Education and the Workforce Committee has a 
major amendment which is coming up shortly and I need to be on 
the floor. But I will come back as soon as I've had my 2 
minutes on the floor. Thank you very much.
    Mr. Mica. Thank you so much, Mrs. Mink.
    I recognize now the gentleman from Maryland Mr. Cummings.
    Mr. Cummings. Thank you very much, Mr. Chairman. I want to 
thank you, too, for holding this hearing. As one who has a 
daughter just about to enter college, I, too, am concerned 
about these loan programs as I am for the students at Johns 
Hopkins University in my district and many other colleges and, 
of course, the students in my district and students throughout 
the country.
    As one who came from a mother and father who never passed 
the first grade, but were able to send all of their children to 
college, their seven children, trying to find ways to make sure 
that students are able to have the opportunity to go to college 
is something that is very near and dear to my heart. I would 
associate my words with that of our ranking member, I think we 
have to look at these things very carefully.
    One of the things they taught us in criminal law my first 
year of law school, was that if there is a way to break the 
law, people will find it, and I think that you are always going 
to have some problems. The question is whether you deal with 
those problems effectively so that the program continues on to 
do the good that it does. I think that it is our responsibility 
to look very carefully at the program to make sure they are 
functioning properly. In the process of doing that, I think we 
must be careful to keep in mind that these programs are making 
it possible for people to have opportunity.
    The great educational scholar James Comber says that people 
can have will, they can have ability, but if they don't have 
opportunity, they're going nowhere fast. And so I hope that 
we'll look carefully at what we're doing here, that we will 
take appropriate actions where we deem them necessary, and we 
will strengthen the things that need to be strengthened and 
made better.
    And so I want to thank the witnesses too, for being here 
today, and as I have said to witnesses many times, it is your 
testimony that makes it possible for us to do what we do. You 
are the ones who are on the front line. You are the ones who 
are dealing with the issues. You're the ones who have to go 
under the scrutiny, and sometimes, I must tell you, after 
sitting on this committee for over 3 years, sometimes the 
scrutiny is one-sided, and so it is good to have you here so 
that you can give us both sides. I've sat in this committee 
where you would have thought somebody had committed an offense 
that was worth 10 death penalties, and by the time we'd 
finished, there was nothing there, and I've seen that many, 
many, many times. So I sit here with open ears and open heart. 
Thank you very much.
    Mr. Mica. I thank the gentleman.
    [The prepared statement of Hon. Elijah E. Cummings 




    Mr. Mica. No further opening statements at this time.
    We'll turn to our first panel. Our first panel consists of 
Dr. John Berthoud, president of the National Taxpayers Union; 
Mr. Thomas A. Butts, the National Direct Student Loan 
Coalition; Dr. Fred J. Galloway, former director of the direct 
loan program evaluation, currently with Macro International, 
Inc.; and Mr. Steven A. McNamara, Assistant Inspector General 
for Audit, Office of Inspector General, Department of 
    I think you're mostly new witnesses. This is an 
investigations oversight panel of Congress. We do swear in our 
witnesses, so if you'd please stand and raise your right hands.
    [Witnesses sworn.]
    Mr. Mica. The witnesses answered in the affirmative, and 
I'm pleased to welcome them.
    Let me just tell you the ground rules first. If you have a 
lengthy statement, we're going to run the little clock here. We 
will be glad to submit this statement or additional information 
or reports for the record. It will be made a part of the record 
upon request. We ask that you summarize your remarks in about 5 
minutes here, and we will begin.
    I first recognize Dr. John Berthoud, president of the 
National Taxpayers Union. Welcome, and you're recognized, sir.


    Mr. Berthoud. Mr. Chairman, distinguished members of the 
committee, thank you very much. It's an honor to appear before 
you. As you said, Mr. Chairman, I'm John Berthoud, president of 
the National Taxpayers Union. We are a nationwide grassroots 
lobbying organization of taxpayers with 300,000 members.
    I come before you today to state our views, and I will 
summarize my remarks as you requested, Mr. Chairman.
    To state our views on the Federal direct loan program, we 
believe that the evidence shows that this program has been 
plagued by intractable administrative problems and 
inefficiencies. These inefficiencies in turn cost taxpayers 
directly today, and in the future could lead to greater losses 
if there are significant defaults on the program's loans. The 
Federal direct loan program has been the fastest-growing 
Federal loan program, yet until recently there has been little 
attention to this program or the Department of Education's 
management practices. We are very grateful at the National 
Taxpayers Union that you are holding this hearing today to shed 
some light on some of the difficulties.
    One of the greatest problems for this program has been 
slipshod administration by the Department of Education. Mr. 
Chairman, you touched on some of the problems. I'll repeat a 
few others.
    In a March 1999 study, the Inspector General of the 
Department of Education found inefficiencies in both the FDLP 
and the Federal family education loan program. Regarding the 
FDLP, the Inspector General wrote, ``To approximate the effect 
of these inefficiencies, we compared our estimates to the 
Department's cost to manage the FDLP, $17 per loan, to the 
average cost that we estimated, based on U.S. Treasury 
research, the large private lenders would have incurred to 
manage the FDLP, $13 per loan. A significant portion of the $4 
difference may be due to inefficiencies; however, some of the 
difference may be due to other factors.'' As you said, I 
believe, Mr. Chairman, this is indeed bad news for taxpayers.
    Beyond what the Inspector General found, there have been 
other troubling indications of waste. Since 1992, while student 
aid awards were up 28 percent, administrative spending is up 
about 200 percent, as your chart over here demonstrates. Two 
years ago, taxpayers were forced to pay $40 million in 
penalties because of the Department of Education's actions 
related to the FDLP. I think, as you indicated, the Department 
had to shut down the loan consolidation program from August 
1997 to December 1997 because it couldn't keep up with the 
backlog of applications.
    However, these were not the first warning signs for this 
program. An earlier report by the Inspector General of the 
Department of Education found other problems. They found 
problems and weaknesses in other areas, including student 
status reporting, electronic data processing controls, loan 
record accuracy, timeliness of reporting, cash management 
reconciliation, written policies and procedures, and quality 
assurance systems. The record of the Department of Education in 
running this program is clearly not one in which the 
administrators or taxpayers can take pride.
    The question arises as to why we have these problems, and I 
know on the second panel you will hear from the Department of 
Education. They may assure you that if there have been 
problems, they will get better. We are not so confident of 
that. I think the problems, from a structural point of view, 
come from the fact that we are asking a bureaucracy to be 
something it is not, which is a bank. NTU believes that where 
the private sector can better fulfill a mission desired by the 
Congress and the President, it should be allowed to do so.
    In my written testimony is discussion of the benefits of 
using the private sector in all facets of public policy. I will 
note that strong use of the private sector is a central 
component of the reinventing government concept that Vice 
President Al Gore often touts. Here, I will only note that 
beyond greater efficiencies through heavy use of the private 
sector, there are lower risks to taxpayers. There's also 
greater satisfaction among end users of the customers of 
government, as was demonstrated in the Macro International 
    Inefficiencies in the FDLP program lead to taxpayer costs 
and risks. The size of the program puts the extent of this risk 
in perspective. The FDLP is more than five times as large as 
the next biggest Federal direct loan program. Through last year 
it had issued more than $30 billion in loans, which is about 
one-third of all outstanding Federal loans. By 2004, just 5 
years from now, it's projected the program will have issued 
more than $100 billion in student loans. Even if this program 
were small, there is no excuse for inefficiency, but the 
enormous size of the program magnifies the cost.
    In conclusion, Mr. Chairman, it is not surprising that the 
Department of Education has not done well with this program. 
NTU believes education policy is best set by those closest to 
students and most concerned with results. To maximize 
efficiency and service delivery, program implementation should 
be turned over to the private sector wherever feasible.
    While many are clamoring for yet more education spending on 
the K through 12 levels and higher, we see, as representatives 
of taxpayers, a huge run-up in education costs in recent years. 
In my testimony, you will see both numbers looking at K through 
12 spending and overall Federal education spending. I think our 
message to you today, which is why these hearings are so 
important, is despite a lot of calls out there for yet more 
dollars to go to our education systems, the facts are clear 
that we have invested heavily in recent years in education. The 
time has come to not spend more, but to spend wiser. In light 
of this huge run-up, the National Taxpayers Union adamantly 
rejects the need for more dollars for education. Again, what we 
need is wiser spending. One small step in that direction would 
be rolling back the Department of Education's role in direct 
loans. As is often the case, much of what the government is 
doing currently could be handled more efficiently and 
effectively through the private sector. Thank you.
    Mr. Mica. Thank you for your testimony. We'll withhold 
questions until we finish the panel.
    [The prepared statement of Mr. Berthoud follows:]

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    Mr. Mica. Our next witness is Mr. Thomas A. Butts, with the 
National Direct Student Loan Coalition. Welcome, and you're 
    Mr. Butts. Thank you, Mr. Chairman. I am Thomas A. Butts, 
associate vice president for government relations at the 
University of Michigan. I was, at one time, the director of 
student financial aid at Michigan and have served as the Deputy 
Assistant Secretary in the U.S. Department of Education. I am 
pleased today to have the opportunity to appear before you on 
behalf of the National Direct Student Loan Coalition.
    The Coalition is composed of institutions participating in 
the Federal direct student loan program. Its purpose is to 
assure the direct loan program accomplishes its goals and 
mission of providing outstanding service and accountability to 
students, institutions, and taxpayers. The chair of the 
Coalition executive committee is Marian Smithson, director of 
financial aid at Southern Illinois University.
    The direct loan program was first authorized as a 
demonstration program as part of the 1992 reauthorization of 
the Higher Education Act and signed into law by President Bush. 
Recognizing the lower cost to the taxpayers and potential 
improved service to students and institutions, the direct loan 
program was expanded in 1993. Today, institutions have the 
choice of participating in either the government-guaranteed 
Federal family education loan or direct loan programs. 
Presently, more than 1,200 institutions participate in the 
direct loan program and originate about $11 billion per year in 
new loans to about 1.9 million students.
    The University of Michigan was among the first 105 
institutions to participate in direct lending. We originate 
about $130 million in direct loans each year and have had a 
very successful experience with the program. It has helped us 
streamline our student aid operations and deliver loans to our 
students in a timely, cost-effective manner. Like other direct 
loan institutions, we have been able to fully integrate the 
loan process with all of our financial aid and business 
processes. While there have been bumps along the way, as anyone 
experienced in large system change projects would expect, the 
Department of Education has really done a wonderful job in 
meeting its responsibilities to us and to our students. I 
believe the Michigan experience is typical, as demonstrated by 
the loyalty direct loan schools have shown to the program and 
its mission.
    Direct loan institutions are also pleased by the fact that 
the competition that we introduced to the FFEL program has 
resulted in improved service to our colleagues who have chosen 
to say in FFEL. Although most dissatisfied institutions left 
FFEL for direct lending, it is good to see that satisfaction of 
those who remained has improved.
