    Direct Student Loan Program: Management Actions Could Enhance
    Customer Service (20-NOV-03, GAO-04-107).

    In 1993, Congress authorized the William D. Ford Federal Direct
    Loan Program as an alternative to the Federal Family Education
    Loan Program (FFELP). While the Direct Loan Program was
    originally mandated to replace FFELP, Congress revised the law
    allowing both loan programs to continue. Since that time,
    competition between the programs has been credited with improving
    borrower benefits and service for schools. The Department of
    Education's (Education) Office of Federal Student Aid (FSA) and
    its contractors administer the Direct Loan Program, and one of
    its goals is to improve customer service. In light of the
    upcoming reauthorization of the Higher Education Act (HEA), which
    authorizes the loan programs, this report examines the extent to
    which schools participate in the Direct Loan Program, factors
    that influenced schools' decision to begin--and for some schools
    end--participation, and steps that FSA has taken to increase the
    userfriendliness of the program.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-04-107
        ACCNO:   A08876
      TITLE:     Direct Student Loan Program: Management Actions Could
    Enhance Customer Service
         DATE:   11/20/2003
      SUBJECT:   Colleges and universities
    	     Customer service
    	     Data collection
    	     Internet
    	     Student loans
    	     Competition
    	     Aid for education
    	     Student financial aid
    	     Higher education
    	     Program evaluation
    	     Web sites
    	     Dept. of Education Federal Family
    	     Education Loan Program

    	     William D. Ford Federal Direct Loan
    	     Program

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    GAO-04-107

    United States General Accounting Office

    GAO 	Report to the Ranking Minority Member, Committee on Health,
    Education, Labor, and Pensions, U.S. Senate

    November 2003

    DIRECT STUDENT LOAN PROGRAM

                   Management Actions Could Enhance Customer Service

    GAO-04-107

    Highlights of GAO-04-107, a report to the Ranking Minority Member,
    Committee on Health, Education, Labor, and Pensions, U.S. Senate

    In 1993, Congress authorized the William D. Ford Federal Direct Loan
    Program as an alternative to the Federal Family Education Loan Program
    (FFELP). While the Direct Loan Program was originally mandated to replace
    FFELP, Congress revised the law allowing both loan programs to continue.
    Since that time, competition between the programs has been credited with
    improving borrower benefits and service for schools. The Department of
    Education's (Education) Office of Federal Student Aid (FSA) and its
    contractors administer the Direct Loan Program, and one of its goals is to
    improve customer service. In light of the upcoming reauthorization of the
    Higher Education Act (HEA), which authorizes the loan programs, this
    report examines the extent to which schools participate in the Direct Loan
    Program, factors that influenced schools' decision to begin-and for some
    schools end- participation, and steps that FSA has taken to increase the
    userfriendliness of the program.

    November 2003

    DIRECT STUDENT LOAN PROGRAM

    Management Actions Could Enhance Customer Service

    Of schools that provided federal loans in every year since 1994-95,
    approximately 1,200 postsecondary schools-or 29 percent-have provided
    loans through the Direct Loan Program, and most continued to participate
    in school year 2001-02. The Direct Loan Program's share of total new loan
    volume has steadily decreased from its peak of 34 percent in 1998-99 to 28
    percent in 2001-02, and the number of schools that have joined the program
    is much smaller than the number of school that have stopped participating.

    Four factors-(1) streamlined loan delivery, (2) greater control over loan
    processes, (3) timely delivery of money to students, and (4) ease of
    tracking loans over time-were extremely or very important in influencing
    schools' decision to participate in the Direct Loan Program. Schools that
    joined and subsequently left the Direct Loan Program reported a number of
    factors that influenced their decision, including difficulties fulfilling
    certain program requirements and reduced or no loan origination fees
    offered by FFELP lenders. Education has reduced origination fees for
    Direct Loan borrowers, but its regulatory authority to do so has been
    challenged. FSA does not systematically collect information from schools
    about the reasons why they stop participating in the Direct Loan Program,
    although this information could be used to identify needed program
    improvements.

    FSA has taken a number of steps to increase the user-friendliness of the
    program, such as using Web sites to disseminate and collect information
    and forms. Many Direct Loan schools reported that FSA's Web sites are
    effective in helping them administer the program and have simplified the
    process for Direct Loan borrowers, but it is challenging to navigate among
    multiple Web sites. FSA officials are aware of schools' concerns and are
    developing a plan to redesign its Web sites. FSA has also implemented a
    new information system that originates and disburses Direct Loans to
    students faster, and 72 percent of Direct Loan schools were generally or
    very satisfied with this system.

    Congress should consider clarifying whether Education may regulate the
    fees charged to borrowers under the Direct Loan Program.

    We are also recommending that FSA collect information from schools that
    could be used to make improvements to the Direct Loan Program. Education
    agreed with our recommendation.

    www.gao.gov/cgi-bin/getrpt?GAO-04-107.

    To view the full product, including the scope and methodology, click on
    the link above. For more information, contact Cornelia Ashby (202)
    512-8403.

            Schools Join the Direct Loan Program for its Streamlined Process

    Contents

    Letter

    Results in Brief
    Background
    About One-Third of Postsecondary Schools That Provided Federal

    Loans since 1994-95 Have Participated in the Direct Loan
    Program

    Similar Factors Influenced a Majority of Schools' Decision to
    Participate in the Program but the Factors That Influenced
    Schools' Decision to End Participation Varied

    Direct Loan Schools Are Satisfied with Steps Taken by FSA to
    Make the Program User-Friendly but Identified Opportunities for
    FSA to Improve These Services

    Conclusions
    Matters for Congressional Consideration
    Recommendation for Executive Action
    Agency Comments

                                           1

                                          3 5

                                           8

    11

    18 26 26 26 27

    Appendix I Scope and Methodology

    Analyzing Loan Volume and Identifying Schools That Participated
    in the Direct Loan Program and FFELP
    Survey of Schools That Have Participated in the Direct Loan

    Program
    Analysis of Benefits Offered by FFELP Lenders
    Site Visits
    Telephone Interviews

    28

    28

    29 32 32 33

    Appendix II Comments from the Department of Education

    Appendix III GAO Contacts and Staff Acknowledgments 36

    GAO Contacts 36
    Staff Acknowledgments 36

    Tables

    Table 1: Comparison of Responsibilities for Schools That
    Participate in the Direct Loan Program and FFELP 8

    Table 2: Fees and Repayment Incentives Available to Borrowers in

    the Direct Loan Program and Selected FFELP Lenders in

    2003 15 Table 3: Estimated Percentages of Direct Loan Schools' Opinions

    about FSA Web Sites for Schools 20 Table 4: Response Rates of Schools That
    Participated in the Direct

    Loan Program in 2001-02 30 Table 5: Characteristics of Schools Selected
    for Site Visits and

    Interviews 33

    Figures

    Figure 1: Number of Direct Loan Schools and Direct Loan Volume

    (in billions of dollars) in School Year 2001-02, by School

    Type 9 Figure 2: Number of Schools Beginning and Ending Participation in
    Each School Year between 1996-97 and 2001-02 10 Figure 3: Factors That
    Were Extremely or Very Important in Schools' Decision to Join the Direct
    Loan Program 11 Figure 4: Estimated Percentages of Schools for Which the

    Availability of Lenders Willing to Lend to Their Students

    Was an Extremely or Very Important Factor in Influencing

    Schools' decision to Join Direct Loan Program, by School

    Type 13 Figure 5: Estimated Percentages of Direct Loan Schools' Usage of
    Certain FSA Web Sites 19 Figure 6: Estimated Percentages of Direct Loan
    Schools That Refer Their Students to Certain FSA Web Sites 22

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
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    separately.

    United States General Accounting Office Washington, DC 20548

    November 20, 2003

    The Honorable Edward M. Kennedy
    Ranking Minority Member
    Committee on Health, Education, Labor, and Pensions
    United States Senate

    Dear Senator Kennedy:

    In 1993, Congress authorized the William D. Ford Federal Direct Loan
    Program (Direct Loan Program) as an alternative to the Federal Family
    Education Loan Program (FFELP). The original legislation authorizing the
    Direct Loan Program specified that it would gradually expand and replace
    FFELP, but in 1998 Congress removed those provisions. In the ensuing
    years, competition between the two loan programs has been credited with
    improving service for schools and benefits for borrowers. Postsecondary
    schools may participate in one or both loan programs. Regardless of which
    program schools use, students and families are eligible for the same types
    of loans. In school year 2002-03, students and their families borrowed an
    estimated $12 billion in new loans through the Direct Loan Program and
    $30 billion through FFELP.

