Direct Student Loans: Efforts To Resolve Lenders' Problems With
Consolidations are Underway (Letter Report, 04/21/98, GAO/HEHS-98-103).

Pursuant to a congressional request, GAO reviewed problems lenders had
with William D. Ford Federal Direct Loan Program (FDLP) consolidation
loans, focusing on: (1) the nature and source of problems Federal Family
Education Loan Program (FFELP) lenders have encountered in the direct
loan consolidation program; (2) whether these problems affected lenders;
and (3) steps the Department of Education and its contractor, Electronic
Data Systems (EDS) are taking to correct these problems.

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

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-98-103
     TITLE:  Direct Student Loans: Efforts To Resolve Lenders' Problems 
             With Consolidations are Underway
      DATE:  04/21/98
   SUBJECT:  Student loans
             Loan repayments
             Loan accounting systems
             Accounting errors
             Data integrity
             Lending institutions
             Debt collection
             Erroneous payments
             Electronic data interchange
             Direct loans
IDENTIFIER:  William D. Ford Federal Direct Loan Program
             Federal Family Education Loan Program
             
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Cover
================================================================ COVER


Report to Congressional Requesters

April 1998

DIRECT STUDENT LOANS - EFFORTS TO
RESOLVE LENDERS' PROBLEMS WITH
CONSOLIDATIONS ARE UNDER WAY

GAO/HEHS-98-103

Direct Loan Consolidation

(104906)


Abbreviations
=============================================================== ABBREV

  CDSI/AFSA - Computer Data Systems, Incorporated/AFSA Data
     Corporation
  EDS - Electronic Data Systems
  FDLP - William D.  Ford Federal Direct Loan Program
  FFELP - Federal Family Education Loan Program
  SSN - social security number

Letter
=============================================================== LETTER


B-278616

April 21, 1998

The Honorable William F.  Goodling
Chairman, Committee on Education
 and the Workforce
House of Representatives

The Honorable Howard P.  McKeon
Chairman, Subcommittee on Postsecondary
 Education, Training, and Lifelong Learning
Committee on Education and the Workforce
House of Representatives

The federal government began making loans through the William D. 
Ford Federal Direct Loan Program (FDLP) in 1994.  Under FDLP, the
government provides capital for the loans, schools make the loans on
behalf of the government, and a contractor services and collects loan
repayments.  In the Federal Family Education Loan Program (FFELP), in
contrast, lenders, usually from the private sector, provide loan
capital, make and service loans, and collect loan repayments.  The
federal government guarantees, or insures, FFELP loans against
default.  In academic year 1996-97, federal student loans made
through FDLP constituted about $10 billion and those through FFELP
about $20 billion. 

The consolidation of student loans allows borrowers to combine
separate loans, including those made under FDLP and those guaranteed
under FFELP, into a single new loan.  Consolidation loans allow
borrowers to extend their repayment periods and make single monthly
payments that are lower than the total of payments on their loans if
made separately.  Consolidation loans are available through both
programs, and total consolidation loan volume for FFELP and FDLP was
about $5 billion in fiscal year 1996. 

The FDLP consolidation process had a number of problems that
contributed to a 3-month shutdown during which new applications were
not accepted.  In the FDLP consolidation process, if any FFELP loans
are among those being consolidated, the federal government, through
its contractor, Electronic Data Systems (EDS), pays off lenders for
the borrower's underlying loans and makes a new consolidation loan to
the borrower.  Some of the program's problems affected FFELP lenders
who (1) were required to complete a loan verification certificate and
send it to EDS, to verify the accuracy of borrowers' loan amounts to
be consolidated, and (2) were then paid the amount due on these loans
by EDS.  Some lenders complained that EDS' and the Department of
Education's handling of this process was prone to error and
problematic for them.  In response to these kinds of lender
complaints, you asked us to learn more about problems that lenders
have had with FDLP consolidation loans.  We agreed to answer the
following questions: 

  -- What are the nature and source of problems FFELP lenders have
     encountered in the direct loan consolidation program? 

  -- How have these problems affected lenders? 

  -- What steps are Education and EDS taking to correct these
     problems? 

As agreed with your offices, we judgmentally selected four FFELP
lenders and reviewed between 8 and 13 examples from each lender that
illustrated problems lenders said they were experiencing in the
direct loan consolidation process--a total of 40 examples.\1 We
reviewed supporting documents and discussed each example with
representatives from the lenders.  These officials also generally
described their problems with the consolidation process.  We also met
with Education and EDS representatives to discuss the problems that
lenders raised, the specific examples the lenders provided, the
reasons for the problems, and the steps Education and EDS said they
were taking to address the problems.  The information regarding these
examples and the problems they illustrate are specific to the lenders
we contacted and cannot be generalized to all FFELP lenders, nor can
we make judgments regarding the overall frequency or extent of these
problems in the program as a whole.  To avoid duplicating work
currently being performed by Education's Office of the Inspector
General, we did not conduct an evaluation of the entire FDLP
consolidation program.  We conducted our review from September 1997
to March 1998 in accordance with generally accepted government
auditing standards.  For details on our scope and methodology, see
appendix I. 


--------------------
\1 As used in this report, "lender" refers to an entity that makes,
holds, services, or collects student loans. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Lenders said their problems came primarily at two stages in the
consolidation process--verifying loan data EDS provided and receiving
payments for the loans being consolidated.  Although our sample was
limited, some of the problems we found appeared to be systemic, which
Education and EDS officials acknowledged.  In some of the examples we
reviewed, EDS sent verification requests with the wrong information
or to the wrong lender, and in other examples, after the information
was verified EDS sent the lender additional requests to verify the
same borrower's loan amounts.  These problems occurred, in part,
because borrowers provided poor information or EDS used inaccurate
Education-provided data to identify lenders' addresses for loan
verification requests.  In other examples, EDS staff did not realize
a lender had returned a verification certificate and erroneously sent
the lender another request. 