    One of the reasons those involved in direct lending thought 
the program would be a success is that it permitted government 
to leverage the best of private market principles. Capital for 
the program is obtained essentially through the auction of 
government securities in the private capital markets, and the 
program is administered through competitive contracts with the 
private sector. This stands in stark contrast with FFEL, which 
essentially is a corporate welfare program masquerading as free 
enterprise. I had to add that in light of the previous 
testimony. I'm sure the Department will be providing us with 
cost comparisons, which, when considering both administrative 
and subsidy costs, will show that direct lending is a good deal 
for taxpayers.
    While the direct loan program is only completing the 5th 
year of operation, it captured one-third of the student loan 
market in its first 3 years. Some express concern that it seems 
to be on hold at that level. However, any private company that 
introduced a new product and went from zero to one-third of 
market share in 3 years would be the darling of Wall Street. 
The last couple of years have given the Department and the 
institutions the opportunity to adjust to rapid expansion. 
Under the new performance-based organization, we are expecting 
substantial improvements in all aspects of program operations, 
including cost.
    We believe that the PBO authorized by the Department and 
being implemented will do much to improve service to direct 
loan institutions and students. Indeed, it should better the 
operation of all of the student financial aid programs. In my 
testimony, I further talk about some of the implementing 
activities of the performance-based organization. I think it is 
well on its way, as we'll hear, I presume, from the Department 
shortly, about what it is about.
    We are also concerned that students receive equal access to 
benefits provided by the taxpayers and that all students in 
both programs be given similar terms and conditions on their 
loans. That is, their interest rates, fees, and so forth should 
be the same. To the extent that the Congress has chosen, 
through a system of mandatory payments to the lenders in the 
FFEL program, to evidently give more than is necessary to 
provide a reasonable profit and cover operating expenses in 
order for them to determine who should get taxpayer benefits, 
we believe the same should obtain in the direct loan program. 
The direct loan program for every $100 lent is $7 cheaper than 
FFEL when considering all of the subsidy costs and the 
administrative costs of both programs.
    Mr. Chairman, thank you. I'd be happy to answer any 
    Mr. Mica. Thank you. We will withhold questions until we've 
heard from everyone.
    [The prepared statement of Mr. Butts follows:]

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    Mr. Mica. We will now hear from Dr. Fred J. Galloway, 
former director of the direct loan program evaluation, with 
Macro International. You're recognized, sir. Welcome.
    Mr. Galloway. Thank you, Mr. Chairman. My name is Fred 
Galloway, and I appreciate the opportunity to appear before you 
today to share with you the results of the 5-year evaluation of 
the Federal direct loan program that I directed while at Macro 
    In my remarks today, I'll be touching on three topics of 
interest to the subcommittee: The structure of our evaluation, 
the research questions that drove the evaluation, and some of 
the results from the evaluation. I'll begin with the structure 
of the evaluation and try and limit my rather lengthy remarks 
between to 5 and 6 minutes.
    The evaluation itself was a 5-year, $6.7 million project 
funded by the Department of Education. Its stated purpose was 
to evaluate the implementation and effectiveness of the direct 
loan program. The project began on October 1, 1993, and was 
scheduled to end on September 30, 1998, although final 
revisions to reports continue through the end of this year.
    In the almost 3 years I spent running the evaluation, I can 
assure you that all of our work was done in a completely 
unbiased manner, and in no way did the Department of Education 
ever force us to change or manipulate any of our findings. 
However, as you will see in a moment, they did cancel part of 
our contract during the 4th year of the evaluation.
    Now, we had four research questions that drove the 
evaluation: What do institutions think about direct lending; 
what do borrowers think about direct lending; how well has the 
Department of Education managed and administered the direct 
loan program; and what are the Federal costs of the direct loan 
program? I would like to spend approximately 1 minute on our 
answers to each of those questions to provide some context for 
you to help understand the program's successes and failures.
    We asked what institutions think about direct lending. We 
conducted four annual surveys of over 3,000 direct loan and 
FFEL institutions. We started in academic year 1994-1995 and 
went through 1995-1996, 1996-1997, and concluded with academic 
year 1997-1998. We used a mail survey methodology with the 
option of completing the survey over the Internet, and our 
response rates ranged from 75 percent in 1995-1996 to 86 
percent in 1997-1998, most importantly with no evidence of 
nonresponse bias.
    We had two major findings from our four institutional 
surveys. First, we found that all schools, direct loan and FFEL 
schools, were increasingly satisfied with their respective loan 
programs. In fact, 81 percent in our last survey expressed 
their satisfaction. This is up from 68 percent in academic year 
1994-1995, suggesting that, something I believe Mr. Butts said 
before, the competition between the two programs has seemed to 
improve both programs.
    Our second finding over the last 4 years, institutional 
satisfaction with the direct loan program had fallen for 3 
years before rebounding last year in academic year 1997-1998. 
Satisfaction with the FFEL program rose through all 4 years. In 
fact, during the first 2 years of our surveys, we found direct 
loan schools were significantly more satisfied than were FFEL 
schools. In the last 2 years of our surveys, we found just the 
opposite, that FFEL schools were more satisfied than direct 
loan schools.
    Now, we also had two minor findings from our institutional 
survey I'd like to briefly share with you. In terms of 
institutional satisfaction with the Department of Education and 
other service providers, in all four of our surveys, we found 
that direct loan schools were more satisfied with the services 
provided by the Department than were FFEL schools. Not 
surprisingly, FFEL schools were significantly more satisfied 
with the materials and training provided by lenders and 
guarantors than that provided by the Department of Education.
    Our last finding, which is quite interesting among 
institutions actually participating in both programs, we found 
those institutions trying to do both were less satisfied with 
the direct loan program than all the institutions participating 
fully in the direct loan program, and they were less satisfied 
with the FFEL program than institutions participating fully in 
the FFEL program. For those schools trying to do both, it was a 
rough road to hoe.
    Now, our second research question, what do borrowers think 
about direct lending? In this case, we conducted three borrower 
surveys, between 2,500 and 5,000 direct loan and FFEL 
borrowers. These were telephone surveys using computer-assisted 
telephone interviewing techniques. Our response rates ranged 
between 64 percent for our survey of borrowers in repayment to 
77 percent for our last, our 1996-1997 survey. Again, there was 
no evidence of nonresponse bias.
    Two major findings: Borrowers were extremely satisfied with 
their respective loan programs; 94 percent of students and 91 
percent of parents expressed satisfaction during our last 
survey, suggesting that borrowers in both programs seemed quite 
satisfied with the loan programs.
    We also found in all of our surveys that when we asked 
students and parents about specific aspects of the loan 
programs, they were also very satisfied. We found no 
significant differences, however, between direct loan and FFEL 
borrowers. Taken together, these findings also suggest the 
competition between the loan programs has improved both 
    We also found two other things of interest. When we talked 
to borrowers in repayment, over 90 percent of them were 
satisfied with their contacts with the Department of Education 
and other service providers, so it seems things are working 
quite well here. Finally, and perhaps most interestingly, we 
found borrowers indicated a relatively low awareness of the 
terms and conditions of their loans. For example, only 15 
percent of students and 19 percent of parents were able to 
recall or estimate the amount of their recent loan within 1 
percent. Almost 6 out of every 10 students and almost half of 
all parent borrowers did not even know their loan amount within 
50 percent of the actual amount. It's quite shocking. It turns 
out, what's even worse is borrowers have become less 
knowledgeable between 1994-1995 and 1996-1997. Fortunately, 
borrowers in repayment do seem to know a little bit more about 
    I would like to turn to our third research question, which 
is how well has the Department of Education administered and 
managed the program? To answer this question, we used our 
survey results together with between 40 and 50 interviews a 
year with individuals involved in the management, 
administration and oversight of the direct loan program to help 
shape our reports. Although we produced several reports, I'd 
like to concentrate on the structure content of our last and 
most retrospective report, direct loan program administration 
1993 to 1998. However, rather than discuss the successes and 
failures that occurred, as documented in our report, I'd like 
to focus on the structure of the report, which the subcommittee 
may find useful helping to understand the context surrounding 
the Department's management and administration of the program.
    We prepared this report in the spring of 1998. It was 
written largely for the new Chief Operating Officer, Greg 
Woods, although we didn't know who it was going to be at the 
time coming in to run the congressionally mandated performance-
based organization. Our goal in producing the report was to 
provide a contextual understanding for some of the major events 
that occurred during the history of the program so the new 
chief operating officer could hit the ground running.
    Specifically, we developed a framework that looked at three 
things. We looked at the effect of external or exogenous 
factors on departmental decisionmaking. We looked at operating 
constraints common to all Federal agencies, and finally, we 
looked at problem areas unique to the Department.
    In developing this context, the two factors that the 
Department must take as given to their daily operations is the 
amount of money they have to operate the program and the level 
of political scrutiny that the program receives. Although to 
some extent, all Federal programs operated under these 
constraints, time and time again we were told by individuals in 
the Department that not having as much money as they needed to 
run the program, coupled with the increased level of political 
scrutiny that resulted from the 1994 congressional elections, 
forced many direct loan decisionmakers into adopting a risk-
adverse posture when making key decisions.
    Now, in addition to these outside factors, we looked at two 
factors prominent in most Federal agencies that the Department 
also has to grapple with: contracting issues and personnel 
issues. It's discussed in a number of the reports by the 
Inspector General and the General Accounting Office. 
Contractual oversight issues coupled with structural weaknesses 
in the technical skills of many employees make running a 
technologically sophisticated program like direct lending a 
tremendously challenging task.
    Finally, we looked at several problem areas unique to the 
Department. These included such issues as organizational 
structure, systems problems and accountability, all of which 
affect the context that surrounds the management and 
administration of the program.
    In our report, we used this contextual framework to help 
explain some of the major events in the history of the direct 
loan program, like the transition of loan origination from 
Utica to the Montgomery, the decision to move to multiple 
services that was subsequently reversed, and the difficulties 
associated with the consolidation process that occurred in the 
latter part of 1997.
    We also looked at a host of smaller issues, and in our 
report we provide the historical perspective and discuss how 
the departmental decisionmaking was influenced by the context 
that the program operates within. If our report could be summed 
up in only one phrase, it might be that of a long-time observer 
of the Department who commented that the program was run better 
than we had thought, but not as well as was needed.
    Now, our last research question, which will take less than 
a minute to discuss, because we didn't complete it, was what 
were the Federal costs of the direct loan program? In this we 
enlisted the help of Coopers & Lybrand to help us with some of 
the accounting information we obtained from the Department, and 
Economic Systems, Inc., to build a microsimulation model for 
us. Together our firms were engaged in the tasks of calculating 
the actual cost to the Federal Government of running the two 
loan programs, which involved gathering such information as the 
administrative costs from the general ledger accounts of the 
Department's primary accounting system. We also looked at 
invoices and analysis of the major Office of SFA program 
systems contracts and loan data from the National Student Loan 
Data System.