    The federal government's role in financing and administering these two
    loan programs differs significantly. Under FFELP, private lenders, such as
    banks, provide loan capital and the federal government guarantees FFELP
    lenders a minimum rate of return on the loans they make and repayment if
    borrowers default.1 Additionally, state-designated guaranty agencies
    perform a variety of administrative functions in FFELP. Under the Direct
    Loan Program, federal funds are used as loan capital and are provided
    through participating schools. The Department of Education's Office of
    Federal Student Aid (FSA) and its private-sector contractors jointly
    administer the program. FSA is responsible for delivering funds to schools
    that provide Direct Loans, monitoring its contracts, and facilitating
    interactions between schools providing Direct Loans and the contractors.
    In 1998, Congress established FSA as a performance-based organization

    1For loans disbursed on or after October 1, 1998, the government pays 95
    percent of the default costs plus certain administrative costs. The
    percentage of default costs paid by the federal government decreases if
    the guarantor's default claims are high compared with the amount of loans
    in repayment.

    with specific purposes, including improving customer service and the
    information systems FSA uses to administer student loan and other
    financial aid programs.

    As part of the upcoming reauthorization of the Higher Education Act (HEA),
    you asked us to review the status of the Direct Loan Program by answering
    the following questions: (1) To what extent have schools participated in
    the Direct Loan Program? (2) What factors influenced schools' decision to
    participate in the Direct Loan Program, and if applicable, what factors
    influenced schools' decision to stop participating? (3) What steps has FSA
    taken to increase the user-friendliness of the Direct Loan Program for
    schools and students?

    To address the first question, we analyzed data from three Education
    databases and identified schools that provided loans through either the
    Direct Loan Program or FFELP in each school year from 1994-95 to 2001-02.
    To address the second question, we surveyed financial aid officials at
    schools that participated in the Direct Loan Program in 2001-02, of whom
    57 percent responded to our survey. 2 We also surveyed schools that had
    participated in the program for at least one school year from 1994-95 to
    2000-01 but did not participate in 2001-02. Twenty-three percent of these
    schools responded to our survey, and because of their low response rate we
    do not provide estimates for this group. We conducted site visits and
    telephone interviews with 20 Direct Loan public and private, 4-year,
    2-year, and less-than-2-year schools located in the Boston, New York, San
    Francisco, and Washington, D.C., metropolitan areas. These schools were
    selected on the basis of school type and loan volume. We also interviewed
    financial aid officials at three schools that had once participated in the
    Direct Loan Program but were no longer doing so. To learn about benefits
    available to borrowers, we reviewed the terms of loans provided through
    the Direct Loan Program as well as the terms of loans provided through
    selected FFELP lenders. To address the third question, we gathered
    information about schools' experiences through our survey and site visits
    at Direct Loan schools. In addition, we

    2Because of the large proportion of the total population of schools that
    responded to our survey and the result of our comparison of respondent-
    and nonrespondent-based estimates, we chose to include the survey results
    in our report and to project sample-based estimates for the total
    population of schools in our study population. Percentage estimates for
    Direct Loan schools are based on the "sample" and are subject to sampling
    error. Unless otherwise noted, we are 95 percent confident that the
    results we obtained are within +/- 6 percentage points of what we would
    have obtained if we had received responses from the entire population. See
    appendix I for more details.

    Results in Brief

    interviewed FSA staff at headquarters and three regional offices. We also
    reviewed the Higher Education Act of 1965, as amended, and related
    regulations; contracts for FSA's information systems; FSA planning
    documents; and FSA Web sites. We conducted our work from February through
    October 2003 in accordance with generally accepted government auditing
    standards.

    Of the schools that provided federal student loans in each year since
    1994-95, approximately 1,200-or 29 percent-provided loans through the
    Direct Loan Program, and most of those schools continued to participate in
    the Direct Loan Program in school year 2001-02. In 2001-02, public 4-year
    schools provided the largest share of Direct Loan volume, about $6.9
    billion, or 67 percent, although roughly equal numbers of public 4-year,
    private 4-year, 2-year, and less-than-2-year schools participated. The
    Direct Loan Program's share of total new loan volume has steadily
    decreased from its peak of 34 percent in 1998-99 to 28 percent in 2001-02.
    During this period, only 34 schools began participating in the program,
    while 166 schools have stopped.

    Similar factors influenced a large majority of schools' decision to
    participate in the Direct Loan Program, whereas the factors that led
    schools to leave the program varied. Four factors-(1) streamlined loan
    delivery, (2) greater control over loan processes, (3) timely delivery of
    money to students, and (4) ease of tracking loans over time-were extremely
    or very important in influencing 70 percent of Direct Loan schools'
    decision to participate in the program. While recognizing that
    improvements have since occurred in FFELP, financial aid officials at
    Direct Loan schools we visited explained that prior to joining the Direct
    Loan Program, they had to follow separate and distinct loan processes for
    each of the many FFELP lenders and guaranty agencies used by their
    students. In contrast, Direct Loan schools have only one lender-the
    federal government-and one process to follow. The factors that led many
    schools to end their participation in the Direct Loan Program varied. For
    example, some experienced difficulties meeting the Direct Loan Program
    requirement that they match the school's loan records with the loan
    origination and disbursement contractor's records and resolve any
    discrepancies. Other schools stopped participating because some FFELP
    lenders offered better loan terms for borrowers. For example, some FFELP
    lenders did not charge borrowers loan origination fees and offered

    interest rate reductions that were unavailable to the schools' students
    under the Direct Loan Program.3 Education has reduced the origination fees
    for Direct Loan borrowers, but a coalition of FFELP lenders has challenged
    its regulatory authority to do so and the case is still pending in court.
    Financial aid officials at Direct Loan schools we visited expressed
    concern about the continued viability of the Direct Loan Program in light
    of FFELP lenders' ability to offer more attractive terms to borrowers. The
    extent to which FFELP lenders will continue to offer such benefits is
    unknown. FSA does not systematically collect information from schools
    about the reasons why they stop participating in the Direct Loan Program,
    although this information could be used to identify needed program
    improvements.

    FSA has made the Direct Loan Program more user-friendly for schools and
    students by (1) using Web sites to disseminate and collect information and
    forms, (2) implementing a new information system that originates and
    disburses Direct Loans to students faster, and (3) providing staff in
    regional offices to assist Direct Loan schools. Direct Loan schools
    indicated that FSA's Web sites are effective in helping them administer
    the program and have simplified the process for Direct Loan borrowers. For
    example, Direct Loan borrowers are able to complete and sign their loan
    applications online and view information about their loans when they enter
    repayment. Despite schools' satisfaction with FSA's Web sites, they
    reported that it is challenging to navigate among multiple Web sites. FSA
    officials stated that they are aware of the challenges facing schools and
    are in the early stages of redesigning their Web sites. Seventy-two
    percent of Direct Loan schools were generally or very satisfied with FSA's
    new information system, which originates and disburses loans faster.
    However, many schools commented that customer service representatives-
    contractors hired to provide technical assistance to schools-do not know
    all of the Direct Loan Program's requirements and thus are typically
    unable to answer their questions. FSA officials reported that they are
    taking steps to address this issue, such as temporarily reassigning FSA
    staff to answer telephone inquiries. More than three-quarters of Direct
    Loan schools were very or generally satisfied with the quality of service
    provided by the regional office staff. Direct Loan schools commented that
    training provided by the regional office staff helped them administer the
    program.

    3Although FFELP lenders did not charge fees to borrowers, they still paid
    the loan origination fees to the federal government.

    Background

    In this report we are suggesting that Congress consider clarifying whether
    Education may regulate loan origination fees charged to borrowers under
    the Direct Loan Program. In addition, we are recommending that FSA's Chief
    Operating Officer take actions to collect information from schools that
    have left the Direct Loan Program about the factors that influenced this
    decision, information that could be used to make improvements to the
    Direct Loan Program, thereby helping FSA meet its goal of improving
    customer service.

    We provided Education with a copy of our draft report for review and
    comment. In written comments on our draft report, Education generally
    agreed with our reported findings and recommendation. Education's written
    comments appear in appendix II. Education also provided technical
    clarification, which we incorporated where appropriate.

    Title IV of HEA authorizes federal student aid programs, including the
    Direct Loan Program and FFELP. FFELP originated in the HEA of 1965, while
    the Direct Loan Program was created in 1993. Originally, the Direct Loan
    Program was expected to replace FFELP over a 5-year period with the amount
    of loans provided through the Direct Loan Program rising from 5 percent in
    1994-95 to 60 percent in 1998-99. In reauthorizing HEA in 1998, Congress
    removed the provisions that called for the phase-in of the program, thus
    keeping two federal loan programs. In the ensuing years, competition
    between the two loan programs has been credited with improving service to
    schools and benefits for borrowers.