Regarding the payments lenders received, in some examples EDS sent
inaccurate payments to lenders for loans being consolidated--at times
they were much too high and at other times they were too low.  Some
lenders received overpayments because EDS paid for the same loan more
than once.  In these examples, EDS sent a lender a duplicate
verification certificate (which it did not identify as a duplicate)
that the lender again completed, but EDS then found the original
certificate and made payments for both of them.  Other examples we
analyzed had more serious problems, such as several instances in
which EDS charged one borrower for a second borrower's loans. 
However, lenders also received underpayments on occasion, which
occurred because not all loans a borrower owed and wanted to
consolidate were paid off.  For example, one borrower was
consolidating 10 loans he had with one lender.  Four loans were paid
for in April 1997, but the lender was underpaid for this borrower's
loans until another four loans were paid in October 1997 and the last
two were paid in December 1997. 

In addition to the two problems lenders raised about the process, we
found a flaw in the transfer of data from EDS to the FDLP servicing
system.\2 We found that refunds that lenders made for overpayments
were not always credited to a borrower's new consolidation loan
account.  This resulted in some borrowers' accounts grossly
overstating the amount they owed. 

Lenders' representatives said that problems associated with FDLP
consolidations adversely affected their operations.  Lenders said
that their staffs had to repeatedly complete verification requests or
call EDS to explain that a completed certificate had previously been
returned.  Lenders' officials also said that it took time for their
staffs to resolve inaccurate payments.  In general, however, lenders
could not quantify their costs of resolving FDLP consolidation
problems. 

Both Education and EDS recognized that the consolidation process had
had problems prior to the shutdown, including those cited in our
examples.  Officials from both Education and EDS said that they have
taken new steps to improve FDLP consolidation processing.  Some of
the changes were made during the shutdown; others went into effect as
we were conducting our study, when EDS again began accepting new
applications on December 1, 1997; and others are still being
implemented.  For example, Education has increased its oversight and
monitoring of FDLP consolidations and has made modifications to tie
payments under its contract with EDS to EDS' performance.  EDS has
devoted more resources and made system changes to improve data
quality throughout the process, it has started a pilot program for
electronic loan data exchange with lenders, and it has begun a review
of the first 1,000 poststartup applications with the goal of
detecting remaining problems.  Lenders' representatives we talked
with had mixed opinions about the effectiveness of these changes and
said it was too early to evaluate them. 


--------------------
\2 The FDLP servicing system maintains borrowers' accounts, recording
borrower payments and other adjustments to accounts.  It is operated
by a contractor for Education. 


   BACKGROUND
------------------------------------------------------------ Letter :2

FDLP loan consolidation begins with a borrower sending EDS an
application for a consolidation loan.  The borrower lists each loan
he or she wants to consolidate and the party holding or servicing the
loan--the FDLP servicing center for FDLP loans and private lenders
for FFELP loans.  For FDLP loans, EDS obtains balance information
from the servicing center.  For FFELP loans, EDS sends a verification
certificate to each lender to verify each loan and the amount owed. 
Lenders complete the verification information and return the
certificates.  Upon receiving and validating all loan verification
information, EDS sends a promissory note to the borrower for
signature.  After the borrower signs and returns the note, EDS pays
off each lender for the underlying FFELP loans and records the
consolidation loan for servicing purposes.  According to Education
officials, EDS sends new loan transactions to the central FDLP
database, managed by Computer Data Systems, Incorporated/AFSA Data
Corporation (CDSI/AFSA), the Education contractor that services all
direct loans.  Information from the central database is then sent to
the FDLP servicing system, also managed by CDSI/AFSA, for loan
servicing and collection. 

FDLP consolidations were first made available in March 1995 when
CDSI/AFSA operated the consolidation program along with its other
direct loan servicing responsibilities.  Education subsequently
awarded a contract to EDS to take over FDLP loan origination
operations, including consolidation processing.  EDS began operating
the consolidation program and processing FDLP consolidation loans in
September 1996.  EDS' responsibilities included obtaining
verification certificate information, generating promissory notes,
ensuring that the promissory notes were returned, and making payments
to lenders.  But beginning shortly after September 1996, a backlog of
unprocessed consolidation loan applications developed and grew
steadily.  In August 1997, with the backlog having reached about
84,000 unprocessed applications, more than half of all applications
that EDS had received, Education closed down the FDLP consolidation
program to new applications until December 1, 1997.  EDS and
Education took steps during the shutdown to resolve the backlog of
applications.\3 By mid-January 1998, about 3,800 applications from
the original backlog remained unresolved, and according to Education
officials, only 15 remained unresolved in late March 1998. 


--------------------
\3 An application that was part of the backlog could be resolved in
one of two ways:  The loan consolidation could be completed, or the
application could be deactivated.  An application was deactivated
after a specified period of time if EDS did not receive certain
necessary information despite several requests or if a promissory
note was sent out but not returned. 


   FAULTY EDS PROCESSES
   CONTRIBUTED TO LOAN
   VERIFICATION PROBLEMS AND
   INACCURATE PAYMENTS; DIRECT
   LOAN SERVICING INFORMATION ALSO
   FLAWED
------------------------------------------------------------ Letter :3

Lenders' representatives said that the primary problems they had with
FDLP consolidations were (1) loan verification certificates EDS them
sent that contained errors and (2) inaccurate payments EDS sent to
pay off loans.  EDS acknowledged the systemic nature of these
problems and generally attributed them to inaccurate data or
inefficiencies in its processes.  For example, because EDS staff
relied on inaccurate data sources for loan information, EDS sometimes
sent verification certificates to lenders with the wrong information. 
In addition, glitches in EDS' editing processes resulted in duplicate
certificates being sent to lenders after original certificates had
been completed and returned to EDS.  With regard to payments, certain
EDS errors, such as data entry mistakes or problems with multiple
certificates, resulted in payments to lenders for loan amounts that
were much too high and, at times, that double-paid a borrower's
loans.  Similar errors also caused payments to lenders that were too
low, leaving a borrower with a remaining balance with the lender when
the borrower's account should have been closed.  While lenders
focused on verification and payment problems, during the course of
our work we discovered an additional system flaw:  Certain
differences between EDS' and the FDLP servicing center's systems,
such as differing edit checks, meant that some corrections to
borrowers' accounts were not recorded in the FDLP servicing system in
a timely manner.  Borrowers were thus left with incorrect loan
balance information so long as the corrections were not posted,
sometimes for many months. 


