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

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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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