    Under the Direct Loan Program, students and families borrow through one
    lender-the federal government-which also provides repayment services to
    borrowers. In contrast, students and families can borrow through thousands
    of FFELP lenders, who may or may not continue to provide repayment
    services to students and families. FFELP lenders may receive a subsidy,
    called a special allowance payment, from the federal government to ensure
    that they receive a guaranteed rate of return on the student loans they
    make. Additionally, under FFELP, state-designated guaranty agencies
    perform a variety of administrative functions and guarantee payment to
    lenders if borrowers fail to repay their loans; the federal government
    subsequently reimburses guaranty agencies for these payments to lenders.

    Borrower and School 	Both the Direct Loan Program and FFELP offer the same
    loans to students and their families: unsubsidized and subsidized Stafford
    and PLUS loans, but the loan origination fees and repayment options can
    differ under each

    Benefits

    program.4 HEA specifies loan origination fees of 4 percent in the Direct
    Loan Program and up to 3 percent under FFELP. Prior to 1998, FFELP lenders
    had the flexibility to reduce origination fees for subsidized loan
    borrowers; in 1998, Congress expanded this flexibility to unsubsidized
    loan borrowers. Although lenders may reduce the fees they charge
    borrowers, they must still pay the full amount of the fee to the federal
    government. Under HEA, guaranty agencies also have the option of waiving a
    1 percent loan insurance fee charged to borrowers that is used to
    compensate guaranty agencies for default costs and other claims. Borrowers
    in the Direct Loan Program and FFELP can choose from three similar
    repayment plans, including:

    o  	Standard repayment-borrowers pay a fixed monthly amount of at least
    $50 up to 10 years;

    o  	Graduated repayment-borrowers pay smaller monthly amounts initially
    and in later years the monthly amount is larger;

    o  	Extended repayment-borrowers pay a fixed monthly amount that can be
    repaid over a time period as long as 25 years under FFEL and 30 years
    under the Direct Loan Program.5

    Last, borrowers in both loan programs have the option of choosing a
    repayment plan that is adjusted according to the borrower's income, but
    under the Direct Loan Program borrowers have a longer period of time to
    repay, and after 25 years of repayment, any remaining amount owed on the
    loan is discharged.

    Another difference between FFELP and the Direct Loan Program is that HEA
    includes a provision that allows a school to become a FFELP lender

    4Subsidized Stafford loans are made to students who are enrolled at least
    half-time and have demonstrated financial need, while unsubsidized
    Stafford loans are made to any student enrolled at least half-time, and
    PLUS loans are made to parents of undergraduate students. Unsubsidized and
    PLUS loan borrowers must pay all loan interest costs, whereas the federal
    government pays the interest cost of subsidized loans while the student is
    in school.

    5The monthly amount paid under the graduated plan and the criteria for who
    qualifies under the extended plan vary between the Direct Loan Program and
    FFELP.

    to its graduate students.6 A school may use its own funds to lend to
    students or, according to one FFELP guaranty agency, the school may
    receive a line of credit from another FFELP lender and pay interest on the
    funds as they are used. Under the law, proceeds earned from the special
    allowance payment and interest payments associated with these loans can be
    used for need-based grants or administrative expenses. Schools also sell
    their loans to secondary markets.7

    Schools' Administrative Responsibilities

    Schools choose which federal loan program they will offer to their
    students and can participate in both. Although a school may provide loans
    through both the Direct Loan Program and FFELP, the administrative
    processes are different under each program, with Direct Loan schools
    assuming additional responsibilities. Under both processes, schools
    collect and provide data on whether borrowers are eligible to receive
    loans. Also, schools in both loan programs must counsel students on the
    responsibilities of borrowing and can use either written materials, an
    audiovisual presentation, or a Web site.

    In the Direct Loan Program, schools are responsible for completing all
    tasks to originate and disburse loans to students.8 Furthermore, schools
    that originate loans in the Direct Loan Program are responsible for
    completing a monthly loan reconciliation by comparing their internal
    Direct Loan records with the cash balance reported by FSA's loan
    origination and disbursement contractor and resolving all differences
    between the contractor's report and the school's internal records. Schools
    must also reconcile on a yearly basis. In comparison, as shown in table 1,
    schools that participate in FFELP share some administrative tasks with
    lenders and are not required to perform reconciliation.

    6Schools can act as lenders generally to graduate students and with some
    limitations to undergraduate students. HEA specifies that a school can act
    as lender to its undergraduates as long as it does not lend to more than
    50 percent of its undergraduates and that it extends loans to students who
    have previously received a loan from the school or have been rejected by
    other lenders.

    7Secondary market lenders include Sallie Mae, banks, and nonprofit state
    agencies that purchase loans from originating lenders in order to provide
    additional capital that originating lenders can then use to make new
    loans.

    8With the Secretary of Education's approval, schools may choose to use a
    third-party servicer to administer the Direct Loan Program on behalf of
    the school.

    Table 1: Comparison of Responsibilities for Schools That Participate in
    the Direct Loan Program and FFELP

                        Who's responsible in Administrative task

    Direct Loan
    Program FFELP

                  Determine students' eligibility for federal School    School
                                                         loan
                        Obtain completed promissory note from School    Lender
                                                     borrower
                      Provide entrance and exit counseling to School    School
                                                    borrowers
                                   Disburse money to students School   Lender and
                                                                        school
                          Perform monthly loan reconciliation School Not required

    About One-Third of Postsecondary Schools That Provided Federal Loans since
    1994-95 Have Participated in the Direct Loan Program

    Source: GAO analysis of FSA and Congressional Research Service documents.

    Of the schools that provided federal student loans in each year since
    1994-95, approximately 1,200-or 29 percent-provided loans through the
    Direct Loan Program, and most of those schools continued to participate in
    the Direct Loan Program in school year 2001-02. Since 1998-99, the Direct
    Loan Program's share of total new loan volume has steadily decreased from
    its peak of 34 percent to 28 percent in 2001-02. During this same time
    period, the number of schools that began to participate in the program was
    smaller than the number of schools that stopped participating.

    Among Schools That Participated in the Direct Loan Program during School
    Year 2001-02, Public 4-Year Schools Provided Most of the Program's Loan
    Volume

    Of the 941 schools that were still participating in the Direct Loan
    Program in school year 2001-02, public 4-year schools provided most of the
    program's loan volume. About an equal number of public and private 4-year,
    2-year, and less-than-2-year schools participated in the Direct Loan
    Program in 2001-02, with many schools beginning participation in the early
    years of the Direct Loan Program. Public 4-year schools provided the
    largest share of Direct Loan volume, about $6.9 billion, or 67 percent of
    total 2001-02 Direct Loan volume (see figure 1).

    Figure 1: Number of Direct Loan Schools and Direct Loan Volume (in
    billions of dollars) in School Year 2001-02, by School Type

    0.1

    Less than 2-year

    0.6

    2-year

    Private 4-year

                                         2-year

    Public 4-year

                                    Less than 2-year

    Private 4-year

                                     Public 4-year

                        Source: GAO analysis of Education data.

    Since 1998-99, More Since 1998-99, the number of schools that stopped
    participating in the Schools Have Stopped Direct Loan Program is greater
    than the number that have joined. During Participating in the Direct this
    same time, the program's share of total new loan volume has

    decreased, despite annual increases in total Direct Loan volume. As
    shownLoan Program than Have in figure 2, 166 schools have stopped
    participating in the program sinceJoined 1998-99, while only 34 began
    participating.

    Figure 2: Number of Schools Beginning and Ending Participation in Each
    School Year between 1996-97 and 2001-02

    Number of schools

    160

    140

    120

    100

    80

    60

    40

    20

    0 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02

    School year

    Schools beginning participation

    Schools ending participation

    Source: GAO analysis of Education data.

    The small number of schools entering the program after 1998 coincided with
    a number of changes that occurred at FSA and in FFELP. FSA officials
    reported that in 1998 they instituted a policy of not marketing the Direct
    Loan Program and ended activities they designed to promote the Direct Loan
    Program, such as holding sessions at conferences or visiting financial aid
    officials to discuss the benefits of the Direct Loan Program. FSA
    officials reported that at a Direct Loan school's request, they send
    information detailing how the Direct Loan Program benefits the school's
    students, and they visit campuses considering leaving the Direct Loan
    Program to make presentations about the program's benefits. FFELP lenders
    have continued to market their services to Direct Loan schools. Their
    efforts include sending mailings to students and inviting financial aid
    staff to attend information sessions to learn more about switching from
    the Direct Loan Program to FFELP.