    During the summer of 1997, we were hard at work estimating 
the Federal cost of the loan programs when our work was stopped 
by the Department of Education. We were told to turn over all 
our work documents and provide a summary of our work to date, 
which we did on August 15, 1997. The modification to our 
contract became official on September 19, 1997, and the 
Department reduced our contract amount by slightly more than 
300,000 as a result of their cancellation of the cost 
    Within less than a month, we had signed a $20,000 contract 
with the Office of Inspector General to provide both materials 
and training necessary for OIG staff to prepare our report 
comparing the cost of the direct loan and FFEL programs. We 
completed our approximately 160 hours of training by the end of 
January 1998 and closed the books on our contract with the OIG 
at that time. I'd be happy to answer questions after the final 
    Mr. Mica. We'll take the questions not in fast forward when 
we get back to you.
    [The prepared statement of Mr. Galloway follows:]

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    Mr. Mica. I'm going to interrupt before we get to you, Mr. 
McNamara, because Mr. Gilman has joined us and may have to 
leave for another hearing.
    Mr. Gilman, I'd like to recognize you for your statement.
    Mr. Gilman. Thank you, Mr. Chairman. I'll be very brief. I 
want to commend you, Chairman Mica, for conducting this 
hearing, and when we see a deficit of $11 billion at the end of 
this year, and possibly by the year 2004 going to $100 billion, 
it certainly warrants a very thorough review of this whole 
process and possibly moving it to the private sector. I want to 
commend the panelists for being here to give us the benefit of 
their thinking, and I want you to know that many of us are very 
much concerned about this kind of a deficit at a time of our 
budgetary constraints.
    So I would like to ask that my opening remarks be made part 
of the record. I thank you for allowing me to.
    Mr. Mica. Without objection, so ordered.
    [The prepared statement of Hon. Benjamin A. Gilman 




    Mr. Mica. I appreciate your patience, Mr. McNamara, you are 
our last witness in this panel. Steven A. McNamara, who is the 
Assistant Inspector General for Audit, Office of Inspector 
General, the Department of Education. Welcome, sir. You're 
    Mr. McNamara. Good morning, Mr. Chairman and members of the 
subcommittee. Thank you for the opportunity to discuss issues 
and costs affecting the Federal loan programs. My name is 
Steven McNamara, and I am the Assistant Inspector General for 
Audit at the Department of Education, Office of Inspector 
General. Today, I am representing the Office of Inspector 
General because our new Inspector General, Lorraine Lewis, was 
just sworn in on Monday of this week. She regrets not being 
here today to provide our testimony, but she has not yet had 
sufficient time to become familiar with the details of our 
report entitled, Study of Cost Issues, Federal family education 
loan program and Federal direct loan program, which is the 
focus of my testimony today.
    Mr. Chairman, with your permission, I would like to provide 
a brief oral summary of my statement and submit my complete 
statement for the record.
    Mr. Mica. Without objection, the entire statement will be 
made part of the record.
    Mr. McNamara. Thank you, Mr. Chairman.
    Before discussing what the study did say, let me put to 
rest some misconceptions about what we didn't say. We did not 
conclude that one program is inherently cheaper than the other. 
We did not conclude that eliminating the direct loan program 
would save the government money. We did not state that the 
inefficiencies affect only one of the programs. And finally, we 
did not state that private lenders making student loans are 
more efficient than the government contractors serving the 
direct loan program.
    Let me say just a little bit about how we did our study, 
which was not an audit of either program. We obtained cost 
information for both programs as reported in the Department's 
published financial statements for fiscal years 1996 and 1997. 
Consistent with the Credit Reform Act, we segregated costs into 
two primary categories, subsidy costs and administrative costs, 
and we addressed them separately in our study. Subsidy costs 
include interest expense, loan origination fees, default costs, 
and other fees, and they constitute by far the majority of the 
direct loan and FFELP costs. The Department has limited control 
over subsidy costs because the economy and Congress exert the 
greatest influence on these costs.
    Administrative costs are those that the Department incurs 
in managing both the FFELP and the direct loan program, and 
they include such costs as contracting, personnel, travel, and 
others. The Department can largely control these administrative 
costs through effective management. Because the Department 
lacks a cost accounting system, it does not allocate 
administrative costs to the various financial aid programs. 
Consequently, we allocated administrative costs to the 
particular loan program in light of the activities and services 
actually performed.
    Our study reached two principle conclusions: No. 1, in any 
given year, either the direct loan program or the FFELP program 
total cost may be greater, given the effect of prevailing 
economic conditions on subsidy cost. Since costs may be higher 
or lower at any one point in time, the total cost figure for 
any one year does not definitively answer the question of 
whether FFELP or direct loans are more expensive over a longer 
period of time.
    Second, we concluded that inefficiencies likely affect the 
Department's administrative costs for both loan programs. We 
base this conclusion on cost calculations that we made in this 
study and reviews that we had done in previous audits. For the 
direct loan program, we estimated the Department's cost to 
administer the loan portfolio to be $17 per loan. We compared 
our estimate of the Department's cost to the benchmark average 
cost of $13 that we derived based on a Treasury study of 
servicing costs of large lenders. We believe that a significant 
part of the $4 difference may be due to inefficiencies. These 
inefficiencies can largely be controlled by improved access to 
reliable information, increased technical and contract 
management expertise, and compatible automated data processing 
systems. We do recognize, however, that some of the differences 
are due to such uncontrollable factors as Federal procurement 
policies and personnel rules. We were unable in our study to 
estimate what portion of the FFELP administrative costs result 
from inefficiencies. This was the case because we didn't have 
any comparable private sector entity to compare the 
Department's FFELP administrative costs to.
    I do want to be perfectly clear on one essential point. We 
are not taking the position that either program over an 
extended period of time is cheaper than the other. The intent 
of the study was to serve as a beginning with the expectation 
that the Department would refine our cost estimates as it 
strives to improve the management of both loan programs. We 
suggested four actions the Department could take to improve the 
administration of the loan programs: No. 1, institute an 
activity-based cost accounting system; two, track employees' 
time to the programs that they work on; three, develop models 
to predict borrower behavior; and four, take actions to address 
possible reasons for cost inefficiencies which we cited in the 
    We are encouraged that the Department has begun efforts to 
develop a managerial cost accounting system, and the OIG is 
working with them as they go forward. Further, the PBO has 
initiated several actions to address areas where we have found 
inefficiencies in our past audits.
    Mr. Chairman, this concludes my statement, and I would be 
happy to respond to any questions on this issue or other work 
    Mr. Mica. Thank you, Mr. McNamara.
    [The prepared statement of Mr. McNamara follows:]

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    Mr. Mica. I'll start out real quickly. Mr. McNamara, this 
is the study that was produced. It says, Study of Cost Issues, 
Federal family education loan program.
    [The information referred to follows:]

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    Mr. Mica. On page 17 it says, ``the 2-year average of the 
Department's FDLP administrative cost is $24 per loan. Of the 
$24 total, $7 is used to perform oversight and default 
functions, while the remaining $17 represents FDLP management 
costs. To assess the reasonableness of the FDLP management 
costs, we compared the Department's cost to manage the FDLP, 
$17 per loan, to the average cost that we estimated the large 
lenders would have incurred to manage the FDL program, $13 per 
loan,'' and you refer to a table and an appendix.
    The report goes on to say, ``Given the similarities of the 
two programs and results of the audits we've reviewed''--and 
another appendix--``we believe a significant portion of the $4 
difference may be due to inefficiencies.''
    Now, I'm not a rocket scientist. I didn't do extremely well 
in math, but the administrative costs appear to be 31 percent 
higher for the government program; is that correct?
    Mr. McNamara. Yes, Mr. Chairman, the difference between the 
$17 and the $13.
    Mr. Mica. Now, what's gotten a lot of publicity isn't 
something that we've uncovered here, but rather what we've 
watched on television. Some of it is probably sensational, but 
some of the reports are that we have $73 million gone astray 
for forgiven disability payments and $3.8 million forgiven 
payments for students that really didn't die. Can you explain 
what's going on there?
    Mr. McNamara. Yes, Mr. Chairman.
    Mr. Mica. Are those inaccurate figures?
    Mr. McNamara. Yes, Mr. Chairman.
    Mr. Mica. Tell us what the figures are.
    Mr. McNamara. The figures are pretty much as you described. 
What we found in doing an audit----
    Mr. Mica. The figures are as I described: $73 million 
forgiven for folks who weren't disabled, $3.8 million for 
students that weren't dead.
    Mr. McNamara. Let me check that very quickly.
    Mr. Mica. Am I in the range?
    Mr. McNamara. Yes, Mr. Chairman. During the period July 
1994 through December 1996, our audit determined that $216 
million in student loans were discharged for death; $292 
million in student loans were discharged for total and 
permanent disability. Nearly $77 million, or approximately 14 
percent, were forgiven for these individuals who we later found 
appeared to have earned income.
    Mr. Mica. That's more, $77 million, 14 percent. Again, it's 
very hard for me to understand. I empathize with Mr. Cummings 
and the ranking member. Their concern is my concern, that these 
dollars should be going to students who are in need, that's the 
reason we set this up. But when you tell me in your testimony 
that we really don't have a problem, that there's not much 
difference, then you testify that there's a 31 percent 
difference, the 14 percent of those given to disability are 
forgiven on a wrong basis, there's something dramatically wrong 
with the program.
    Mr. McNamara. Mr. Chairman, I would point out that the 
numbers I'm quoting are for the FFELP program. We think the 
underlying cause would be the same for both, so it doesn't 
relate to the administrative cost of the direct loan program.
    Mr. Mica. I don't care if it's for the government or for 
the private sector. It's still just not an acceptable level, 
and again, I don't mean to give you a hard time, but what we're 
trying to do is find out--if the information is correct, and 
are the reports we're getting correct. Is this happening?
    Mr. McNamara. Yes.
    Mr. Mica. Thank you.
    Mr. Butts, you're from the University of Michigan, and you 
had some laudatory things to say about the direct program. 
That's correct?
    Mr. Butts. Yes.
    Mr. Mica. Is it true that the University of Michigan in 
1995 and 1996 could not reconcile its books on this program?
    Mr. Butts. I'm not sure exactly what you're referring to, 
Mr. Chairman.
    Mr. Mica. Isn't one of the requirements that when you 
participate in the direct loan program that you reconcile your 
    Mr. Butts. It's my understanding that all of our records 
are reconciled, and all cash has always been reconciled.
    Mr. Mica. Is it not also true that more than $100,000 is 
given out in 1 fiscal year that could be collected by your 
    Mr. Butts. I'm not aware of that.
    Mr. Mica. I would appreciate it if you go back and check 
and see if 1995 and 1996 have even yet been reconciled.
    Mr. Galloway, you conducted this extensive--sounds like a 
consumer survey. How much did that cost? What was the total 
cost of finding out whether these folks are satisfied or not?
    [The information referred to follows:]

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    Mr. Galloway. Our institutional surveys which we conducted 
for them, the cost varied between $215,000 and $300,000 per 
    Mr. Mica. The total amount contracted over the period of 
years for your activities, all of your activities?
    Mr. Galloway. Put together were about $6.3 million.
    Mr. Mica. You ended by saying that you felt that there were 
still problems. In fact, some of the problems you cited you 
said--and this is from your testimony ``structural weaknesses 
in the technological skills of many employees make running a 
technologically sophisticated program like direct lending a 
tremendously challenging task.'' Were you trying to say it's 
hard for a government bureaucracy to be a bank? Is that what 
you said, Mr. Berthoud?