      EDS ERRORS CAUSED LENDERS
      PROBLEMS IN VERIFYING LOAN
      DATA
---------------------------------------------------------- Letter :3.1

The process EDS used to verify the loan amounts that borrowers wanted
to consolidate was prone to error.  It was designed so that lenders
would verify information that EDS had in its system to determine
balances that would be paid to lenders upon the consolidation of the
loans.  Because the process relied on faulty data sources and did not
contain effective controls, lenders sometimes received a certificate
with one of three problems:  it contained incorrect information, it
was sent to the wrong address, or it was sent after a certificate had
already been sent and returned. 

First, lenders sometimes received certificates containing incorrect
information.  EDS generally sent certificates to lenders that
contained a lender's name and address; the borrower's name, address,
and social security number (SSN); and the type of loans to be
consolidated so that lenders could identify the loans to be
certified.  However, lenders' representatives told us that they
received certificates containing various types of mistakes, such as a
wrong name or address for a lender or names or SSNs of borrowers
whose loans the lender did not own.  Lenders were sometimes required
to research borrowers' accounts to determine, if a certificate did
not match, whether it was for the wrong loan type (such as a
subsidized loan inaccurately identified as an unsubsidized loan) or
for a borrower whose loan was with a different lender. 

Second, lenders said verification certificates were sometimes sent to
a wrong address.  For example, one lender with several servicing
centers around the country received certificates at one center for
borrowers' loans serviced by a different center.  Another lender
received certificates addressed to its corporate headquarters, to
which borrowers' correspondence--servicing information or
payments--is not normally addressed. 

EDS officials said both these problems were in part the result of its
system's reliance on faulty data sources to obtain loan and lender
information.  EDS relied heavily on information a borrower provided
on his or her application regarding lender name and address and loan
type, and EDS staff did not attempt to verify this information before
contacting the lender.  However, borrowers did not always provide
complete loan information on their applications or may have provided
wrong information, such as the wrong lender's name.  In addition, EDS
staff relied on a computerized file of FFELP lender names and
addresses, compiled and provided by Education, and EDS staff matched
lenders' names and addresses provided by a borrower on his or her
application to those in the file.  EDS did not attempt to verify the
accuracy of the information prior to sending a certificate to the
lender.  However, some lenders were listed with several addresses or
with a wrong address, and some had names similar to those of guaranty
agencies, which were also in the file but whose names were not well
distinguished. 

The third problem lenders mentioned was that they sometimes received
more than one certificate for a particular borrower.  EDS officials
acknowledged that its system would sometimes sent multiple copies of
the same verification certificate to a lender, even if the lender had
already provided the requested information to EDS.  The officials
said this occurred in part because of a glitch in one of EDS' edit
processes.  As lenders returned completed verification certificates,
EDS scanned them into a computer imaging system and, if certificates
passed an edit check, generally sent them for entry into the data
system.  However, if a certificate being scanned had incorrect or
missing data, it was set aside for manual editing.  After a certain
period of time elapsed without data from a certificate being entered
into the data system, the system automatically generated a new
certificate to be sent to the lender.  Furthermore, when borrowers or
lenders called EDS to inquire about the status of a loan's
verification certificate, EDS customer service representatives, who
had access to both data and imaging systems, would sometimes check
only the data system, not the imaging system.  If they noted that
data were missing in the data system, they would assume the
verification certificate had not been returned.  EDS would then send
lenders another certificate.\4

EDS' failure to enter data from completed verification certificates
also resulted in its sending letters to borrowers and lenders,
inaccurately stating that the lender had not returned a certificate. 
EDS' system automatically generated a standardized letter if no data
were entered into a borrower's file 60 days after a certificate was
sent to a lender.  This letter, sent to the borrower with a copy sent
to the lender, said that the consolidation was delayed because the
lender had not provided requested information.  Lenders said they
believed they were being blamed for loan consolidations being delayed
when, in reality, they had returned the verification certificate. 


--------------------
\4 This problem was intensified during EDS' efforts to reduce the
application backlog in the fall of 1997.  EDS staff often sent
certificates to lenders for any unresolved applications, often
handwritten and via fax.  In their effort to get these out quickly,
EDS staff often did not check the imaging system to see if
certificates had already been returned. 


      VERIFICATION CERTIFICATE
      PROCESSING ERRORS AND OTHER
      MISTAKES LED TO INACCURATE
      PAYMENTS TO LENDERS
---------------------------------------------------------- Letter :3.2

EDS' system to pay lenders for the loans that borrowers wanted to
consolidate did not always result in accurate payments.  Lenders
sometimes received large overpayments while at other times they
received underpayments.  These payment inaccuracies resulted from
errors in processing verification certificates and data entry errors. 
In addition, in some cases a borrower's loans were charged to a
second borrower's account. 

EDS' system is designed to slightly overpay each loan to ensure that
the borrower's original account was paid in full and closed.  Lenders
expect such overpayments, which enable them to close borrowers'
accounts while they reconcile final payments with EDS.  Large or
unjustified overpayments, however, were sometimes made to lenders for
a variety of reasons: 

  -- EDS officials attributed one cause of overpayments to the
     multiple verification certificates that EDS erroneously sent to
     lenders and that lenders returned.  EDS' system paid lenders on
     the basis of certificates that were returned.  At times,
     therefore, EDS would receive a certificate, make a payment to a
     lender to pay off a borrower's loan account, and then
     subsequently discover a second completed certificate.  EDS would
     then make an additional payment to the lender.  For example, one
     lender's official said that, after completing two certificates,
     the lender received two checks for a borrower to pay off her
     loan.  The two checks were issued on the same day, but they were
     for slightly different amounts--$58,354.46 and $58,349.02.  The
     lender should have received only one of the checks.  Another
     lender was asked twice to return a certificate to EDS for a
     borrower with two loans, one for about $3,700 and the other for
     about $2,000.  When EDS sent promissory notes to the borrower,
     one note included about $8,000--counting the $2,000 loan twice
     and the $3,700 loan once--and a second note included the $3,700
     loan again.  EDS double-paid the borrower's account, sending two
     payment checks for each loan, totaling about $12,000, or about
     $6,000 in overpayment. 