    Similar Factors Influenced a Majority of Schools' Decision to Participate
    in the Program but the Factors That Influenced Schools' Decision to End
    Participation Varied

    Similar factors influenced a large majority of schools' decision to
    participate in the Direct Loan Program, whereas the factors that led
    schools to leave the program varied. Four factors-(1) streamlined loan
    delivery, (2) greater control over loan processes, (3) timely delivery of
    money to students, and (4) ease of tracking loans over time-were extremely
    or very important in influencing 70 percent of Direct Loan schools'
    decision to participate in the Direct Loan Program. The factors that led
    many schools to end their participation in the Direct Loan Program varied
    and included, for example, difficulties meeting program requirements, the
    availability of lower loan origination fees under FFELP, and repayment
    incentives offered by FFELP lenders, which were unavailable to Direct Loan
    Program borrowers. FSA does not collect information on reasons why schools
    stop participating in the Direct Loan Program; thus it may be unaware of
    improvements that could be made to better serve schools and borrowers.

    Four Factors Were Very A substantial majority of schools reported that
    four factors were Important in Influencing extremely or very important in
    influencing their decision to participate in Schools' Decision to the
    Direct Loan Program. Figure 3 shows, for each of these factors, the
    Participate in the Program percentage of schools that reported them as
    very or extremely important.

    Figure 3: Factors That Were Extremely or Very Important in Schools'
    Decision to Join the Direct Loan Program

    Streamlined loan delivery 90

    Timely delivery of money to students 90

    Greater control over loan processes 89

                            Ease of tracking loans over time

    0 1020304050607080

    Estimated percentage of schools Source: GAO Survey of Postsecondary School
    Experiences with the Direct Loan Program.

    82

    90 100

    Although financial aid officials at Direct Loan schools we visited
    acknowledged improvements in FFELP, they commented that prior to joining
    the Direct Loan Program, they had to learn and follow separate and

    distinct loan processes for each lender and guaranty agency that was used
    by their students and their parents. In contrast, the loan delivery
    process under the Direct Loan Program is streamlined: there is only one
    lender- the federal government-and a uniform process. Financial aid
    officials also noted that under FFELP, students often did not receive
    their loans in a timely matter, in some cases waiting 6 weeks after school
    began to receive funds. Under the Direct Loan Program, they said, students
    received their loans quickly. Once again, financial aid officials noted
    that FFELP lenders have improved in this area as well. Financial aid
    officials at Direct Loan schools also told us that a third factor-greater
    control over loan processes-was important because in the Direct Loan
    Program schools were directly responsible for ensuring that an eligible
    student received a loan, whereas in FFELP, schools were dependent on
    lenders or guaranty agencies to approve a student's loan before a student
    could receive the money. Moreover, school financial aid officials said
    that under the Direct Loan Program they were also able to easily change
    the amount of a loan if needed. For example, schools can adjust the amount
    of a Direct Loan to reflect changes in students' courseload or increases
    in grant and scholarship aid-events that could affect the loan amount
    available to borrowers. The fourth factor-ease of tracking student loans
    over time- was important because the Direct Loan Program improved the loan
    process for students. Under the Direct Loan Program, for example, student
    borrowers could easily track their loans because the same lender held the
    loans through repayment, which was often not the case under FFELP.
    Financial aid officials at a few schools associated students' ease of
    tracking loans with reductions in default rates on their campuses.

    While another factor-the availability of lenders willing to lend to a
    school's students-was reported by about 36 percent of Direct Loan schools
    as extremely or very important, responses varied by school type. In
    particular, as shown in figure 4, for a higher percentage of 2-year and
    less-than-2-year schools the factor was extremely or very important.

    Figure 4: Estimated Percentages of Schools for Which the Availability of
    Lenders Willing to Lend to Their Students Was an Extremely or Very
    Important Factor in Influencing Schools' decision to Join Direct Loan
    Program, by School Type

    Less-than-2-year 62

    2-year 52

    4-year private 22

    4-year public 7

                                  10 20 30 40 50 60 70

    Estimated percentage of schools

    Source: GAO Survey of Postsecondary School Experiences with the Direct
    Loan Program.

    Note: The 95-percent confidence interval for the estimated percentage of
    less-than-2-year schools is from 56 to 69 percent.

    According to financial aid officials at 2-year and less-than-2-year
    schools we visited, prior to the Direct Loan Program, some FFELP lenders
    refused to lend to students at their schools because some of their
    graduates did not repay their loans on time. In contrast, financial aid
    officials at public and private 4-year schools we visited said that they
    did not have any problems finding lenders to serve their students, and
    FFELP lenders actively marketed their products to them and their students.

    Thirty-nine percent of schools that participated in the Direct Loan
    Program in 2001-02 also participated in FFELP and provided a number of
    reasons for doing so. Some schools participated in FFELP, in addition to
    the Direct Loan Program, to provide PLUS loans to parents. Some financial
    aid officials reported that parents receive better terms for PLUS loans
    through FFELP. For 57 percent of schools that participated in both loan
    programs, maintaining relationships with lenders was an extremely or very
    important factor in influencing this decision. Through our site visits we
    learned that some schools do this to establish relationships with lenders
    in order to allow students access to alternative loans and make the
    transition to FFELP smoother in case the Direct Loan Program is
    eliminated. Finally, some schools provided most of their loans through
    FFELP but wanted to allow students that transferred to their school with a
    Direct Loan the option of continuing to borrow through the Direct Loan
    Program.

                                           0

    A Variety of Factors Influenced Schools' Decision to End Participation in
    the Direct Loan Program

    A number of schools that joined the Direct Loan Program but subsequently
    stopped participating reported that different factors influenced their
    decision to do so. Some of these factors were related to schools'
    experiences meeting Direct Loan Program reconciliation requirements or
    having staff with technical expertise to administer the program. For
    example, over half of the 61 former Direct Loan schools that responded to
    our survey reported that the amount of time spent on loan reconciliation,
    a requirement only schools participating in the Direct Loan Program must
    meet, was extremely or very important in influencing their decision to
    leave the program. Schools reported that complying with the requirement to
    reconcile schools' records with contractors' records was challenging
    because sometimes the contractor had incorrect information and resolving
    those differences was time-consuming and frustrating. Although many
    schools reported that the loan reconciliation process was challenging, we
    learned during our site visits and from FSA officials that schools that
    established internal "checks and balances" and meticulously organized
    their loan information could more easily complete the loan reconciliation
    process.

    Another important factor for leaving the program reported by former Direct
    Loan schools responding to our survey and through our interviews was that
    some FFELP lenders offered better loan terms for their students and
    parents in 2003 than those offered by the Direct Loan Program. For
    example, many FFELP lenders offered loans with reduced or no origination
    fees and the potential for interest rate reductions that were unavailable
    to the schools' students under the Direct Loan Program. For both loan
    programs, borrower interest rates are variable and change annually based
    on prevailing market rates, in accordance with the law.9 Lenders have the
    flexibility, however, to offer borrowers lower rates. Moreover, all but
    two guaranty agencies did not charge student borrowers the loan insurance
    fee, thus lowering costs for almost all borrowers in FFELP. As shown in
    table 2, financial benefits available to borrowers may vary by program and
    lender.

    9Under the law, the maximum borrower rate for Stafford loans is based on
    the 91-day Treasury-bill rate plus 1.7 percent while students are in
    school or plus 2.3 percent if a student's loan is in repayment, capped at
    8.25 percent.

    Table 2: Fees and Repayment Incentives Available to Borrowers in the
    Direct Loan Program and Selected FFELP Lenders in 2003

                                  Origination                Repayment incentives
                         Lender              fee
                                              3% o  0.25% interest rate reduction
                  Department of                                      for repaying
                                                   electronically  o  1.5% rebate
              Education (Direct  (Stafford loan)  of loan amount borrowed applied
                  Loan Program)               4%   at the time loan is disbursed.
                                                           Borrowers must make 12
                                                  consecutive on-time payments or
                                  (PLUS loan)    amount will be added back to
                                                 borrower's
                                                                         account.
                                                 o  0.25% interest rate reduction
                 FFELP lender A               0%                     for repaying
                                                    electronically  o  PLUS loans
                                 (Stafford loan) interest-free for the first year
                                                          o  portion of loan debt
                                              3%           cancelled when student
                                                    graduates with degree; amount
                                    (PLUS loan)a     varies by degree type  o  2%
                                                            rate reduction for 48
                                                              consecutive on-time
                                                                 monthly payments

    FFELP lender B 0%  o  0.25 % interest rate reduction for repaying
    (Stafford electronically

    loan)  o  interest rate reduced to 0% after 36 monthly on3% time payment
    for Stafford or PLUS loans

    (PLUS loan)a

    FFELP lender C Up to 3%  o  0.25% interest rate reduction on PLUS loans
    for (Stafford repaying electronically if serviced by a specific
    servicerand PLUS loans)  o  3.3% credit or cash rebate on principal
    balance of Stafford loans if loans are serviced by a specified servicer,
    borrower agrees to have account information available at a valid e-mail
    account, and initial 33 payments are made on time

    FFELP lender D 3%  o  0.25 % interest rate reduction for repaying
    (Stafford electronically

    and PLUS  o  credit on origination fees if Stafford loans are loans) owned
    and serviced by lender minus $250 after the first 24 consecutive payments

    o  	2% interest rate savings after first 48 months of on-time payments if
    loan is owned and serviced by lender

    Source: GAO analysis of borrower benefits under the Direct Loan Program
    and selected FFELP lenders. a PLUS loan origination fees are credited back
    to the borrower's account. Note: FFELP lenders include banks and guaranty
    agencies that also serve as lenders.