    Mr. Berthoud. Yes, it is, Mr. Chairman.
    Mr. Mica. Is that basically what it boils down to?
    Mr. Galloway. That's part of it. The other part of it, 
there's a lot of systems requirements in running the direct 
loan program, and it seems a lot of people told us they really 
had trouble getting people with cutting-edge technical skills.
    Mr. Mica. You also said that given the difficulty of firing 
anyone in the Department I'm very familiar with that, I chaired 
the Civil Service Subcommitee for 4 years. Mr. Cummings was one 
of my ranking members. We found it was almost impossible to 
fire anyone in the Federal work force. Managers are forced to 
rely constantly on a thin layer of capable people. Now, these 
aren't my words. This is your testimony; is that correct? Is 
that one of the problems?
    Mr. Galloway. If I could add one word to that, I would be 
glad to say it's correct. Some managers--not every manager has 
that problem, but a lot of managers talked to us about having 
problems with some people who couldn't get the job done, and 
they kind of shove them off in a corner of the room, and they 
rely on the people who could get the job done.
    Mr. Mica. Still on the payroll, and then we tax the ones 
who are able to--
    Mr. Galloway. It's tough for the people who have the skills 
because they get called on all the time.
    Mr. Mica. Mr. McNamara, one final question. There's also 
been a number of stories and reports about the problem with 
foreign schools, people getting loans and not attending school 
or something wrong with the school. What's the problem there in 
a nutshell?
    Mr. McNamara. In a nutshell, Mr. Chairman, foreign schools 
operate differently than schools in the United States. The 
check goes directly to the student, and currently there isn't 
any process in place to verify either before the student gets 
the loan or while they're in school that they actually are 
attending the school.
    Mr. Mica. So there's still no mechanism in place to check 
up on this?
    Mr. McNamara. As of this moment, no, but I'm aware the 
Department is in the process of setting up a website. They 
could tell you more about the exact status. There is no 
mechanism in place to prevent the student from initially 
getting the fraudulent loan.
    Mr. Mica. Thank you.
    I'd like to yield now to the ranking member, Mrs. Mink.
    Mrs. Mink. Thank you very much.
    Mr. McNamara, the Chair has raised some disturbing 
statistics about discharges from liability to repay loans on 
the grounds of total permanent disability or death or other 
reasons where the government is allowed to discharge the debts 
rather than by payment. Are there any safeguards in the law 
which--upon audits such as the one that was performed--which 
disclosed all of these figures allowing the government to go 
back and reclaim the loan payments due? Or is the discharge and 
waiver that's issued final and permanent even though the 
circumstances upon which those waivers were given turn out not 
to be true?
    Mr. McNamara. I believe if we could determine that people 
that applied for disability did so based on fraud, we could 
prosecute them criminally or civilly and attempt to----
    Mrs. Mink. In the absence of fraud, is there any way in 
which the law would permit a recovery of the loan payments due?
    Mr. McNamara. The regulations would not permit us to go 
back and do that right now.
    Mrs. Mink. So if, at the date of discharge of the loan 
liability, the person was indeed disabled, perhaps, as 
indicated from these notes, collecting Social Security 
disability, and then subsequently was able to recover, get a 
job notwithstanding that disability--I mean, blind people are 
employed, and they do earn sufficient moneys. Persons that are 
disabled in many ways can go back to school, become trained in 
computer technology or something and become gainfully employed. 
Under those circumstances there's no way that the government is 
able to go back then and recover the loan liability if 
subsequently the person became an earner, and therefore liable 
for taxes under IRS? Because I assume that the IRS is the one 
that disclosed some of these figures.
    Mr. McNamara. Actually, we obtained these figures by 
matching everyone who had received a discharge with the Social 
Security master earnings data base. It certainly could be the 
case that someone could be declared permanently disabled and 
then perhaps recover. The Department's regulations right now 
state that, and I think they're on the chart on the wall--on 
the board over there, basically you have to be so disabled that 
it's unlikely you can either return to work or go to school or 
that you're going to die. So it's pretty extreme.
    Mrs. Mink. So is there any ability, under the loan 
regulations that exist, for the government to go back and 
reclaim the loan liability?
    Mr. McNamara. Currently, no.
    Mrs. Mink. So would it be your recommendation that we 
correct the discrepancy or omission in the law and allow the 
government to go back and reopen this liability?
    Mr. McNamara. I think if it can be proven that there was 
fraud, definitely.
    The other question, the previous regulations dealt with 
that, if you were going to get a new loan, your previous loan 
would be reinstated. That regulation changed, I think, in 1995, 
that's clearly a policy question but we would support that.
    Mrs. Mink. Now, on the cost basis which your inspector's 
report indicated as a $4 difference in terms of operational 
costs, to what do you directly attribute the $4 difference?
    Mr. McNamara. We attributed that to possible inefficiencies 
surrounding access to the necessary information to run the 
programs. The Department didn't always have necessary 
management information. As has been mentioned earlier by other 
members of the panel, the Department is aware that it needs to 
make improvements in its technical and contracting expertise. 
We've met with the new PBO Chief Operating Officer, Greg Woods, 
on that regard, and he has brought in people that have this 
expertise. And finally, the last inefficiency would be 
basically the timely information coming in that would allow you 
to make the management decisions you needed to make.
    Mrs. Mink. How do you determine what the cost of the loan 
is if the basis of the determination is lack of information, 
lack of a cost accounting system, or lack of relevant data? How 
do you make an assessment on what the true cost is for the 
    Mr. McNamara. We use the audited financial statements for 
fiscal years 1996 and 1997, so we started with a full deck. 
Then basically, we just allocated it down to one program or the 
other, and we came out with a bottom line.
    Mrs. Mink. So if you had the true data, it might turn out 
to be quite different?
    Mr. McNamara. We did have the true data.
    Mrs. Mink. You had the true data in terms of how to 
distribute the administrative costs to each type of loan?
    Mr. McNamara. Yes, ma'am.
    Mrs. Mink. You have confidence that the $4 difference is a 
true difference?
    Mr. McNamara. I have confidence in what the actual costs 
were for fiscal years 1996 and 1997. The $4 difference is 
derived by a projection that we made using a U.S. Treasury 
study that estimated the cost of a large private lender to 
service a similar portfolio. We used that as a benchmark, and 
we compared that to the actual cost.
    Mrs. Mink. Which is the large private vendor that was used 
as a benchmark?
    Mr. McNamara. There was no particular lender. This was a 
Treasury study done to try to determine how much FFELP lenders 
should be paid last year when there was a lot of controversy 
about the interest rates and what they should get. This was 
their approximation of what it would cost a hypothetical large 
lender to service loans.
    Mrs. Mink. The decision of the Congress to go into the 
direct loan program was basically to save money. As I recall 
the deliberations in my committee, there was an assumption that 
there would be a $4 billion savings in establishing a direct 
loan program which the universities would administer directly 
rather than going through the private lenders route. Has that 
savings panned out?
    Mr. McNamara. I could comment on the results of our study. 
The savings, I guess, would depend on what previous study you 
were quoting and whether they said it would cost more or less. 
Studies we looked at fell out on both sides. I think one of the 
major flaws we found in all the studies we looked at was that 
some of them were made before the law was passed. They were 
assumed to be 100 percent direct loan program, for example, and 
other significant changes Congress made really invalidated the 
assumptions of many of those studies. We know what we found, 
and I really couldn't compare it to the earlier studies because 
they didn't use the same assumptions.
    Mrs. Mink. What is your conclusion then in terms of whether 
there have been any budgetary savings overall by the transfer 
to a direct loan program?
    Mr. McNamara. We didn't make that conclusion. What our 
conclusion was that in any given year, and that really subsidy 
costs drive it, either program could cost more or less. I think 
there are projections available, and depending on what interest 
rates you use going into the future, you could project one to 
be more or less than the other.
    Mrs. Mink. I have just one final question, Mr. Berthoud, 
representing the National Taxpayers Union. Certainly I 
appreciate your comments with respect to the attention which 
your National Taxpayers Union directs to the cost of various 
    I just wanted, Mr. Chairman, to note that when this matter 
was being debated in the Congress, specifically in my 
committee, the author of the program was Congressman Robert 
Andrews, with the support of our then chairman, Mr. Ford. We 
have a letter from the record dated September 20, 1991, from 
the National Taxpayers Union endorsing the bill that Mr. 
Andrews introduced, H.R. 3211. The letter commends him for 
introducing it because it would yield taxpayers savings of $1.5 
billion a year. I'd ask unanimous consent to have this inserted 
in the record.
    Mr. Mica. Without objection so ordered.
    Mrs. Mink. Thank you very much.
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T3517.094
    Mr. Mica. I'd like to now recognize the gentleman from 
Indiana, Mr. Souder.
    Mr. Souder. I thank the chairman, and I also thank him for 
this hearing. This has been a difficult topic as we move 
through the higher education bill over in the education 
committee, and it's important that we continue to monitor this 
    First, I'd like to ask Dr. Berthoud in general, I was on 
the small business program, and every time we expanded small 
business lending, people said, well, this is free. We have this 
little portion that we can expand. Don't you see this phenomena 
happening across the government, that at the time we have 
economic good times, we're expanding all the risk of the 
Federal Government, and we're not really having an analysis of 
what this could cost the taxpayers long term?
    Mr. Berthoud. I think that's absolutely right. The Congress 
in recent years has made important steps on better accounting 
of its loan and direct loan and loan guarantee programs. But in 
many cases, with Federal and State governments loans, loan 
liabilities, the tremendous unfunded liabilities of the Social 
Security program and others, there are a lot of long-term 
fiscal concerns that we have.
    Mr. Souder. Many conservatives such as you and I, favored 
moving toward loans from some grants and having accountability 
and responsibility, but there also needs to be a balance of 
what amount at risk the government would have if there was a 
downturn. I've never seen such a projection in any forecasting. 
We see the total cumulative, but not the differential cost to 
the government if there's a recession or a growth rate of X 
amount. It simply isn't in our budgetary calculations. We see 
the large hundred billion exposed, $11 billion annually, but we 
don't see what that actually means in the bad debt allowance 
that a private company would have to be projecting, assuming an 
average bad debt ratio over time. We assume a fixed bad debt 
ratio even if the exposure increases.
    Mr. Butts, when the program was first conceived, was there 
any consideration given to that variance in the amount of bad 
debts and how that would be calculated in the budget?
    Mr. Butts. The assumptions were that the defaults should 
be--would be roughly similar, and that the Department of 
Education needed to do everything it could to reduce the 
default rates, and as direct lending comes on-line, it should 
have and maintain a loan rate. You'll note that in the last few 
years the overall default rate in student loans has dropped 
from something like 22 percent to under 10 percent now.
    Mr. Souder. But isn't this exactly where the administrative 
costs come into play, because if you have fixed overhead plus 
the bad debts, it's no longer a savings because we don't 
absorb--in other words, if all of a sudden we have a recession 
and the bad debts go up, we don't ask the private lenders that 
we have to pay their overhead.