  -- Data entry errors that were not detected by EDS' systems also
     led to overpayments.  In one example, EDS entered a $16,715.09
     loan into the data system as $167,115.09.  EDS did not discover
     or correct this error before sending the lender a check, causing
     an overpayment of more than $100,000.  In another example, a
     lender certified a loan as $10,953.91, but EDS erroneously
     entered it as $19,953.91.  EDS overpaid the lender by about
     $10,000. 

  -- Other EDS processing errors went undetected by its systems and
     contributed to overpayments.  In one example, a borrower wanted
     to consolidate three subsidized Stafford loans totaling
     $17,000.\5 The verification certificate the lender returned to
     EDS showed the borrower's graduation date of May 1997.  Because
     they were subsidized loans, the lender filled in "zero" for
     interest due on each loan, with a note saying "info good thru
     11/30/97," the end of the borrower's grace period.  However,
     EDS' system did not recognize that the loan was not subject to
     interest accrual for the 6-month grace period.  EDS erroneously
     added interest to the payments, which it made in October 1997,
     resulting in overpayments.  Education and EDS representatives
     said that accrued interest should not have been added to the
     loan payment. 

In all overpayment cases we analyzed, borrowers signed promissory
notes for amounts that exceeded what they owed, which means that
borrowers might have been liable for repaying the inaccurate amount
on the promissory notes.  EDS representatives said that, as with
lender information derived from borrowers' applications, its
processes and systems rely on borrowers' knowledge of their loan
amounts to prevent overpayments.  They said they now realize that
borrowers often believe that promissory notes they receive must be
correct, perhaps believing--if they received multiple notes--that the
first one they returned needed to be amended.  In the cases we
analyzed, Education and EDS systems did not identify the
overpayment--they were detected only when the lender contacted EDS,
while trying to reconcile a borrower's account, or when we brought it
to EDS' attention. 

Underpayments to lenders were also a problem.  Most of the
underpayments that we analyzed resulted from data that lenders
provided to EDS not being entered into EDS' data system, while others
resulted from a control EDS put in place to try to reduce duplicate
payments or other system problems: 

  -- In several examples, EDS did not enter data into its system for
     one of a borrower's loans when a lender certified a number of
     loans.  EDS did not pay the lender for the omitted loan, so the
     borrower's account with the lender was not closed out because a
     loan remained unpaid.  In some cases, these underpayments
     resulted from EDS sending lenders inaccurate or incomplete
     verification certificates--for example, the certificate failed
     to list all a borrower's loans or loan types. 

  -- Some underpayments resulted from an overly sensitive edit check
     that EDS put into place to reduce the likelihood of a duplicate
     payment.  The edit would not allow a borrower to have two loans
     in the data system with the same "first disbursement date." EDS
     mistakenly assumed that if the borrower had two loans disbursed
     on the same date, they were actually the same loan and one of
     the loans had been incorrectly entered in its system.  However,
     this is an extreme assumption, because a borrower can have two
     different loans disbursed on the same date.  For example, a
     student might receive a subsidized and an unsubsidized Stafford
     loan on the same date, such as the start of a school year.  We
     identified several instances in which this edit led to EDS'
     system underpaying lenders because at least one loan a borrower
     applied to consolidate was not paid off. 

  -- Another way EDS' system caused underpayments was the
     misidentification of loans in default at the time of
     consolidation.  FDLP allows defaulted loans to be consolidated
     under certain circumstances, and the costs previously incurred
     to collect the defaulted loan are to be added to the borrower's
     amount to be consolidated.\6 Certain data fields in EDS' data
     system should have helped ensure that EDS could identify such
     loans, but EDS' records did not always contain consistent
     information in these fields.  For one of the examples we
     analyzed, the data system showed that a borrower's loan was not
     in default, but the borrower was assigned collection costs, a
     system inconsistency.  In this case, the loan actually was in
     default, but the system did not identify the inconsistency in
     the data.  Because EDS' data system relied on the information in
     the "loan default" field, it did not include collection costs. 
     Had the system also checked the field showing whether any
     collection costs were due, it would have seen that the account
     had collection costs, the consolidation loan would have included
     them, and the guaranty agency would have been reimbursed for
     them. 

Perhaps the most serious examples of incorrect payment problems were
those in which two borrowers' accounts were not kept separate.  In
these instances, during EDS' process of entering loan data into one
borrower's account, EDS staff erroneously entered loan data
pertaining to another borrower.  The first borrower's account then
included a loan with the first borrower's SSN in some places and a
second borrower's SSN in others.  The first borrower's account
reflected the charges for these loans, in addition to his or her own. 

For example, one borrower tried to consolidate loans totaling less
than $100,000 but eventually accumulated a $190,000 balance in the
data system because, among other errors, his account was charged for
a second borrower's loans.  EDS overpaid the lender by more than
$90,000 on this borrower's account, and about $47,000 of this excess
was for loans that belonged to the second borrower.  When the lender
received the payment checks, it saw the second borrower's SSN on some
of the checks, saw that the second borrower's account had already
been paid in full, and returned the checks to EDS.  In another
example of this type, EDS sent three checks to a lender for a
borrower with two loans.  The third loan had a different nine-digit
account number that was actually the SSN of a different borrower.  In
all, we found four instances of this type of mistake. 


--------------------
\5 For subsidized Stafford loans, whether made through FDLP or FFELP,
interest does not accrue until after the expiration of a 6-month
grace period that starts when the borrower leaves school. 

\6 Guaranty agencies are entitled to receive a percentage of loan
principal and interest on defaulted loans, capped at 18.5 percent, to
cover their collection efforts.  These costs, in addition to any late
payment fees, are added to the balance being consolidated. 


      FDLP SERVICING SYSTEM DID
      NOT ALWAYS REFLECT
      ADJUSTMENTS TO BORROWERS'
      ACCOUNTS
---------------------------------------------------------- Letter :3.3

Education's oversight of the data transfer process between EDS and
the FDLP servicing center failed to ensure that adjustments to
borrowers' accounts were credited in a timely manner.  EDS' system
sent loan consolidation transactions, including new loans and
subsequent adjustments, to the central FDLP database for entry into
the FDLP servicing system.  Such adjustments included credits for
refunds made by lenders on behalf of borrowers.\7 According to
Education officials, consolidation data were not always smoothly
transmitted between EDS' system, the central database, and the FDLP
servicing system--some transactions were rejected when being moved
from one system to the next, and these transactions were sent to a
"suspense" file.  This caused an accumulation of loan accounts
showing incorrect balances until the adjustments could be properly
posted.  In some of the examples we reviewed, the adjustments had yet
to be made. 