    Although FFELP lenders can offer reduced fees and other benefits to
    borrowers, they are not obligated to do so every year. FFELP lenders'
    decision to offer such benefits to borrowers may depend on a variety of
    factors, such as lenders' cost for each loan dollar and lenders' ability
    to link the benefits to borrower behavior. For example, lenders with
    relatively low costs for each loan dollar might decide to pass these
    savings on to borrowers. FFELP lenders might also choose to offer such
    benefits only to select borrowers that exhibit certain repayment behavior,
    such as those who make consecutive on-time repayments. According to some
    lenders, the number of borrowers who receive benefits because they satisfy
    such repayment requirements may be low.

    In order to compete with FFELP lenders, Education reduced its origination
    fees in 1999 for Direct Loan borrowers and, as a repayment incentive,
    offered an interest rate reduction for borrowers who repay electronically,
    but its authority to lower origination fees has been challenged. When
    taking these actions, Education cited an HEA provision that states Direct
    Loan Program borrowers are to receive the same terms and conditions as
    FFELP borrowers. A coalition of FFELP lenders filed a lawsuit challenging
    Education's regulatory authority to reduce origination fees because HEA
    also includes a provision that sets the Direct Loan Program origination
    fee at 4 percent.10 At this time, the case is still pending. Given the
    differences in fees and other benefits offered to students through FFELP,
    financial aid officials at Direct Loan schools we visited expressed
    concern about the continued viability of the Direct Loan Program in light
    of FFELP lenders' ability to offer more attractive loan terms to
    borrowers. Some financial aid officials we interviewed suggested that
    Education further reduce or eliminate loan origination fees for Direct
    Loan borrowers. Because loan origination fees offset federal loan program
    costs, any changes to the amount of origination fees charged to borrowers
    may affect federal costs.11

    10Student Loan Finance et al. v Riley, Civ. A. No. 2660 (D.D.C. 2000). In
    response to a congressional request before the litigation was filed, GAO
    issued an opinion finding that Education lacked authority to reduce the 4
    percent loan origination fee B-238717, Sept. 29, 1999.

    11When Education lowered fees in 1999, Education officials reported in its
    report Cost of the 1999 Reduction in Direct Loan Fees that the fee
    reduction would increase the cost of the Direct Loan Program. However they
    believed that the increase would be offset by the ability to attract new
    borrowers to the Direct Loan Program who might otherwise obtain loans from
    the more costly FFELP, whose lenders were offering fee discounts to
    attract borrowers.

    In addition, more recently some schools have switched from the Direct Loan
    Program to FFELP in order to become lenders to the schools' graduate
    students-an option not available under the Direct Loan Program. A large
    public 4-year Direct Loan school in the Midwest recently entered into such
    an agreement with a coalition of FFELP lenders for school year 2003-04 in
    which it would end its participation in the Direct Loan Program and the
    school would serve as a lender to its graduate students. Under the
    agreement, the school agreed that the lender coalition would be the
    preferred lender for its undergraduates.12 In return, students pay no
    origination fees and receive other repayment incentives. Financial aid
    officials at several Direct Loan schools with graduate students reported
    that FFELP lenders have contacted them and their schools' executive
    officers about the financial benefits available to a school that becomes a
    lender to its graduate students. Although these schools have not switched
    from the Direct Loan Program to FFELP, they reported that they are
    considering the opportunity to earn money as school lenders.

    FSA Does Not Collect Information on the Factors Influencing Schools'
    Decision to Stop Participating

    FSA does not systematically collect information about the factors that
    influence schools' decision to stop participating in the Direct Loan
    Program, although this information could be used to identify needed
    program improvements. Current regulations require schools to notify the
    Secretary of Education of their intent to leave the Direct Loan Program,
    and after 60 days, or at an earlier time if the Secretary agrees, they can
    stop participating. However, FSA officials reported that they typically
    learn schools have stopped participating when schools stop disbursing
    funds through the Direct Loan Program. Although schools may send letters
    detailing why they have stopped participating, such letters may not always
    be sent to the same office within FSA. FSA may also learn about factors
    that influence some schools' decision to stop participating in the Direct
    Loan Program from schools that provide such feedback via regularly
    scheduled conferences and focus groups convened by FSA, which, among other
    things, provide forums for schools to provide suggestions for improving
    the program. However, FSA officials reported that they neither routinely
    nor systematically collect information on the specific reasons why schools
    decide to stop participating in the program. As a result, FSA may not be
    aware of improvements that could be made to the program,

    12Schools that participate in FFELP may designate one or more lenders as a
    preferred lender from which students can borrow.

    Direct Loan Schools Are Satisfied with Steps Taken by FSA to Make the
    Program User-Friendly but Identified Opportunities for FSA to Improve
    These Services

    which, in turn, might help FSA achieve its goal of improving customer
    service.

    FSA has made the Direct Loan Program more user-friendly for schools and
    students by (1) using Web sites to disseminate and collect information and
    forms, (2) implementing a new information system to originate and disburse
    Direct Loans, and (3) designating regional staff to assist Direct Loan
    schools. Direct Loan schools indicated that FSA's Web sites are effective
    in helping them administer the program, but that navigating among the
    numerous Web sites can be difficult. FSA officials stated that they are
    aware of schools' concerns and are developing a strategy to redesign its
    Web sites. Direct Loan schools were also generally satisfied with FSA's
    information system for originating and disbursing loans, but they have
    encountered difficulties with customer service representatives who are
    unable to help them resolve their problems. Finally, FSA regional staff
    have provided training and technical assistance to Direct Loan schools,
    and about three-quarters of Direct Loan schools were very or generally
    satisfied with the quality of service provided by the regional staff.

    Direct Loan Schools Many Direct Loan schools reported on our survey that
    FSA's Web sites Reported That FSA's Web helped them administer the Direct
    Loan Program but that navigating Sites Have Helped Them among FSA's Web
    sites was challenging. Schools reported that the Web

    sites were effective in that they helped them perform variousAdminister
    the Program, administrative functions, such as determining student
    eligibility for Directbut Navigating among Loans. Figure 5 provides
    information about key Web sites FSA developed Multiple Sites Can Be for
    schools, the purpose of the Web sites, and the extent to which Direct
    Challenging Loan schools reported using the Web sites very often or often.

    Figure 5: Estimated Percentages of Direct Loan Schools' Usage of Certain
    FSA Web Sites FSA school Web sites Purpose Survey results

    NSLDS
    Schools verify students reported using Web sites very often or often

    Estimated percentage of Direct Loan schools that

    eligibility to receive loans and view loan history.

    https://www.nsldsfap.ed.gov/secure/logon.asp

    Common Origination and Disbursement

    Schools can view and process data for Direct Loan and other student aid
    programs and obtain technical assistance.

    https://cod.ed.gov/cod/LoginPage

    Direct Loan home page

    Schools can review

    information and guidance

    specific to the Direct Loan

    program.

                                           `

    87

    84

    57

    58

                                           42

    0 10 2030405060708090100

    Types of schools

    4-year public Less-than-2-year

    4-year private Overall

    http://www.ed.gov/DirectLoan 2-year

    Sources: GAO Survey of Postsecondary School Experiences with the Direct
    Loan Program and U.S. Department of Education, Office of Federal Student
    Aid, Washington, D.C.

    Note: During FSA's transition to a new loan origination and disbursement
    system, there were two Web sites that schools could use to process and
    view loan information; these results are related to the Web site for FSA's
    newly implemented system-the Common Origination and Disbursement (COD).

    The various school types reported Web site usage that differed. For
    example, a larger percentage of 4-year public and private schools reported
    that they used the NSLDS Web site very often or often than did
    less-than2-year schools. At a large public 4-year school with a number of
    satellite campuses worldwide, financial aid officials stated that the
    ability to use FSA's Web sites to verify that students have met certain
    program requirements has been useful because many of its students are
    unable to visit the financial aid office in person. Almost 64 percent of
    less-than2-year schools13 reported that a corporate office or a third
    party servicer14 handled the administrative processes for the Direct Loan
    Program, thus they did not need to use the Web sites. Furthermore, some
    schools were not aware of all the FSA Web sites that provided information
    about the Direct Loan Program.