    Mr. Butts. The private lenders are guaranteed 98 percent of 
repayment on their loans and are guaranteed an entitlement, 
mandatory payment from the Congress, a subsidy for every loan 
they make, which would appear to be more than is necessary to 
make a reasonable profit and to cover their overhead costs for 
    The direct loan program, it was anticipated--we're in our 
5th year. We're making over $10 billion a year in new loans. 
And students are beginning to come into repayment, so it is 
only logical that the servicing costs should be increasing as 
that volume comes on-line. That was anticipated when the 
program was enacted, and the administrative funding that was 
put into the law anticipated those costs.
    If you look at the administrative costs of the program that 
the Department has, one of the things that we don't have is a 
comparison of what those real administrative costs are in the 
FFELP program because it's so diverse, it has never been 
studied. We've not had a good study of the subsidies. The 
Congressional Budget Office has studied those issues with the 
Treasury, and I have some concerns here. But the latest 
methodologies that I've seen from the OMB and the CBO, if you 
take into account the subsidy payments in both FFELP and direct 
lending and the administrative costs to the Department, it is 
roughly $7 per $100 loaned cheaper to do a direct loan than to 
do a FFELP loan, and if you reduce direct loan volume, taxpayer 
costs will increase. If you increase direct loan volume 
overall, they will decrease.
    Mr. Souder. I already have the yellow light. I want to make 
a couple of points. One is that, in a factual basis, we've had 
a loan increase since 1992 of 28 percent and an administrative 
increase of 212 percent. Now, there may be many different 
reasons, but we've heard a number today. This program was sold 
that it was going to save the Federal Government money. At 
best, the Inspector General seems defensive in his report in 
saying he's not saying that the private loan programs are 
cheaper to administer. In other words, at best you're saying 
it's a draw. Is that a misrepresentation of what you said, Mr. 
    Mr. McNamara. We didn't conclude it was a draw. We simply 
said we didn't draw a conclusion on the difference.
    Mr. Souder. In fact, you did draw a conclusion in the sense 
you said it could be higher under one program one year, and it 
could be lower under another program, which means it could go 
back and forth. But you did not suggest that, in fact, the way 
the program was sold, which is that it was going to save the 
government money, was a definitive conclusion.
    Mr. McNamara. Correct. We didn't conclude that.
    Mr. Souder. And that furthermore, if this was a private 
government audit--and we heard things, as the chairman already 
pointed out, structural weaknesses in the technological skills 
of many employees, which is because the Department of Education 
is not expected to be a bank; the difficulty of firing anyone 
in the Department, which is true because it's government; and 
as was also pointed out by those from Dr. Galloway and Mr. 
McNamara, having access to reliable information.
    Well, yes, government departments aren't private sector 
organizations that necessarily have this equipment, having 
qualified technical aid and contract management, because 
they're not a bank using compatible automated data processing 
systems. We have that throughout the government, and it's the 
danger of trying to expand and take over additional private 
sector things; we're not going to be able to afford all the 
data processing systems, including uncontrollable factors as 
Federal procurement. Yes, we do have personnel rules. Yes, we 
do have that.
    Furthermore, I think earlier in your testimony you said 
they don't have a cost accounting system. I can't imagine a 
private sector company this big without a cost accounting 
system. And then my personal favorite line of which I am very 
proud of is that the--from Dr. Galloway, the 1994 congressional 
elections, me, I was one of the people that came in, forced 
many direct loan decisionmakers into adopting a risk-adverse 
posture. I would hope so. They are loan officers.
    As a borrower, I don't like banks a lot of times. They only 
want to give you money if you deserve it, and they sit there, 
and unless you can prove you have plenty of money, they don't 
want to give you the loan. It's aggravating. As a parent with 
two students in college, quite frankly, I understand that in 
initial procedures with direct lending, it actually helped 
simplify, much like sometimes a public sector entity is needed, 
but then they back up after we've fixed some of that.
    The truth here is that I am concerned about the ability of 
the government and definitely don't believe it should be 
expanding, and that I hope they continue to be somewhat 
concerned by Congress so they adopt a risk-adverse policy, and 
I view that as a tremendous compliment, and I want to thank you 
for it.
    Mr. Mica. I thank the gentleman from Indiana. I don't think 
you were asking for a response.
    Mr. Cummings.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    Mr. McNamara, a lot of times these hearings come about--I'm 
not always sure about how they come about--but a lot of times 
what happens, we read things in the newspaper or we hear it on 
the news, and the next thing you know we have a hearing. 
There's nothing wrong with that. One of the articles that I 
think probably had some impact here was a June 1, 1999, 
article, editorial rather, of Investors Business Daily. Are you 
familiar with that?
    Mr. McNamara. No, sir, I'm not.
    Mr. Cummings. They talk about your report extensively.
    Mr. McNamara. The cost study?
    Mr. Cummings. Yes. When you look at an editorial, a lot of 
times the editorial writer takes a lot of liberty, and I'm not 
sure whether--I mean, just based upon your testimony today, I 
question whether the writer is accurate. I just want to make 
sure we're clear.
    First of all, the editorial says that your report says, 
``one program is costing taxpayers an extra $100 million a 
year.'' Is that accurate?
    Mr. McNamara. No, sir.
    Mr. Cummings. You never said that?
    Mr. McNamara. No, sir.
    Mr. Cummings. It also says that the Department of Education 
ignored your report, do you believe that to be accurate?
    Mr. McNamara. No, I don't believe that they have ignored 
it. We've had a lot of discussions with them. They also plan to 
adopt the methodology we use to allocate costs as they go forth 
to set up their accounting system, and we've had a few meetings 
with them so far to get that process started.
    Mr. Cummings. This article was written on June 1. The 
actions that you just spoke of, did some of them happen before 
June 1, such as maybe something happened afterwards that the 
writer didn't know about? I'm just curious.
    Mr. McNamara. I would say it's both.
    Mr. Cummings. Could you tell us what has happened since 
June 1 so I can sort of update this information in my mind?
    Mr. McNamara. Since June 1, and I'm doing this off the top 
of my head.
    Mr. Cummings. I understand. Do the best you can.
    Mr. McNamara. We obtained information from the Army 
Materiel Command on activity-based costing. I had my staff 
member that did this study review that. I know he's had some 
discussions and had preliminary meetings with the head of the 
accounting and finance group in the new PBO, and she's 
interested in working with us as she decides on a new 
managerial cost accounting system. Some of that happened before 
the first, and some of it has happened since the first.
    Mr. Cummings. Quite a bit of other things happened before 
the first. It was only a few days ago.
    Mr. McNamara. Yes, sir.
    Mr. Cummings. Let me ask you this. Going back to the 
editorial, I think you said you had four recommendations?
    Mr. McNamara. Yes, sir.
    Mr. Cummings. Can you just say them again for me real 
    Mr. McNamara. To institute a cost accounting system, a 
managerial cost accounting, activity-based cost accounting 
system was one.
    Mr. Cummings. Some action is being taken on that based on 
what you just talked about?
    Mr. McNamara. Yes, sir.
    Mr. Cummings. Go ahead. Two.
    Mr. McNamara. The second one was to allocate employee cost 
to the program that benefited.
    Mr. Cummings. Has there been anything happening on that?
    Mr. McNamara. That would probably be subsumed into the 
first recommendation.
    Mr. Cummings. I'm not an accountant, but I kind of figured 
    No. 3?
    Mr. McNamara. Was to start studies on borrower behavior.
    Mr. Cummings. Tell me what you have in mind by that? What 
does that mean?
    Mr. McNamara. Well, the more you know about borrower 
behavior, the more you know about what might happen if you 
change various policies, what effect it might have on defaults 
and various other things. I think lenders typically do this to 
know that if you raise interest rates, are you going to make 
more loans or less loans; what affect would certain collection 
practices have in terms of your ability to get the loans back 
in, that sort of thing.
    Mr. Cummings. Has any action been taken on that?
    Mr. McNamara. I'm unaware of that. The Department would be 
in a better position to talk about that.
    Mr. Cummings. No. 4.
    Mr. McNamara. Recommendations. I'm almost going from memory 
now. Let me just refer to the fourth one. The final one was to 
address the inefficiencies that we pointed out from previous 
studies that we had done or the General Accounting Office had 
done. Problems with the--for instance, the information systems, 
trying to consolidate those, eliminate the stovepipe systems 
that have been discussed earlier.
    Mr. Cummings. Some action has been taken on that?
    Mr. McNamara. It's currently under way. That's why the PBO 
was set up. Greg Woods is working on a blueprint that I'm sure 
he'll tell you about. Our office has been invited, and we are 
working with them as they design the systems to try to make 
sure that internal controls are designed in at the start.
    Mr. Cummings. Do you feel comfortable with--having spent 
this time doing your investigation? Do you feel satisfied that 
the Department is doing their part to followup on the things 
that you recommended generally, and from what you do know?
    Mr. McNamara. From what I do know, they clearly made a 
beginning on the first two, and that's the cost accounting. The 
others, you know, they've gotten started, but it's really too 
early to tell.
    Mr. Cummings. I don't have anything else.
    Mr. Mica. Thank you.
    We'll recognize now Mr. Ose, the gentleman from California.
    Mr. Ose. Thank you, Mr. Chairman.
    Mr. Butts, I want to make sure I understand the process in 
the direct program. The student comes in, applies to a 
university or higher education facility seeking financial 
assistance for continuing at school, for tuition, books and the 
like. The institution goes through its underwriting criteria, I 
presume, exercises some judgment on the ability of the student 
to repay, and makes a loan. Once the loan is made, what happens 
to the loan itself? You package it and sell it to Sallie Mae?
    Mr. Butts. Once the university has given a student a 
financial aid package of Pell grants, loans, and so forth, we 
distribute the funds to the students with appropriate 
promissory notes and draw down the money from the Federal 
Government, as we do for all of our programs, and allocate it 
to the students' account wherever it is appropriately to go. 
The signed promissory note is sent to the Department of 
Education's contractor for servicing purposes. The servicer 
then enters it and sends a confirmation notice to the student 
that reminds the student that they have a loan. The government 
then assumes the responsibility for the billing and servicing. 
All the servicing of the student loans for direct loans is 
handled by private sector contractors to the Department of 
    Mr. Ose. That's the $13 or $17 figure we keep talking 
    Mr. Butts. Yes, sir. That $17 figure, as I understand it, 
includes the profit paid to the contractors. I'm not sure that 
the other number includes that.
    Mr. Ose. In this process, somewhere along the way, the note 
is sold, or is it held by the Federal Government?
    Mr. Butts. It is held by the Federal Government. You see, 
the capital for these loans have been obtained for all 
practical purposes through the weekly auction in the private 
capital markets, similar to T-bills and at, of course, very 
good rates for the government because it can leverage its 
purchasing power in the marketplace. As the loans are repaid in 
direct lending, then they are simply turned to the Treasury.
    Mr. Ose. The actual loan is never packaged and sold?
    Mr. Butts. Not in the direct loan program.
    Mr. Ose. How about the Federal family education program, 
the FFELP?