In particular, we found that some overpayments that lenders returned
to EDS were not credited to borrowers' servicing accounts.  One
borrower, discussed earlier, signed promissory notes totaling about
$190,000, although he actually owed only about $90,000.  One of his
lenders received overpayments totaling over $90,000 and sent refunds
of this amount to EDS in May and September 1997.  As of February
1998, however, the FDLP servicing system continued to show that the
borrower owed $190,000.  Education officials, in attempting to
explain why the borrower's account was not properly updated, said
that when the borrower's account is eventually corrected, an
adjustment would be made retroactive to the date of the overpayment,
so that the borrower would not be liable for any interest that
accumulated since then.  While this was the largest erroneous dollar
amount we found, it was not an isolated incident.  For the borrower
described earlier whose $58,000 loan EDS had paid twice, FDLP
servicing system records continued to show the additional $58,000 as
part of her loan balance in February 1998, although EDS received the
lender's refund in May 1997.\8 In all, we found 11 examples of
borrowers whose refunds had not been properly credited when we
completed our audit work.  (For details on these and other examples
we analyzed, see app.  II). 


--------------------
\7 For example, say a borrower owed $10,000 but was sent an FDLP
consolidation promissory note for $15,000 because one loan was
double-counted.  If the borrower signed and returned the note, that
borrower's account in the FDLP servicing system would be $15,000, and
EDS would pay the lender $15,000 for the underlying loans.  When the
lender refunded the $5,000 overpayment to EDS, EDS would send a
$5,000 refund transaction to the FDLP servicing system.  After this
transaction was fully processed, the account balance would reflect
the $10,000 the borrower actually owed. 

\8 In most examples we analyzed in which the borrower had not been
credited for refunds, we verified that EDS received the refund but
could not determine whether the refund transaction had reached the
FDLP servicing system.  However, in one case we determined that
information reached the servicing system but had not been properly
recorded.  In this example, 15 refund checks were sent but 2 of them
were not processed correctly, and the servicing system showed the
borrower as owing $19,000 more than he should. 


   LENDERS REPORT
   GREATER-THAN-EXPECTED
   PROCESSING TIME AND
   DISSATISFIED CUSTOMERS, BUT
   COSTS ARE DIFFICULT TO QUANTIFY
------------------------------------------------------------ Letter :4

The lenders we spoke with agreed that FDLP loan consolidation
problems have created difficulties for them.  These difficulties
included having reduced productivity, having to redeploy or hire new
staff, and having their relationships with borrowers damaged. 
However, while lenders provided several examples of additional costs
these difficulties brought, they generally could not assign a dollar
value to them. 

Lenders' representatives expressed concern that one EDS
requirement--that verification certificates must be filled in
manually rather than being electronically generated in the lender's
own format--has reduced their staffs' productivity.  For example,
representatives from one lender said that its staff could
electronically generate (that is, electronically complete borrower
verifications) about 116 certificates per hour.  However, this
lender's staff could manually complete only 12 certificates per hour. 
Representatives from another lender indicated that electronically
generating loan information for certificates received from EDS takes
only 2 hours, but the manual copying of loan information onto the
certificates can take a staff person an additional half a day to
complete. 

Lenders also said that they have had to redeploy or hire personnel to
handle problems that have resulted from the FDLP loan consolidation
process.  One lender's representative said that it has shifted staff
to deal with inaccurate loan payment problems and that other areas in
his unit have been left understaffed.  Lack of staff in these other
areas resulted in delays in lenders' posting payment checks and,
therefore, delays in updating borrowers' accounts to show that their
loans have been paid off.  Another lender's representative said that
the time needed to handle duplicate verification certificates, return
overpayments, or make additional payment requests has resulted in
extra work for the staff, although it is hard to quantify its amount. 

The effect that delayed consolidations had on lenders' relationships
with their borrowers was of particular concern to lenders.  One
lender's representative expressed concern that borrowers' mistrust of
lenders increased because some borrowers' loans were not being
consolidated promptly.  EDS sends a letter to each borrower after
sending payments to lenders, telling the borrower that his or her new
consolidated loan account is active and that all underlying loans
have been paid off.  However, according to the representative, if a
lender receives inaccurate payments for any of the borrower's loans,
it can take time to resolve the difference with EDS.  The
representative expressed concern that borrowers assume or believe
that lenders are holding up their loan consolidation, thereby
increasing distrust of the lenders.  Another lender's representative
said that her customer service staff has received calls from
borrowers asking why they are receiving late payment notices from the
lender after they have been notified that their loans had been
consolidated. 

All four lenders we talked with agreed that their problems with the
FDLP loan consolidation process had affected their operations. 
However, none of the lenders' representatives were able to assign a
dollar cost to their experiences. 


   EDUCATION AND EDS ARE MAKING
   CHANGES TO IMPROVE THE
   CONSOLIDATION PROCESS
------------------------------------------------------------ Letter :5

Since the shutdown of the FDLP loan consolidation program between
August 27 and December 1, 1997, both Education and EDS have taken
steps to improve the process and reduce the problems that contributed
to the buildup of the backlog.  For Education, these steps include a
more coordinated internal approach to overseeing the program, changes
to the contract with EDS that emphasize performance measures, and
closer monitoring of the consolidation process and the transfer of
data to the FDLP servicing system.  EDS has taken new quality control
steps in the consolidation process aimed at getting more accurate
loan information in a timely manner.  In addition, EDS has made
changes to its automated system and has incorporated greater use of
electronic data in some of its processes.  EDS has begun evaluating
these changes, but the final results are not yet available. 


      EDUCATION'S CHANGES FOCUS ON
      MANAGEMENT AND MONITORING
---------------------------------------------------------- Letter :5.1

According to Education officials, several changes since the shutdown
of the loan consolidation program in August 1997 will lead to
improved performance.  First, Education has established a team
focused on managing FDLP consolidations, made up of staff on
full-time detail from four units within the Department responsible
for different aspects of the consolidation process--contract
management, systems management, program management, and financial
management.  Before establishing this team, Education had not
designated a person or team to manage FDLP consolidations.  Instead,
it used staff from a number of units to manage the program, but these
staff had responsibilities in their own areas and were able to devote
only part of their time to consolidations.  Furthermore, little
coordination existed internally between the various units.  Education
hopes this new team, which began meeting in mid-January 1998, will
provide much more coordinated oversight within the Department.  Among
other tasks, the consolidation team is working directly with lenders
to try to resolve consolidation problems.  For example, according to
Education officials, the team is working with certain lenders to
create an electronic certification process. 