    Additionally, Direct Loan schools reported that FSA Web sites provided
    relevant and timely information, answered their questions, and were easy
    to understand. For example, as shown in table 3, 91 percent of Direct Loan
    schools reported that the NSLDS Web site provided relevant information.

     Table 3: Estimated Percentages of Direct Loan Schools' Opinions about FSA Web
                                   Sites for Schools

    Estimated percentage of Direct Loan schools that reported Web sites were
    excellent or good in

                               FSA Web sites for schools

    Providing relevant information

    Providing timely information

    Answering questions

                                        Using language that is easy to understand

    NSLDS 91 81 70 https://www.nsldsfap.ed.gov/secure/logon.asp

            Common Origination and Disbursement          73        69       63
             |https://cod.ed.gov/cod/LoginPage
                Direct Loan Servicing Online
          https://schools.dssonline.com/index.asp

    Direct Loan home page 80 78 68 http://www.ed.gov/DirectLoan

    Source: GAO Survey of Postsecondary School Experiences with the Direct
    Loan Program.

    Note: We asked schools to evaluate the COD and Direct Loan Servicing
    Online Web sites together.

    13The 95-percent confidence interval for this estimate is from 56 to 72
    percent.

    14A third party servicer is an individual, a state, or a
    private-for-profit or nonprofit- organization that enters into a contract
    with Title IV-eligible institutions to administer the school's Title IV
    program.

    Despite overall satisfaction with FSA's Web sites, many Direct Loan
    schools reported during our site visits and through our survey that it is
    challenging to navigate among multiple Web sites because many of the sites
    require separate passwords. Almost 90 percent of Direct Loan schools
    believe developing a single password to access all FSA Web sites would
    have a generally or very positive effect on the Direct Loan Program. Some
    schools we visited stated that in order to keep track of the many
    passwords and different expiration dates associated with the passwords,
    they have stored passwords on personal electronic devices or created
    easily retrievable documents that list all passwords-actions that could
    compromise the security of financial information. FSA officials told us
    that they are aware of the challenges facing schools and are in the early
    stages of redesigning how they use Web sites to present information and
    services. This strategy will attempt to address schools' concerns about
    multiple passwords as well as enhance security by increasing FSA's ability
    to verify schools' access to and use of data. Further, FSA officials
    reported that they will continue to collect feedback from schools that
    submit comments at its Web sites as well as those that attend sessions at
    FSA-sponsored conferences and focus groups held to discuss their strategy.
    FSA expects to implement its new Web site strategy by 2006. During the
    course of our review, FSA developed interim measures linking two of its
    Web sites- Direct Loan Servicing's Online School site and the Common
    Origination and Disbursement (COD) site-with one password in an effort to
    improve customer service.

    In addition to developing Web sites geared to financial aid
    administrators, FSA has also developed Web sites that students can use to
    apply for financial aid, fulfill requirements for receiving a Direct Loan,
    and monitor their loans from disbursement through repayment. For example,
    students can access a Web site that allows them to electronically sign a
    master promissory note, a legally binding agreement between students and
    Education that outlines the terms and conditions of a Direct Loan. As
    shown in figure 6, almost half of Direct Loan schools referred their
    students often or very often to the Direct Loan Servicing Online Web site.

    Figure 6: Estimated Percentages of Direct Loan Schools That Refer Their
    Students to Certain FSA Web Sites

    FSA student Web sites Purpose Survey results

    Online Direct Loan servicing Estimated percentage of Direct Loan schools
    that Students can fulfill requirements report referring students to Web
    sites very often or often

    that they understand the
    responsibilities of borrowing. 64
    Students can also access this
    site to obtain information about
    repayment options and
    electronically repay their loans.

    41

    http://www.dlssonline.com/index.asp

    Electronic promissory note 68
    Students or parents can
    electronically sign master
    promissory note.

    36

    https://lo-online.ed.gov/empn/unsecure/

    NSLDS 53
    Students can review information
    regarding their loan and financial
    aid history.

    33

    0 10 20304050607080

    Types of schools

    4-year public Less-than-2-year http://www.nslds.ed.gov 4-year private
    Overall

    2-year

    Sources: GAO Survey of Postsecondary School Experiences with the Direct
    Loan Program and U.S. Department of Education, Office of Federal Student
    Aid, Washington, D.C.

    Schools that prefer to have their students complete many tasks with paper
    materials reported a number of reasons for doing so. Financial aid
    officials at two Direct Loan schools we visited told us that they use
    paper master promissory notes because they believed it is important for
    students to sign an actual piece of paper to emphasize the responsibility
    associated with borrowing. Another school said that their students did not
    have access to computers at home and the school had a limited number of
    computers on campus, making it necessary for students to complete paper
    forms to meet program requirements.

    Despite the fact that some schools still rely on paper records, some
    Direct Loan Program materials were sometimes unavailable. Additionally,
    some financial aid officials told us that many Direct Loan-specific
    publications, such as brochures used to describe the program to students,
    have either been discontinued, or are available only online, or have not
    been updated in several years. Moreover, several Direct Loan schools
    reported that critical documents, such as the master promissory note, were
    not available in time for the 2002-03 school year. FSA officials reported
    that there were delays in distributing paper master promissory notes to
    schools because the process needed to obtain departmental approval is
    lengthy. These materials were ready for the 2003-04 school year.

    Direct Loan Schools Were Generally Satisfied with FSA's New Information
    System, which Delivers Loans Faster to Students

    Seventy-four percent of Direct Loan schools were generally or very
    satisfied with FSA's newly implemented information system, known as COD,
    which delivers loan funds quicker to students.15 FSA officials indicated
    that COD is able to process loans quicker than the former loan origination
    system, with loans made available to schools and borrowers the same day.
    During our site visits, some Direct Loan schools agreed that they received
    loan funds faster under the COD system and liked COD features that allowed
    them to make changes to student loan amounts instantaneously. For example,
    a 4-year public school in California commented that, due to the state's
    budget crisis, tuition and fees charged to students will increase in
    school year 2003-04 and with COD they will be able to make changes to
    students' loan amounts that will allow students to pay their tuition bills
    on time.

    15As part of its goal to integrate its systems, FSA has implemented COD to
    combine two different information systems previously used to originate and
    disburse Direct Loans and Pell Grants-federal grants awarded based on
    students' financial need. All schools must be full participants in COD by
    2005-06.

    Although schools are satisfied with COD, many reported that customer
    service representatives designated to handle their questions are typically
    unable to resolve their problems. FSA has contracted with a private sector
    organization-Affiliated Computer Systems, Inc.-to hire and manage customer
    service representatives.16 This is the third time that FSA has changed
    contractors to operate the customer service centers. Several Direct Loan
    schools reported that the customer service representatives are friendly
    and responsive but typically lack the knowledge of Direct Loan Program
    requirements needed to resolve schools' issues. For instance, financial
    aid officials reported difficulties in trying to resolve differences
    between school records and COD data on whether students had completed the
    master promissory note. In addition, several Direct Loan schools reported
    particular problems performing monthly reconciliation of their Direct Loan
    accounts. For example, one school mistakenly disbursed loan funds for the
    same student twice, and the customer service representatives were unable
    to help them correct this mistake. A previous study of the Direct Loan
    Program in 1998 also highlighted schools' frustration with customer
    service representatives during past transitions between contractors.17

    FSA officials acknowledged that they may have to rethink their approach to
    providing customer service for their loan origination and disbursement
    systems in order to minimize problems schools encounter when switching
    contractors. Moreover, FSA officials also acknowledged that they may have
    underestimated the skills needed by representatives hired to answer
    questions about COD. FSA officials have taken additional steps to address
    schools' concerns about the customer service representatives, including
    temporarily reassigning FSA regional staff to answer telephone inquiries
    and providing additional training to COD customer service representatives.
    As outlined in its COD contract, FSA has surveyed schools to gather
    information about their experiences with COD and will take further action
    once it has analyzed data obtained in its survey.

    16Another contractor, TSYS, is responsible for designing and operating the
    COD system.

    17Macro International, Inc., Direct Loan Program Administration:
    1993-1998, (Washington, D.C. 1998).

    FSA's Regional Offices Offer Direct Loan Schools Training, Technical
    Assistance, and Other Services

    FSA staff in regional Direct Loan School Relations Offices (DLSRO) have
    provided training, technical assistance and software support, and answered
    queries. For about 43 percent of Direct Loan schools, the major reason
    they contacted FSA regional office staff in school year 2001-02 was to
    receive technical assistance specific to Direct Loans. Further, 82 percent
    of Direct Loan schools were very or generally satisfied with DLSRO, and
    about three-quarters were very or generally satisfied with the quality of
    service provided by the DLSRO staff. For example, several financial aid
    officials at schools we visited reported that the training offered by
    DLSRO staff is helpful and assists them in administering the program.