    Mr. Butts. In the FFELP program, there are, I think, some 
7,000 lenders, over 300 or so very active lenders, and a 
variety of secondary markets including Sallie Mae, tax exempts 
and so forth. Those loans can be bought and sold in the 
marketplace. One of the advantages, we think, of the direct 
loan program is that the student always knows who owns their 
loan and who to make the payment to.
    Mr. Ose. Because the institution continues to hold it, and 
it is serviced by the private contractor.
    Mr. Butts. Because the government owns the loan, and it's 
being serviced by one entity.
    Mr. Ose. Now, you would have the direct loans, so you would 
not be involved in the guarantee, because if the Federal 
Government isn't paid, they just write it off or declare them 
    Mr. Butts. At one point we were involved with the 
guaranteed loan program, and we dealt with every lender and 
secondary market in the country as a national university and 
dealt with--it was a very complicated process for us, which is 
why we changed. We think direct loans provide better service to 
our students; other institutions think otherwise. Clearly the 
marketplace is now making both programs competitive, but we 
think that the fact that the student in direct lending knows 
who owns their loan, and that doesn't change, may change 
repayment plans wherever possible, and has access to income-
contingent repayment plans are clear advantages for the 
    Mr. Ose. Mr. Chairman, I thank you for the 5 minutes. I 
know we have a vote, so I yield back.
    Mr. Mica. I want to thank all of our panelists: Mr. 
Berthoud from the National Taxpayers Union. Mr. Butts, we're 
waiting to hear back from the University of Michigan's 
reconciliation of accounts from 1995-1996. Dr. Galloway, we 
wish you many further studies and contracts. Mr. McNamara, 
thank you. We appreciate the new Inspector General's 
willingness to go forward today, even though she's not in 
place, but we wanted to get this matter before the subcommittee 
in a timely fashion.
    I might say, too, this is not the result of a GAO study 
ordered by Congress. This is a study, as I understand, that the 
Department authorized, and the audit results speak for 
themselves, but we do need your interpretation and appreciate 
your cooperation.
    We will hear from the second panel and the Department of 
Education in--I think we have four votes or so. We're going to 
have to recess the hearing until about 12:35. It will be just 
under an hour, which will give folks an opportunity to catch a 
quick bite.
    I apologize to our next two witnesses, but there will be a 
series of votes, and we can't conduct business in the interim. 
I thank this panel. You're excused. This meeting of the 
subcommittee is in recess.
    [Whereupon at 11:45 a.m., the subcommittee recessed to 
reconvene at 12:35 the same day.]
    Mr. Mica. I would like to call this meeting of the 
subcommittee back to order.
    We have our second panel before us: Dr. Marshall S. Smith, 
Acting Deputy Secretary, Department of Education; Mr. Greg 
Woods, Chief Operating Officer, Office of Student Financial 
Assistance Programs under the Department of Education.
    Gentlemen, this is an investigation and oversight 
subcommittee. Would you please stand and be sworn?
    [Witnesses sworn.]
    Mr. Mica. The witnesses answered in the affirmative.
    If you have lengthy statements, we'll make them part of the 
record by unanimous consent. Otherwise, you're recognized.
    The first witness is Dr. Marshall Smith, Acting Deputy 
Secretary, Department of Education.
    Welcome, and you're recognized, sir.

                    DEPARTMENT OF EDUCATION

    Mr. Smith. Thank you, Mr. Chairman, Mrs. Mink.
    The Department of Education administers two Stafford 
student loan programs. Under the FFEL, Federal family education 
loan program, the Federal Government subsidizes private lenders 
to make student loans and then guarantees those loans against 
    Under the direct loan program, we fund student loans with 
Federal capital and hire private companies under performance-
based contracts to deliver and service the loans.
    This year, the FFEL program will provide an estimated $20.4 
billion in new loans for approximately 3.5 million students; 
and the direct loan program will provide $10.6 billion in loans 
to 1.9 million students.
    Before the direct loan program was founded in 1994, 
students and schools were often confused by an array of 
different paperwork, procedures and schedules in the FFEL 
program. Only 68 percent of schools expressed satisfaction with 
the program. Federal subsidies for FFEL lenders and guarantee 
agencies were too costly for taxpayers, and the program had not 
received a clean audit opinion at least since the Department of 
Education was founded in 1980.
    The direct loan program reduced paperwork, created a single 
loan account with one point of contact for each student and 
allowed the graduates greater flexibility in repaying the 
loans, including the new income contingent repayment plan. In 3 
years, over 1,200 schools chose to leave the FFEL program and 
join direct lending. The direct loan program now originates as 
many loans as the largest 15 FFEL lenders together. It holds 
one-third of one of the largest financial markets in the world.
    A new and strong competitor, the direct loan program helped 
inspire FFEL lenders to help improve their services. As a 
senior FFEL executive said last year, ``Direct Loans have 
introduced some ways of doing business and some delivery 
mechanisms that made the private industry wake up a little bit. 
It's been good for the industry, particularly for students and 
    Competition does help, primarily to improve service in the 
FFEL program. Satisfaction with both student loan programs 
among schools increased from 68 percent in 1994-1995 to 81 
percent in 1997-1998.
    Students are also satisfied. A 1998 survey found that 94 
percent of all student borrowers were satisfied with their loan 
    With the help of Congress and our partners, the Department 
strengthened the financial management of the loan programs. The 
national cohort default rate has been reduced from 22.4 percent 
5 years ago to a record low 9.6 percent. At the same time, 
annual collections have increased by two-fifths, from 6.6 
percent of outstanding defaults in fiscal year 1993 to 9.2 
percent in fiscal year 1998.
    The National Student Loan Data System has helped prevent 
ineligible students from receiving as much as $400 million in 
grants and loans this year. These and other improvements helped 
the Department receive an unqualified opinion from its auditors 
on its fiscal 1997 financial statement.
    The subcommittee heard this morning from the Department of 
Education's Office of the Inspector General, which recently 
completed a study of direct loans and FFEL costs. We welcome 
the findings of the study, which I hope will help us reduce 
administrative costs and improve our internal accounting. 
However, I'm concerned that some have misunderstood the study 
and wrongly concluded that the direct loan program is more 
expensive for taxpayers than the FFEL program.
    The report does not compare the total cost to the taxpayer 
of these programs. It's that simple. Instead, the Inspector 
General's report compares documented direct loan administrative 
costs with estimates of what it might cost a large FFEL lender 
to manage the same loans. It does not report actual 
administrative costs in the FFEL program. More importantly, it 
does not combine the Federal administrative costs with the 
Federal subsidy costs.
    The overall Federal subsidy includes default costs, 
interest subsidies and other expenses that are the large 
majority of Federal expenses in operating the FFEL program. 
Adding the subsidy costs to the Federal administrative costs 
would present a clearer picture of the total cost to taxpayers.
    The table on page 8 of my written testimony does this. That 
table shows that using current economic assumptions, both by 
the CBO and by the administration, the direct loan program is 
substantially less expensive for taxpayers than the FFEL 
program. In this analysis, each FFEL loan is nearly twice as 
expensive for taxpayers as a comparable direct loan, according 
to either the administration or the CBO's estimate. As a 
result, direct loans are estimated to save taxpayers over $700 
million this fiscal year compared to the cost of all direct 
loans if they were FFEL loans.
    In summary, the student loan programs have come a long way 
since the direct loan program was established in 1994. Major 
improvements to the program include healthy competition between 
the two student loan programs, creating marketplace incentives 
to improve service and increase customer service satisfaction. 
Now schools can move to the program that they believe will best 
serve their students.
    We now have lower interest rates for students who have 
saved $4.7 billion--since 1994.
    Finally, there have been over $5 billion in savings--$5 
billion in savings for taxpayers since 1994 due to reduced 
subsides for FFEL financial institutions and the lower Federal 
costs for direct loans than for FFEL loans. That's $5 billion.
    In addition, taxpayers have saved additional billions in 
reduced default costs.
    Now the loan programs are poised for further improvements. 
The new performance-based organization established by Congress 
has greater management flexibility, accountability for results, 
and incentives for high performance.
    We supported this law and have been pleased to implement it 
quickly and enthusiastically. The first Chief Operating Officer 
for Student Aid, Greg Woods, has hit the ground running. He has 
the right experience, including being the CEO of a software 
company and 5 years at the Reinventing Government initiative, 
to make the PBO a success.
    After Mr. Woods describes his plans for improving the 
administration of student aid, I'd be happy to answer any 
questions you may have. Thank you, Mr. Chairman.
    Mr. Mica. Thank you.
    [The prepared statement of Mr. Smith follows:]

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    Mr. Mica. I'd like to recognize Mr. Greg Woods, Chief 
Operating Officer, Office of Student Financial Assistance 
    Mr. Woods. Mr. Chairman, committee members, thank you very 
    I'll focus on the improvements we're making in the PBO in 
the overall delivery of student financial assistance; and, with 
your permission, I will submit a written record.
    Mr. Mica. Without objection, that will be made part of the 
record. Thank you.
    Mr. Woods. I'll summarize it briefly here.
    Six months ago, I became the first Chief Operating Officer 
of the government's first performance-based organization. 
Congress created that performance-based organization to focus 
on the operational aspects of student aid, as distinguished 
from its policymaking functions, the whole idea to make the 
thing run more like a business.
    That's my background. I'd been a success in business, and I 
bring that point of view to this job.
    My specific mandates in the legislation are to improve 
customer service and to reduce cost and, as a way of doing 
both, to integrate and streamline the computer systems. I view 
my ultimate customer here as the student who needs financial 
help to get an education, but the aid is delivered in the 
system. That system includes partnerships with schools and the 
financial community.
    The overall cost of getting aid to the student includes 
everything that our delivery partners and we spend on that 
entire process. That means my job, as I view it, is to do 
whatever I can to make both these programs, the direct loan 
program and the FFEL program, efficient and effective, to make 
them both excellent values for the student and the taxpayers 
and to make them both excellent investments for America.
    The natural competition between the two programs I view is 
a good thing and a powerful tool to that end. The Secretary has 
already spoken to the advantages that competition has 
introduced into this arena and that competition continues. On 
the other hand, OSFA and these commercial lenders are partners 
with a common goal. That is, we're helping to put America 
through school. So we're trying to constantly collaborate with 
these partners to improve service and cut costs in the entire 
    Our overall goal in the PBO is service that equals the best 
in business. To get to that level of performance, we're in the 
process of changing absolutely everything that goes on in this 
organization. We're reorganizing the Office of Student 
Financial Assistance along the lines of private sector 
corporations to focus in channels on the people that we deal 
with, a channel for students, a channel for schools, and a 
channel for our financial partners.
    We're instituting a financial management system to get the 
kind of cost data that the IG referred to as necessary to do 
proper cost estimates and to manage this business day in and 
day out.
    We have a Customer Service Task Force that's been in 
consultation with our partners listening to students, listening 
to partners, listening to our own employees; and, next month, 
we'll publish a report with about 200 ideas on ways to improve 
service delivery in our organization.
    We have a new acquisition strategy. We are in the process 
of renegotiating all of our contracts for our computer systems 
into performance contracts with goals that would tie to my own 
as the Chief Operating Officer of the organization.