Second, EDS' contract with Education was amended to tie contract
payments to EDS to performance under the contract.  According to
Education staff, under the original contract between Education and
EDS, the terms surrounding consolidation responsibilities, systems,
and processes lacked specificity.  The modification signed on January
27, 1998, includes provisions for increased payments to EDS but at a
level that depends on its timeliness in processing consolidation
applications.  For example, EDS will be paid a per-unit price for
each application EDS completes within a target number of days, and as
an incentive to complete applications quickly, it will be paid a
bonus for each day in advance of the target that consolidations are
achieved.  In addition, the contract provides an additional incentive
payment for each consecutive 3-month period in which EDS meets a set
of performance criteria that is to be developed by the company.  The
modification also includes a financial penalty for performance
shortcomings, such as not meeting performance measures in a
consecutive 3-month period. 

Third, Education is monitoring the consolidation process more closely
now than before the shutdown.  Education officials said they meet
with EDS staff early mornings three times a week to discuss problems. 
In addition, Education staff receive much more, and more detailed,
information on performance statistics than EDS made available during
the first year under the contract.  For example, EDS sends Education
staff daily summary statistics detailing how many applications are at
each stage of the consolidation process.  One summary report shows,
for example, that on January 19, 1998, EDS had received more than
13,000 applications since reopening the consolidation process on
December 1, 1997.  About 1,430 applications had been deactivated or
rejected or were waiting to be processed.  Of the remaining
applications, about 7,700 were awaiting lenders' return of
verification certificates and another 1,260 were awaiting promissory
notes returned from borrowers or review by EDS staff.  About 2,750
applications, or about 20 percent of all applications received since
the December 1 reopening, had been completed.  By March 30, 1998,
about 17,000 of 41,000 applications received, or 41 percent, had been
completely processed, according to Education officials. 

Finally, Education is working to ensure that transactions flow
smoothly between EDS and CDSI/AFSA electronic systems.  Education
officials said that EDS and CDSI/AFSA have been working since October
1997 to reduce a large number of transactions that had not been
successfully transferred from EDS to CDSI/AFSA.  Education officials
also said that changes are under way that are intended to improve the
transfer of such transactions in the future.  For example,
transactions reflecting adjustments to borrowers' accounts were not
numbered in such a way that the adjustment could be traced back to
the original transaction being adjusted.  Now, the adjustment is
linked to the original transaction, making it easier for the
servicing system to trace adjustments to borrowers' accounts. 


      EDS CHANGES RELATE TO
      PROCESSES AND SYSTEMS
---------------------------------------------------------- Letter :5.2

EDS has also taken new steps in its process for consolidating loans
since the August 1997 shutdown, including adding three new quality
control teams, making system changes, experimenting with electronic
data submission, and conducting an evaluation of the changes.  These
changes affect applications that have been received since the
reopening of the consolidation program in December 1997. 

According to EDS and Education officials, EDS has expanded and
redirected staff to provide quality control at three points in the
consolidation process.  At the front end of the consolidation
process, EDS has put in place a team called the exam entry team,
which will examine application information to make sure it is ready
for data entry.  According to EDS, the first place in which problems
developed in the consolidation process was its use of incomplete or
inaccurate loan information shown on the application.  It said that
obtaining complete and accurate applications from borrowers is
critical to making consolidation work.  Therefore, exam entry staff
will be working more closely with borrowers and using a variety of
other information sources to ensure that information about a
borrower's loans, such as lender's name and address, is complete and
accurate.  Exam entry staff will be matching application materials
with data keyed into EDS' data system.  Staff will be looking for
keying errors and the accuracy of the loan holder's information. 
When information is missing or inaccurate, staff will attempt to be
more aggressive than in the past by using available sources,
including telephoning the borrower, to get complete and accurate loan
information.  Staff also make use of the National Student Loan Data
System--an Education system that contains current student loan
information for borrowers--to obtain information on a borrower's loan
holders.  Finally, EDS now requests applicants to include with their
application a copy of a page from their payment book or a servicing
notice for each loan they are consolidating. 

EDS has set up a second team to help reduce the inventory of
outstanding verification certificates and to keep the inventory low. 
The certification team receives a daily report of verification
certificates that are overdue.  According to EDS staff, certification
team members, who are organized geographically and assigned to
specific lenders, work with lenders that have overdue verification
certificates to get the certificates returned quickly.  Certification
team members also work with lenders who return incomplete
certificates. 

In its final quality control in the consolidation process, EDS has
set up a third team, referred to as the promissory note underwriting
team, to review all borrower application documentation before it pays
lenders and issues borrowers a promissory note.  According to EDS
staff, this team was set up during the shutdown to provide a critical
quality review before a borrower's loans are consolidated. 
Promissory note underwriting staff trace loan amounts shown on
promissory notes back to the verification certificates, the original
application, and any supporting documentation to ensure that the
promissory note amount is correct.  Only after a borrower's loan
application has been reviewed and approved by the promissory note
underwriting team can a promissory note be sent to the borrower and
the consolidation loan made.  Currently, the promissory note
underwriting team reviews all applications before notes are made
final and sent to borrowers.  However, according to Education and EDS
representatives, eventually the team will be reviewing a sample of
each batch of applications that make it to this stage.  EDS staff
cautioned that while promissory note underwriting staff should reduce
errors, some mistakes can still occur since much of the underwriting
staff's work is based on judgment. 

In addition to these three teams, EDS representatives said that they
have made changes to its automated system that they believe will help
reduce errors.  Since the shutdown, 86 Education-requested changes to
the system--called direct modification requests--have been
implemented.  The changes include measures aimed at preventing such
things as the use of duplicate SSNs, incorrect calculation of loan
collection costs on certain defaulted loans held by guaranty
agencies, and data from duplicate loan applications being entered for
a single borrower. 