    According to DLSRO officials, the level of assistance that they provide to
    schools can vary. A DLSRO official reported that over time, as some
    schools have become more familiar with administering the Direct Loan
    Program, they have tended to need less intensive services. Other DLSRO
    officials stated that some schools require intensive assistance to
    establish processes and systems so that they can meet Direct Loan
    reconciliation requirements. Some DLSRO staff told us that in recent years
    budget constraints have limited their ability to conduct on-site visits
    with Direct Loan schools. To provide services to schools, DLSRO staff
    organized training sessions at a location convenient for several schools
    to attend, thus maximizing the efficiency of the training. Although some
    schools have reported that they are more comfortable administering the
    program, they continue to use DLSRO staff for services, such as training
    and help reconciling their accounts. A few Direct Loan schools that we
    visited reported that they often attend training held at the regional
    office because they are unable to attend FSA's national conferences.
    Moreover, one school told us that during the transition to COD, DLSRO
    staff have been able to address many questions related to the program that
    the contractor was not equipped to handle because the contractor was
    unfamiliar with the issues involved.

    In July 2003, FSA reorganized its staff in headquarters and in the
    regional offices to improve its program delivery and customer service.
    Under the reorganization, DLSRO has been renamed the School Relations
    Office, and its mission has been broadened from assisting Direct Loan
    schools to assisting all schools participating in Title IV programs. FSA
    officials reported that this change was made because the number of schools
    participating in the Direct Loan Program has decreased and they believed
    that schools in the Direct Loan Program no longer need individual
    attention. To address agency needs, several former DLSRO staff have been
    temporarily reassigned to other offices, where they perform such tasks as

    Conclusions

    Matters for Congressional Consideration

    Recommendation for Executive Action

    providing training to COD contractor staff, developing FSA program
    software, or working in FSA headquarters operations. FSA officials
    reported that changes under the reorganization would not adversely affect
    customer service provided to Direct Loan schools.

    The creation of the Direct Loan Program as an alternative to FFELP has
    provided schools with a choice of programs to provide federal loans to
    their students. Many financial aid officials believe that competition
    between the two loan programs has improved service for schools and
    borrowers. While some schools have recently begun to participate in the
    Direct Loan Program, others that began participating several years ago
    have recently stopped. Some schools have stopped participating because
    some FFELP lenders offered better loan terms-including reduced origination
    fees and the potential for reduced interest rates-to their students. Not
    all FFELP lenders offer these better terms nor are they obligated to do
    so. Further, lenders' willingness and ability to offer these better terms
    can be contingent on a number of economic factors, including lender costs
    and the extent of competition in the marketplace. Whether some lenders
    will continue to provide better loan terms for students in the future is
    unknown. Nonetheless, schools that remain in the Direct Loan Program have
    expressed concerns about the continued viability of the program in light
    of the better benefits offered by some FFELP lenders and the lack of
    clarity over whether Education may offer similar benefits. In addition to
    the availability of better loan terms for students under FFELP, schools
    have also stopped participating in the Direct Loan Program for other
    reasons. Because FSA does not routinely collect information about why
    schools stop participating in the program, it is missing an important
    opportunity to learn whether it could make changes or improvements to the
    Direct Loan Program that would better serve its customers.

    In light of questions about provisions in the HEA concerning Direct Loan
    Program origination fees, Congress should consider clarifying the extent
    to which Education may regulate the loan origination fees charged to
    borrowers during its reauthorization of the HEA.

    To improve knowledge of its Direct Loan customers and meet its goal of
    increasing customer satisfaction, we recommend that FSA's Chief Operating
    Officer develop a process for collecting information from schools that
    decide to stop participating in the Direct Loan Program about

    Agency Comments

    the factors that influenced this decision and use this information to make
    improvements to the program.

    We provided a draft of this report to Education for review and comment. In
    written comments on our draft report, Education generally agreed with our
    reported findings and recommendation. Regarding our finding that Education
    does not collect information from schools that have stopped participating
    in the program, Education agreed but suggested we acknowledge that
    Education does provide forums for schools to provide suggestions for
    improving the Direct Loan Program. In response, we noted on page 17 that
    conferences and focus groups convened by FSA provide such forums. In
    response to our recommendation, Education stated that in the future, it
    would conduct exit interviews of schools leaving the Direct Loan Program
    and use the information as appropriate. Education also provided technical
    clarification, which we incorporated where appropriate. Education's
    written comments appear in appendix II.

    We are sending copies of this report to the Secretary of Education,
    appropriate congressional committees, and other interested parties. In
    addition, the report will be available at no charge on GAO's Web site at
    http://www.gao.gov.

    If you or your staff have any questions about this report, please call me
    on (202) 512-8403 or Jeff Appel on (202) 512-9915. Other contacts and
    staff acknowledgments are listed in appendix III.

    Sincerely yours,

    Cornelia M. Ashby Director, Education, Workforce, and Income Security
    Issues

                            Appendix I: S e and Methodology

    Appendix I: Scope and Methodology

    Analyzing Loan Volume and Identifying Schools That Participated in the
    Direct Loan Program and FFELP

    To address our research objectives, we analyzed loan volume data and
    identified schools that participate in the Direct Loan Program or Federal
    Family Education Loan Program (FFELP), surveyed financial aid directors at
    schools that have participated in the Direct Loan Program, analyzed
    information on financial benefits provided by lenders, conducted site
    visits to Direct Loan schools that were selected based on a variety of
    criteria, and interviewed by telephone financial aid officials at schools
    that either were participating in or had participated in the Direct Loan
    Program.

    To identify loan volume and schools that have provided loans through the
    Direct Loan Program or FFELP, we analyzed institutional-level data on
    loans in three Department of Education databases-(1) the Committed Loan
    Volume Report, which includes loan data reported by schools and
    contractors; (2) the National Student Loan Data System (NSLDS), a national
    repository of information about federal loans and grants awarded to
    students; and (3) the Integrated Postsecondary Education Data System
    (IPEDS), a collection of information obtained from surveys of all
    institutions whose primary purpose is to provide postsecondary education
    and provides institutional-level data for a variety of characteristics.
    The Committed Loan Volume Report was used to determine the loan volume and
    schools in the Direct Loan Program for school years 1994-95 to 2001

    02. NSLDS was used to determine the loan volume and schools in FFELP.
    IPEDS was used to identify school characteristics. To assess the
    reliability of the Committed Loan Volume Report, NSLDS, and IPEDS, we
    reviewed existing information about the data, including documentation
    produced by officials at Education. Education officials also reported
    performing data accuracy, validity, and integrity tests to ensure data are
    reliable. We performed validity tests of key variables. We determined that
    the Direct Loan, NSLDS, and IPEDS data were sufficiently reliable for our
    purposes.

    We used Education's Office of Postsecondary Education's identification
    number (OPEID) to match data in each database and excluded all foreign
    schools. We also excluded schools that did not provide loans through
    either program in any year between school years 1994-95 and 2001-02. After
    applying our criteria, we identified 4,155 schools that provided
    subsidized Stafford, unsubsidized Stafford, or PLUS loans through the
    Direct Loan Program or FFELP from school years 1994-95 through 2001-02. We
    classified schools into three categories:

    o  	FFELP school-2,935 schools provided loans through FFELP and never
    participated in the Direct Loan Program.

                           Appendix I: Scope and Methodology

    o  	Direct Loan school-941 schools participated in the Direct Loan Program
    in school year 2001-02. Of schools in this category, 366 also provided
    loans through FFELP in 2001-02.

    o  Former Direct Loan school-279 schools participated in the Direct Loan

    Survey of Schools That Have Participated in the Direct Loan Program

    Program for at least one school year from 1994-95 to 2000-01 but not in
    school year 2001-02. These schools provided loans through FFELP in
    2001-02.

    We administered a Web survey to financial aid officials at schools we
    identified as participating in the Direct Loan Program from the 1994-95 to
    2001-02 school years. These schools consisted of four school types: 4-year
    public, 4-year private, 2-year, and less-than-2-year schools. We excluded
    a small number of schools from the population, and e-mailed the survey to
    all remaining 1,196 schools in our study population.1 We conducted the
    survey between June and August of 2003.

    Because most of our survey questions asked schools about their experiences
    in the Direct Loan Program in 2001-02, we divided the study population
    into two groups-Direct Loan and former Direct Loan schools. We obtained
    responses from 57 percent of Direct Loan schools and 23 percent of the
    former Direct Loan schools. Because of the low response rate of former
    Direct Loan schools, we do not produce estimates for this group of schools
    in this report.2

    Table 4 summarizes the population size of and responses received from
    Direct Loan schools, by school type.