    With the help of the schools community, technical centers 
like Highway One and financial powerhouses like the Bank of 
America, we've been preparing a Modernization Blueprint that 
will go after the reengineering of our stovepipe computer 
systems. And in September, I'll deliver to the Congress a 5-
year performance plan that will have an aggressive set of goals 
for improving service and lowering cost. In fact, everything 
we're doing goes back to the PBO mandates from Congress to 
improve service to the students and to cut costs, whether they 
be FFEL or direct loan costs.
    Thank you very much. I would be happy to assist the 
Secretary now in answering any questions that you might have.
    Mr. Mica. Thank you.
    [The prepared statement of Mr. Woods follows:]

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    Mr. Mica. I have questions for both of you. We'll try to 
cover this pretty quickly here.
    First of all, we've seen the audit, the report, and there 
are a number of criticisms. There were some items that we had a 
report--was it Mr. McNamara who cited that corrections are 
being instituted, some corrections he was aware of, some he was 
not? Specifically, what has brought this hearing to such a peak 
are questions about disability and people having their payment 
waived and then coming back on the system and being reeligible. 
Could you tell us, first of all, what's being done to correct 
    Mr. Woods. Absolutely. One thing I'd like to make sure is 
understood here, this is an example of the Department 
identifying a problem and trying to get after it on its own. 
The study that the IG did here was at the request of the 
Department. The Department was concerned about fraud and other 
disability programs and was concerned about trends in the rise 
in its disability claims and asked the IG to look into it.
    The results of the study confirmed those fears, as you've 
indicated, in the worst way. We have things in process already 
with our partners here.
    Note that this problem exists within the FFEL program 
primarily. That's where the difficulties have been found 
because more of the loans in the FFEL program are into the 
repayment status. And we're working with the guaranty agencies 
on new procedures here, looking again at commercial practices.
    We can require certified certificates. That's something we 
haven't done. It's common practice in the insurance industry.
    We can require doctors' identification numbers and phone 
numbers. We can go into training programs with the guarantors 
and their people who are reviewing these applications for 
disability so that they're better informed about what to look 
    The other thing I'd like to state here is that we, in fact, 
believe we can go after and recover this money. Where we find 
that there were mistakes made in processing, we can reinstitute 
these loans and collect on them.
    Mr. Mica. Well, Dr. Smith, in the record, page 8, I believe 
it is--there's a chart. It says, new loans after disability 
discharge, and it shows 1994-1995 pretty much stable and then 
1995 just shoots off the charts. It's my understanding that the 
Department changed the regulations in 1995 to make it easier 
for students who have gotten loans forgiven to get new loans. 
Has that policy been changed back or are we still operating 
under the policy that had this sort of shoot off the charts?
    Mr. Smith. At this moment we're still operating under the 
policy. The regulation will be under review. It is now under 
review. All these regulations have to go through something 
called negotiated rulemaking. It's the congressional intent for 
all of our regulations. So we have to bring people together in 
order to change things, and we intend to look at that. I intend 
to talk with the Secretary soon about this, and we'll be 
    Mr. Mica. We just heard reports coming out in a month after 
this hearing or so with a lot of suggestions, but to get things 
done and--you know, we have to focus on the big enchiladas 
here. Certainly, this is the biggest area, we have identified 
the program. Your audit which--I congratulate you for taking 
that step, but now our job in oversight is making certain that 
there's a change in action and a change in policy. So we're 
going to have to followup on this, and we need a change in the 
    We've also satisfied the PBO with I'm told more than 1,000 
folks; is that correct?
    Mr. Woods. The staffing level----
    Mr. Mica. Tell me what our staffing level is. We've ramped 
that up pretty dramatically, and our administrative costs I 
guess have risen 200 percent in 6 or 7 years.
    Mr. Woods. I'd be delighted to address that.
    Actually, the staffing level in the PBO is relatively 
stable at 1,200 people. These people were involved in the 
    Mr. Mica. That's a third of the Department of Education.
    Mr. Woods. It's a third of the Department of Education--a 
    Mr. Mica. I'm sorry, 25 percent approximately; and when did 
they come on?
    Mr. Woods. This staff?
    Mr. Mica. Yes.
    Mr. Woods. The staff was increased over the past few years 
with the direct loan program, but that staffing increase number 
I don't have for you here today. It's nothing like the kind of 
percent that's shown on this chart. The indication in the chart 
is that we've dramatically increased the cost without an 
increase in workload, and I'd like to dispel that idea. That's 
just not the case at all.
    What we've been doing in the direct loan program for 
several years now is issuing on the order of $10 billion a year 
in loans. So each year a loan is put out, that adds to the 
workload. It doesn't go away after the first year.
    Now we're actually entering a period of time where as the 
loans go into servicing, the workload increases. The servicing 
is a much more expensive proposition than simply issuing them. 
They're not being serviced to that extent while they're in 
school. So our workload has actually increased dramatically 
over this time.
    Mr. Mica. We're told that one of the biggest problems with 
the PBO is that there's no chief information systems officer. 
Is that still the case?
    Mr. Woods. We have an excellent man who's been leading the 
information systems work there for some time. We've been able 
to add a couple of experts, for example, in privacy and 
security to support that. And, of course, this is my 
background. I'm certainly fully qualified to carry that work 
out and make decisions in that area. So compared to where we 
were 6 months ago, we're probably dramatically stronger.
    Mr. Mica. Two other areas, there's been great concern 
expressed about both in this panel and in the public arena, and 
that's payments for students who claim to be dead and are very 
much alive and then the problem with our foreign student loans. 
Could you address both of those for me?
    Mr. Woods. The death and disability claims is what we 
referred to earlier and the changes we're making there with 
death certificates and training and those improvements as well 
as the policy issue you addressed to the Secretary.
    Mr. Mica. Specifically, though, are you now requiring the 
death certificate?
    Mr. Woods. Yes. We're----
    Mr. Mica. Is that in place?
    Mr. Woods. We have notified the guarantors that we intend 
to do this.
    Mr. Mica. But it's not in place?
    Mr. Woods. No, sir. They are already looking at changing 
their policies. Where we stand with each of the guarantors I 
couldn't tell you today. I would be happy to answer that 
detailed question for the record.
    Mr. Mica. Is that a policy question that Dr. Smith would 
have to address that becomes----
    Mr. Woods. We don't believe that change is a regulatory 
change, so we believe we can proceed administratively to deal 
with this. The community is very eager to work with us on this.
    Mr. Mica. But it's still not in place. It's a request at 
this point?
    Mr. Woods. That would be accurate.
    Mr. Mica. Dr. Smith, did you want to respond?
    Mr. Smith. Well, it's just that Mr. Woods has to work with 
a variety of guaranty agencies out there and explain to them 
exactly what they need to do and they need to look it over and 
see how quickly they can put their changes into practice. I 
think that's the delay in this process. It's not as though 
they're going to get a choice. They will have to carry out the 
    Mr. Mica. That would be a variety, I guess, of 
    What about the direct loan program where you can make a 
decision. Has that been made?
    Mr. Woods. That decision has been made.
    Mr. Mica. And is taking place?
    Mr. Woods. Yes, sir.
    Mr. Mica. The other item was the foreign student problem.
    Mr. Woods. Right. The foreign schools issue I don't believe 
is a schools issue per se. Several years back, the Department 
undertook a review and went through a recertification on 
schools and a number of schools dropped out of the program--in 
fact, over 400. We have about 450 foreign schools currently 
involved in the direct loan program. The cases that were found 
seemed to be cases that were involved with students, and 18 
cases is what we're talking about here. Eighteen cases of fraud 
identified where students are being pursued for that, a 
relatively small number.
    The other point I'd make about the foreign schools program 
is that the overall default rate, which has been much at issue 
here this morning and this afternoon, that default rate is 5.5 
percent, which is better than the national average. So while 
we're concerned about fraud any time we find it, I just want 
that to be in perspective.
    We also think we've instituted some practices here that 
will improve the performance going forward. We're notifying 
schools, for example, when loans are issued to students who are 
alleged to be enrolled there. That will get the schools 
involved as a checkpoint on whether that student is actually 
there and eligible for funding.
    Mr. Mica. Dr. Smith, did you want to respond?
    Mr. Smith. No, that's fine.
    Mr. Mica. You said that one of the things you wanted to do 
was study borrower behavior. Could you elaborate a little bit 
more on that?
    Mr. Woods. My private sector experience was that it's very 
important to be focused on the customer and to think in terms 
of what the private sector talks about as customer 
segmentation. Different parts of the population have obvious 
different needs. Small business is different than big business, 
seniors different than juniors.
    In our case, students in 4-year, 2-year and proprietary 
schools have different needs and, as we find, much different 
default rates among those institutions. We think that by 
understanding behaviors in these customer segments and the 
needs of those populations, we can intervene earlier, and 
thereby reduce the cost in terms of default and produce a 
better situation for that borrower in terms of services. That's 
what we are interested in.
    Mr. Mica. One other quick question before I get to the 
ranking member, I did not ask you. I asked you about the number 
of employees with the PBO. Do we have any way of assessing the 
contract employees or employees that are involved through 
    Mr. Woods. We certainly could get you an accurate number if 
you'd like. I believe that number, at a peak during the year, 
might run to 3,000 employees if you totaled it up for all the 
peak periods.
    The reason I say peak is because our business is cyclical. 
When we're consolidating loans, we ramp up in that area. We 
don't maintain that staff level. As soon as we don't need the 
people, these part-time people under contract are reduced.
    The same thing with our student eligibility application. We 
ramp up and tail off in order to minimize the cost. So that's 
the way we're managing that contract work force.
    There was conversation here about the practice of involving 
the private sector, using private sector firms to handle the 
loan programs. The truth is that this organization is well on 
the path to contracting out these service functions and 
processing functions. We have experts for phone service, 
experts for computer processing, experts for transforming paper 
into electronic images, and contractors who ramp up and down to 
meet the particular business cyclical needs.
    Mr. Mica. Let me yield now to Mrs. Mink, if I may.
    Mrs. Mink. Thank you very much, Mr. Chairman.
    I served on the Education and Workforce Committee when it 
was known as the Education and Labor Committee, and as I 
recall, the initiation of the whole idea of direct loans, it 
was something that was generated by Congressman Robert Andrews 
and supported by the chairman, William D. Ford of Michigan. 
Those were the two individuals most responsible for the 
initiation and creation of this program.
    After a number of discussions and debates and meetings with 
the administration, the administration came on board and 
supported the program. Is my memory correct on that?
    Mr. Smith. I think that's right, Mrs. Mink. I believe that 
a direct loan program existed in the prior Congress as well, a 
small direct loan program. Congressman Petri as well as, I 
believe, Congressman Andrews and, of course, the chairman were 
all involved in that. And then I believe there was discussion 
early in Mr. Clinton's administration, and there was a decision 
to move with a larger program rather than just the pilot.
    Mrs. Mink. Yes. What I wanted to note with reference to 
this history is that--to dispute or dismiss the assumption that 
this was a grab on the part of the Federal Government for the 
administration, supervision and management of a program. 