EDS representatives also said they are working with selected lenders
to allow the electronic submission of verification certificate
information.  In a pilot project currently under way, a lender
submits loan information to EDS on computer diskettes.  EDS said
electronic submission of this information should save staff time for
both lenders and EDS and will avoid the need to manually copy
information onto the form.  EDS said that this should also increase
the accuracy of loan information. 

Finally, both Education and EDS officials said that EDS is monitoring
the recently implemented changes to its consolidation process through
an extensive review of the first applications processed through the
new procedures.  Since the reopening of the consolidation process in
December 1997, EDS has been tracking the first 1,000 consolidation
applications, and it hopes its evaluation of these applications will
provide information on how well the new changes to the process are
working.  According to EDS officials, the review will follow each
application from the point it is first received from a borrower
through loan verification, generation of a promissory note, and,
finally, loan payoff and transfer to the FDLP servicing system after
the signed promissory note is returned.  The review will track how
much time applications are spending in each stage of the process. 
EDS officials also said that the review will use a sample drawn from
the first 1,000 applications to determine whether payment accuracy
has improved and whether any postdisbursement adjustments have been
correctly recorded in the servicing system.  Although the
evaluation's results were to be available in mid-January 1998, EDS
had not fully completed the evaluation in March 1998, when we
completed our audit work. 

We contacted each of the four lenders included in our study to get
their initial reaction to Education's and EDS' changes.  The
representatives we spoke with offered mixed reactions to the changes
and said that it is too early to tell whether they will lead to
improved outcomes.  One lender's representative noted that, although
she has noticed fewer duplicate certificates since the program
reopened to new applicants on December 1, 1997, some certificates are
still sent to the wrong addressee.  Representatives from a lender
that is experimenting with electronic transmission of verification
certificate data are optimistic that this process will help resolve
verification certificate problems, but they are still working out
details with EDS.  Representatives from all four lenders said that
they continue to receive inaccurate payments.  However, they said
that they cannot determine whether these are for borrowers who were
part of the backlog or new applicants since December 1, so they do
not know whether the new process is leading to more accurate
payments. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

EDS' errors in processing FDLP consolidation applications led to a
number of problems; lenders had to spend additional time resolving
the problems, and borrowers' applications were not always processed
correctly.  In addition, Education's management and oversight of the
FDLP consolidation program failed to ensure that borrowers'
applications were processed correctly, and it insufficiently managed
the transfer of data between two contractors, EDS and CDSI/AFSA, to
ensure that borrowers' accounts reflected what they actually owed. 

The changes that Education and EDS are putting into place appear to
move in the right direction to address some of the concerns that
lenders raised, such as duplicate verification certificates and
payment mistakes.  However, most of the changes are recent and have
not yet been evaluated, and improved outcomes are not yet ensured. 
Lenders' representatives we spoke with generally believe it is too
soon to determine whether they will see fewer problems now that EDS
has resumed taking applications and made process changes. 

EDS' current evaluation--consisting of 1,000 applications--will test
many of the new processes, but we cannot judge whether payoff
accuracy and the quality of information being transferred to the
servicing system have improved.  Because EDS continues to rely on
lenders notifying it of inaccurate payments, it does not know whether
payoffs are accurate until several weeks after it makes disbursements
to lenders, to allow time for a refund or a claim for underpayment. 
According to EDS officials, the evaluation of the first 1,000
applications will include an analysis of payment accuracy, and we
believe that no conclusion can be reached on systems improvements
until this analysis is complete.  In addition, EDS said that the
review will test whether borrowers' accounts with the FDLP servicing
system are accurately adjusted for any refunds lenders make--another
process that has not always been completed successfully.  Finally, we
are concerned that the new process changes do not address previous
applications--from before the shutdown--that had errors during their
processing, such as those in our sample that have not yet been
corrected.  However, for the examples we reviewed, if all
transactions that were placed into suspense files can be correctly
applied to borrowers' accounts, most or all errors on the
applications would be resolved. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :7

The Department of Education, in commenting on a draft of our report,
stated that the report presents a fair analysis of the problems we
discuss.  Education emphasized that new processes, most of which we
discuss, should resolve the types of problems lenders experienced
during EDS' first year operating the program.  Education offered a
clarification to our analysis of the problems involved with
transactions that were not applied to borrowers' accounts in the
servicing system, and we revised the draft to reflect the
clarification.  In addition, Education provided several technical
comments, which we incorporated as appropriate.  Education's written
comments are in appendix III. 


---------------------------------------------------------- Letter :7.1

We are sending copies of this report to the Secretary of Education,
the appropriate program manager for EDS, appropriate congressional
committees, and others who are interested.  If you or your staffs
have any questions or wish to discuss this report further, please
contact me or Jay Eglin, Assistant Director, at (202) 512-7014. 
Major contributors include Nancy Kintner-Meyer and James W. 
Spaulding. 

Carlotta C.  Joyner
Director, Education and
 Employment Issues


SCOPE AND METHODOLOGY
=========================================================== Appendix I

We interviewed officials from four judgmentally selected Federal
Family Education Loan Program (FFELP) lenders.  We selected the
lenders to obtain variety in size, as measured by FFELP loan volume,
and different perspectives on lenders' experiences with William D. 
Ford Federal Direct Loan Program (FDLP) consolidations.  Two
performed third-party servicing (under contract) for other lenders
and also had other parties perform servicing for them, and the two
others serviced all their loans and no loans for other lenders.  One
was affiliated with a guaranty agency.  Although we tried to obtain a
variety of examples, these lenders were not representative of all
FFELP lenders. 

We visited each lender and interviewed officials who were familiar
with FDLP consolidations.  The officials described their problems
with consolidation processing.  They also provided us with
documentation on specific examples of problems with the verification
certificate process, overpayments, and underpayments.  We selected
between 8 and 13 examples from each lender for a total of 40. 

We discussed with Electronic Data Systems (EDS) and the Department of
Education the problems the lenders raised.  We also visited EDS and
obtained its documentation for each of the 40 examples we had
selected.  We reviewed some of these cases in detail with EDS to
obtain its perspective on the problems the lenders raised. 

We discussed, and when possible obtained documentation on, changes
both Education and EDS were making to the FDLP consolidation process. 
We then interviewed the lenders' officials again to obtain their
impressions of whether these changes might lead to improvements in
the process. 