    1We did not include 24 schools in our survey because we could not locate
    correct email addresses. Eighteen of the 24 schools no longer participated
    in the program in 2001-02. The other 6 schools participated in the program
    in 2001-02 but their omission does not affect our findings.

    2In some instances we report the number of former Direct Loan schools
    responding to a question, but this should not be interpreted as an
    estimate of the broader population.

    Appendix I: Scope and Methodology

    Table 4: Response Rates of Schools That Participated in the Direct Loan
    Program in 2001-02

                                        Direct      Number of Direct   Percentage
                                   Loan school   Loan schools that     of schools
                     School type    population responded to survey     responding
                   4-year public           210                   141
                  4-year private           240                   133
                          2-year           268                   153
                Less-than-2-year           217                   110
                           Total           935                   537

      Source: GAO Survey of Postsecondary School Experiences with the Direct Loan
                                        Program

    Estimation

    We compared key characteristics of nonrespondents and respondents. We
    performed an analysis to determine whether there were significant
    differences between respondents and nonrespondents on several key
    characteristics. Separately for respondents and nonrespondents, we
    estimated the percentage of schools that participated in both the Direct
    Loan Program and FFELP and the proportion of schools participating in the
    Direct Loan Program for 6, 7, or 8 years. We performed this analysis for
    all Direct Loan schools, and also separately for each of our strata
    (school type). For most of the comparisons, these characteristics were not
    significantly different between the respondents and the nonrespondents.
    Additionally, we estimated average loan volume and average enrollment for
    the respondents and the nonrespondents. Although the results of this
    estimate indicate that respondents have larger loan volume and enrollments
    for some strata, survey estimates related to loan volume or enrollment are
    not contained in this report.

    Because our sample contained a large proportion of the total population of
    schools, and because of the result of our comparison of respondent and
    nonrespondent-based estimates, we chose to include the survey results in
    our report and to project sample-based estimates for the total population
    of schools in our study population.

    All population estimates based on this survey are for the target
    population defined as Direct Loan schools. Estimates of this target
    population were computed using methods that are appropriate for a
    stratified probability sample. Within each stratum, we formed estimates by
    weighting the survey data by the ratio of the population size to the
    sample size. This method of estimation assumes that the response for this
    survey was equivalent to probability sampling within each stratum.

                           Appendix I: Scope and Methodology

    Sampling and Nonsampling Error

    As with all sample surveys, this survey is subject to both sampling and
    nonsampling errors. The effects of sampling errors, due to the selection
    of a sample from a larger population, can be expressed as confidence
    intervals based on statistical theory. Sampling errors occur because we
    use a sample to draw conclusions about a larger population. As a result,
    the sample was only one of a large number of samples of schools that might
    have been obtained from the population of all Direct Loan schools. If a
    different sample had been taken, the results might have been different. To
    recognize the possibility that other samples might have yielded other
    results, we express our confidence in the precision of our particular
    sample's results as a 95-percent confidence interval. The 95-percent
    confidence interval is expected to include the actual results for 95
    percent of samples of this type. For percentage estimates in this report,
    we are 95 percent confident that when sampling error is considered, the
    results we obtained are within +/- 6 percentage points of what we would
    have obtained if we had surveyed the entire study population, unless
    otherwise noted. For example, we estimate that 90 percent of the schools
    reported that streamlined loan process was an extremely or very important
    factor in influencing the decision to join the Direct Loan Program. The
    95-percent confidence interval for this estimate would be no wider than
    +/-6 percentage points, or from 84 to 96 percent.

    In addition to the reported sampling errors, the practical difficulties of
    conducting any survey introduce other types of errors, commonly referred
    to as nonsampling errors. For example, questions may be misinterpreted,
    some people may be less likely than others to respond to the survey,
    errors could be made in recording the questionnaire responses, or the
    respondents' opinions may differ from those of financial aid officials at
    schools that did not respond to our survey. We took several steps to
    reduce these errors. Prior to fielding the questionnaire, we pretested the
    data collection instrument with six schools to ensure that respondents
    would understand the questions and that answers could be provided. Because
    this was a Web survey, the responses were directly entered by respondents
    and were not subject to other data entry errors. Data edits and estimation
    programs were independently verified to ensure that programming errors did
    not affect our estimates. To reduce nonresponse, we sent two follow-up
    emails to all schools that had not responded to the survey by our
    deadline. Additionally, we conducted an intensive follow-up with a
    randomly selected group of 100 nonrespondents that had participated in the
    Direct Loan Program in 2001-02 and received responses from an additional
    35 schools that were included in our final survey results.

                           Appendix I: Scope and Methodology

    Analysis of Benefits Offered by FFELP Lenders

    Site Visits

    In order to examine financial benefits available from different FFELP
    lenders, we obtained information through the Web sites of the eight FFEL
    lenders with the highest amount of loan originations in fiscal year 2002-
    each made federal loans of more than a billion dollars-and all 36 guaranty
    agencies. We also interviewed two FFELP lenders and an organization that
    represents FFELP lenders.

    We conducted interviews with financial aid officials at 20 current Direct
    Loan schools of various types that were located in the Boston, New York
    City, San Francisco, and Washington, D.C., metropolitan areas. We selected
    schools based on school type and loan volume. These schools included 6
    public 4-year schools, 6 private 4-year schools, 4 2-year schools, 3
    less-than-2-year schools, and 1 public university system that includes 12
    4-year and 5 2-year schools.3 At the time of our visits, 13 of these
    schools participated only in the Direct Loan Program and 7 participated in
    both the Direct Loan Program and FFELP. See table 5.

    3We visited a university official at the City University of New York,
    because Direct Loan Program operations are centralized for its campuses.

                           Appendix I: Scope and Methodology

      Table 5: Characteristics of Schools Selected for Site Visits and Interviews

                                                        Student Direct Loan FFELP
                                                      enrollment, volume, volume,
                             Name of school School type fall 1998 2001-02 2001-02

    Boston area, located in FSA Region I New York City, located in FSA Region II DC
                         Metro area, located in FSA Region III

           Suffolk University      4-year private   6,445 $15,791,907 $27,789,571
           Benjamin Franklin       4-year public      279  $1,166,773          $0
        Institute of Technology
           Harvard University      4-year private  24,373 $77,643,462          $0
         New England College of    4-year private     422  $9,535,668          $0
               Optometry
           Porter and Chester                                                  $0
               Institute          Less-than-2-year  1,072 $5, 421,063

    City College of New 4-year and 2-year      194,746 $87,598,773
              York
                                public       (total at 17 (total at 17
                                              campuses)    campuses)           $0
    Cornell University   4-year private            692  $6,966,706    $200,931
         Medical College
        Technical Career    2-year private          3,545     $538,731 $6,744,374
            Institute
            New York
          International                               168
          Beauty School    Less-than-2-year                   $528,310    $25,282

          Bowie State University     4-year public   5,024 $14,789,515         $0
          University of Maryland,    4-year public  14,142 $44,038,905         $0
            University College
         Johns Hopkins University    4-year private 17,111 $37,382,682 $4,702,746
        Northern Virginia Community                                            $0
                  College            2-year public  36,216 $1,766,193

         RETS Technical Training    2-year private     476    $391,581 $2,227,900
                 Center
               Sanz School         Less-than-2-year    611 $1,895,126          $0
    San Francisco area, located
            in FSA Region IX
           San Francisco State      4-year public   27,446 $57,413,020 $3,817,165
               University
         Sonoma State University    4-year public    7,003 $19,346,287         $0
        University of California,   4-year public   31,011 $92,029,808         $0
                Berkeley
    University of San Francisco  4-year private   7,990 $46,255,625         $0
           Napa Valley College      2-year public    5,646    $348,260         $0

    Source: GAO Analysis of Education data.

    Telephone Interviews 	We also conducted telephone interviews with
    financial aid officials at two Direct Loan schools-the University of
    Nebraska and the University of Idaho-and financial aid officials at three
    former Direct Loan schools-the University of Vermont, Michigan State
    University, and Indiana University.

    Appendix II: Comments from the Department of Education

    Appendix II: Comments from the Department of Education

    Appendix III: GAO Contacts and Staff Acknowledgments

    GAO Contacts

    Staff Acknowledgments

    (130225)

    Jeff Appel, Assistant Director (202) 512-9915
    Andrea Romich Sykes, Analyst-in-Charge (202) 512-9660

    In addition to those named above, the following people made significant
    contributions to this report: Carla Craddock, Kathleen White, Margaret
    Armen, Cynthia Decker, Luann Moy, Mimi Nguyen, Mark Ramage, Bonita
    Vines, and Weili Shaw.

    Page 36 GAO-04-107 Direct Student Loan Progr

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