Rather, as I recall, it was an initiation by the Congress at a 
time when everyone was looking for ways in which to reduce the 
deficit and balance the budget. And because of the high 
interest that the private sector banks and financial 
institutions were charging for the management of this program, 
there was this idea that maybe the Federal Government, even 
though you realize you have to put on more manpower and 
personnel and create a whole new system, that it could be done 
with a cost savings.
    Now, in your statement, Dr. Smith, you say substantial 
savings have occurred for the taxpayers. Can you elaborate on 
    The testimony we heard this morning seemed not to conclude 
that that has, in fact, occurred; and since that was the 
genesis of this whole idea, I'm very anxious to really get to 
the bottom as to whether we, in fact, have enjoyed any savings.
    Mr. Smith. Mrs. Mink, we estimate and the Congressional 
Budget Office estimates that the savings have been 
considerable. As I mentioned, we can estimate them at about 
$700 million this year if all of the direct lending students 
were, in fact, in the FFEL program.
    Now, there have been a lot of other savings as well to the 
taxpayers and to the students, and they've come about in two 
ways. One is the way I just mentioned. That is, that the direct 
lending program, because it doesn't have to pay huge subsidies 
to private lenders, turns out to be a cost saver under most 
economic assumptions.
    As you recall, the IG said he wasn't sure. There are 
certain economic assumptions one can make about the interest 
rates and so on where it might not be a cost saver but, by and 
large, and certainly over the last 6 years, the life of this 
program, it has clearly been a cost saver. We estimate that the 
cost savings to the taxpayer have been roughly $5 billion since 
    We can supply more detail on that if you'd like, but it is 
from a couple of things. One is from the direct lending program 
having one-third of the business. The other is the reduction in 
some of the subsidies that have gone to the private sector. The 
private sector, as you know, continues to make a reasonable 
profit on this, a fair profit.
    Mrs. Mink. What is the percentage surcharge now on the 
loans that the private sector charges the student or the 
    Mr. Smith. The interest rates?
    Mrs. Mink. Yes. The surcharge for managing the program.
    Mr. Smith. To the Federal Government? We do it in terms of 
subsidies. The private sector gets an origination form of fee, 
which is about 4 percent. They also then charge interest rates 
to the students, and they get to keep whatever profits on those 
interest rates. In effect, they have to give some money back.
    By and large, what you have is a system where the Federal 
Government guarantees the private sector payments and then pays 
them a reasonable subsidy in order to provide loans for 
students. It has worked reasonably well over the last 4 or 5 
    I think here is where the other real savings comes in. 
There's competition between the two programs, which I believe 
resulted in savings to students and much better service to 
students and has gotten the two sectors competitive. The 
private sector, the FFEL program, for example, has become quite 
competitive in the reduction of some of the origination fees 
and in some of the other costs to students. So I think we've 
got a very healthy, competitive system now that has saved 
students a large amount of money and saved taxpayers a large 
amount of money.
    Adding them together, it's almost $10 billion over the last 
6 years.
    Mrs. Mink. About a third of the loans currently expected 
are about one-third in the direct loan and the balance in the 
private sector; is that correct?
    Mr. Smith. That's correct.
    Mrs. Mink. That's a balance you expect to maintain over the 
long haul?
    Mr. Smith. That's certainly what we expect to maintain over 
the foreseeable future, that's right. And it is, as I said, a 
competitive market; and we're working to maintain that.
    Mrs. Mink. The direct loan program was initiated when? When 
was the first loan issued?
    Mr. Smith. I believe in 1994.
    Mrs. Mink. Now, has there been, since the initiation of the 
direct loan programs, any experience with collections and 
defaults and determinations of waivers and discharges of debt 
and so forth with respect to the direct loan program?
    Mr. Smith. Well, there's been some but not very much to 
make a real generalization.
    Mrs. Mink. It hasn't been in existence that long to 
    Mr. Smith. That's right. In fact, the numbers are very low 
right now. The percentages are low. I wouldn't count on that as 
being something that will hold up in the future. We see no 
reason that this will behave any differently than the FFEL 
    Mrs. Mink. The reason for my question, the reports that 
generated the call of these hearings with respect to the 
discharges for disability and the erroneous notion of students 
being dead and having their debt discharged emanate not from 
the direct loan program but from the existing private sector 
loan program.
    Mr. Smith. I believe that's true. It's probably true for 98 
to 99 percent of the cases, if not 100 percent.
    Mrs. Mink. So the management of the private sector loans to 
which this problem is attributed is a responsibility of the 
private sector? Or is it the responsibility of the Federal 
Government to institute control so that it doesn't occur?
    Mr. Smith. I believe it's a shared responsibility. These 
are fiscal----
    Mrs. Mink. Who recommends the waiver of the collection? Is 
that the private sector that recommends it or is it the Federal 
Government that recommends it?
    Mr. Woods. The process would have the private sector agency 
processing the paperwork. As the chairman indicated earlier, 
there are regulations that the Department issues that cover 
this practice and then----
    Mrs. Mink. Who makes the final decision?
    Mr. Woods. At that instant in time on the piece of paper, 
the private organization would make that determination, but we 
have required certain things of them. Once they've gone through 
that, they're perfectly within their rights to make that call.
    Mrs. Mink. If they sign off and say this is discharged 
because of disability, in the end it's the taxpayer that loses 
because it's unable to collect.
    Mr. Woods. That's correct.
    Mrs. Mink. What is the process then that the Federal 
Government has set up to look at these discharges to make sure 
they're all valid? Is there someone in the Department that does 
    Mr. Woods. We have not had a review function specifically 
focused on this issue. We have an active review program that 
looks at the overall practice, makes site visits, program 
reviews for these guarantors. And naturally those reviews in 
the future, any one of them that we make, would focus on this 
issue. But we haven't got a medical examiner or a medical 
reviewer at the Department level for this function.
    Mrs. Mink. Can you say with some assurance that, with 
respect to the new program, the direct loan, that you have this 
in hand and that these sorts of misdeterminations would not 
occur under the government-managed program?
    Mr. Woods. I wouldn't want to assure you that there would 
be zero, but I know we can reduce this number dramatically by 
instituting the kind of practices that are followed in other 
Federal agencies and in other retirement programs in making 
these determinations. Those are available to us, and we'll be 
able to institute those.
    Mrs. Mink. Mr. Chairman, I'm at the end of my questioning; 
I just simply want to say that I'm very much reassured by the 
testimony of the two witnesses from the Department that the 
direct loan program is being well administered. The questions 
that we raised have now been brought to their attention, and I 
have confidence that they'll be able to correct it. I say this 
not as an early supporter of the direct loan program. I have to 
make a public confession that I had great misgivings about the 
creation of this huge bureaucracy to manage a program that I 
considered so vital. At that point in our early deliberations, 
it seemed to me that it was an undertaking that was going to 
challenge our witnesses and our abilities.
    But I'm pleased to hear today that it's progressing along, 
and I commend the Department for initiating the audit to look 
at yourselves and come up with safeguards to make sure that 
this program will continue to be managed well and that the 
taxpayers' dollars will indeed be saved by it.
    Thank you, Mr. Chairman.
    Mr. Mica. Thank you. I appreciate the comments of the 
gentlelady and the ranking member.
    I wish I could be as confident in the bureaucracy we've 
created to oversee this program. Quite frankly, I do have some 
concerns, as I said even during their testimony, that they had 
commented that corrections are on the way. I think I've sat and 
heard that before and then some of the mechanisms and resources 
that we've provided for them, including PBO, which have been 
put in place at great expense, still have not produced the 
results we hoped for.
    We now have 24 percent of the entire Department of 
Education, as far as personnel, involved in the program, and 
costs are escalating for administration, so I have some 
concerns. Not to mention that we have some great loopholes in 
forgiveness of payments for people who are ineligible and, in 
fact, by their own report and these are not insignificant 
    Again those corrections are not in place. Some policy 
changes are not in place, and we need those in place. Some of 
the administrative corrections are not in place by their own 
general audit. We still have some serious personnel deficits 
and problems that need to be addressed to make this whole 
program work. I have additional questions regarding the 
differential between the administrative costs that have been 
presented, not by me but by the audit, and I think we'll have 
some very specific questions in writing so that we can get a 
written response.
    Additionally, I have specific questions which I didn't get 
to about loan consolidation costs.
    In closing, maybe I could just ask a quick question. The 
information that our subcommittee obtained said that loan 
consolidation costs of the direct loan program greatly exceed 
those of the guaranteed loan program. For example, I guess you 
have indicated that the direct loan consolidations in 1998 cost 
$12.9 million for 107,000 loans or $121 per consolidation. In 
1999 you reported $21.8 million for 194,000 consolidations 
equaling a little bit less than cost, bigger volume, $112 per 
    However, we're told that these figures may, in the private 
sector, be about half the amount, far less than the 
consolidation loans that are done by you. In fact, I guess the 
consolidation problem got so bad, and this has been testified 
to, that in August 1997, the Department had to close down the 
direct loan consolidation program. What's being done to correct 
this situation? And, in fact, is it still costing almost twice 
as much for loan consolidation by the Department?
    Mr. Smith. Mr. Chairman, we're going to have to check your 
figures. The $110 figure is actually the maximum figure, the 
underperformance-based contract. They're expected to hit a 
target of, I believe it's 65 days, or whatever the industry 
standard is. If they come in earlier than that with a 
consolidated loan that is faster for the student, they get an 
increase in that payment. If they come in later, they can 
deduct it from their amount of money.
    The average amount of money here is $70 per loan. For a 
regular loan, we charge--it costs us, in terms of paying the 
consolidator, considerably less for certain other kinds of 
loans. So there's a real mixture of loans, and I believe what--
the figure you're using is actually the figure for the maximum 
amount that could be paid rather than the amount that on 
average is actually paid. But we will get you those figures.
    I also believe that the numbers for 1998 were not quite 
right, but we'll also get you those.
    Mr. Mica. Again, we're using figures that have been 
supplied by the Department or figures that have been taken from 
the audit studies. So we have some very specific, lengthy 
questions. And I know that you have a limited time schedule; 
and you've been most patient, Dr. Smith. We appreciate your 
testimony today.
    Mrs. Mink, why don't we, by unanimous consent, submit the 
balance of the questions to the Department for response in 
    Mrs. Mink. Fine with me.
    Mr. Mica. And we'll leave the record open for 30 days to 
give you extra time to respond.
    Again, I think we've raised some important issues here. 
It's not our job just to be bad guys. Mrs. Mink practices in 
trying to be one of the nicest Members in Congress, and she's a 
wonderful ranking member, but we have a responsibility to 
conduct oversight of these programs. Your audit helped trigger 
some of the reports about continuing problems, and they 
certainly need to be addressed by our panel. Working with you 
we hope we can get this program in order and make it work 
efficiently and take whatever legislative steps are necessary. 
We hope that we'll get response from the policy and operational 
    There being no further business to come before the 
subcommittee at this time, this meeting is adjourned. Thank 
    [Whereupon, at 1:20 p.m., the subcommittee was adjourned.]
    [The prepared statement of Hon. Dennis J. Kucinich