Finally, we obtained servicing history information for some of the
borrowers' accounts included in our examples.  We noted whether
refunds made on a borrower's behalf from EDS to the lender were
properly credited to the borrower's account.  We obtained these data
from Education and Control Data Systems, Incorporated/AFSA Data
Corporation (CDSI/AFSA). 

The information we obtained is specific to the four lenders we
selected and cannot be generalized to all FFELP lenders.  We did not
select a random sample of cases from these lenders; rather, the
lenders nominated cases for our review on the basis of their
perceptions of problems in the program.  For this reason, we cannot
make judgments regarding the overall frequency or extent of these
problems in the program as a whole. 


ADDITIONAL DETAILS ON EXAMPLES OF
PROBLEMS
========================================================== Appendix II

This appendix contains more detailed analysis of some of the examples
cited by lenders involving overpayment and underpayment problems.  In
addition, we present details on some examples of borrowers whose
accounts with the FDLP servicing system were incorrect at the time of
our review, and we include other comments lenders made about the FDLP
consolidation process. 


   OVERPAYMENTS TO LENDERS HAD A
   VARIETY OF CAUSES
-------------------------------------------------------- Appendix II:1

EDS officials said that one cause of overpayments was that EDS
mistakenly sent multiple verification certificates to lenders and
that lenders returned them.  EDS would pay lenders on the basis of
certificates that were returned.  So at times, if EDS received a
certificate, paid off a borrower's loan account, and subsequently
discovered that it had received another completed certificate it had
sent to a lender, it would make a second payment to the lender.  For
example, one lender returned two certificates for a borrower,
verifying two loans, one in March 1997 and one in April.  EDS sent
two checks, one for each loan, on April 10 and two more--which
constituted double-payments--on May 15. 

In addition to multiple verification certificates, EDS data entry
errors, made while entering data from verification certificates into
the data system, subsequently led to overpayments.  In one example,
an EDS representative said that one of three loans a borrower wanted
to be consolidated, for $16,715.09, was entered in EDS' data system
as a $167,115.09 loan.  However, one of the two other loans, for
about $41,000, was entered into the system and subsequently
overwritten by an erroneous entry of only $5,000.  EDS sent checks
totaling $179,531.53 for the three loans, constituting a net
overpayment of about $114,000, which the lender refunded to EDS. 

In another example, a lender listed a borrower's four loans on a
verification certificate as totaling $29,565.97.  The first of the
four loans was for $10,953.91, but EDS data-entered it as $19,953.91
by mistake.  In EDS' system, this error, combined with slight
overpayments for the three other loans, made the total for the four
loans almost $40,000, which EDS paid the lender, resulting in a
$10,000 overpayment. 

Verification certificates include a box showing the total amount of
the loans being certified.  In each of these cases, had EDS staff
checked the box showing the total, the data entry error on the
individual loan would have been apparent. 

Other EDS processing errors contributed to overpayments.  In one
example, a borrower had three subsidized Stafford loans totaling
$17,000.  The verification certificate the lender returned to EDS
showed the borrower's graduation date of May 1997.  Because they were
subsidized loans, the lender filled in "zero" for interest due on
each loan, with a note saying "info good thru 11/30/97," the end of
the borrower's grace period.  Despite the lender's notation on the
certificate, EDS added interest to the payment, which it made in
October 1997.  The interest covered 36 days, and the checks were sent
out 32 days after the date on the certificate, so enough interest was
added to cover 4 days of mailing time.  Although small, the interest
amounts constituted overpayments. 

In all overpayment cases we analyzed, borrowers signed promissory
notes for amounts that exceeded what they owed, which means that
borrowers might have been liable for repaying the inaccurate amount
on the promissory notes.  In some of these cases, a borrower signed
two very similar promissory notes, sometimes within several weeks of
each other, and EDS paid lenders for the same loan twice.  In other
cases, the borrower signed only one promissory note that covered the
same loans twice or contained other errors.  In still other cases,
borrowers signed as many as five promissory notes, each one partially
covering their loans but totaling far more than what was owed. 


   UNDERPAYMENTS ALSO HAD A
   VARIETY OF CAUSES
-------------------------------------------------------- Appendix II:2

Underpayments generally resulted from lenders' data not being entered
into EDS' data system.  Typically, a lender certified a number of
loans for a borrower, and EDS entered data for all but one of the
loans, or data that were entered for a loan were subsequently
overwritten.  EDS did not pay the omitted loan, and the borrower's
account with the lender could not be closed out because the system
showed that a loan remained unpaid. 

For example, one borrower had 10 loans with a lender.  Five of the
loans were included in a promissory note EDS mailed to the borrower
in March 1997, which the borrower signed and returned the following
month.  EDS sent the lender four checks on April 17 and sent a check
for the fifth loan on October 7.  EDS sent a second promissory note
in October, which was signed and returned that month, and EDS sent
the lender three additional checks on October 20.  Finally, the last
two loans were included on a third promissory note, and EDS sent
payment for these on December 12. 

Some underpayments resulted from an edit check EDS put into place to
reduce the likelihood of a duplicate payment.  The edit check would
not allow a borrower to have two loans in the data system with the
same "first disbursement date," mistakenly assuming that if two loans
showed the same disbursement date, they were actually the same loan. 
As EDS staff entered loan data into the data system from a
verification certificate, if one loan had the same disbursement date
as another loan already entered, the system would overwrite the
previously entered data rather than creating data for a new loan. 
This edit led to EDS underpaying several lenders because it did not
pay off at least one loan that a borrower intended to consolidate. 

In one example, a borrower had five loans with a lender, but two had
the same first disbursement date.  During data entry, the second of
these overwrote the first loan, which was for about $19,000, so the
first was not included on the initial promissory note.  The
certificate was returned to EDS in August 1997, EDS sent out the
initial promissory note in September, and EDS sent payment to the
lender for four loans on October 20.  After a second promissory note,
covering the last loan, was signed and returned, EDS sent a check for
the last loan on December 10. 

In another example, a borrower had three loans with the same
disbursement date, and only one of them was entered into the
system--the two others were overwritten.  Thus, EDS did not pay these
two loans and underpaid the lender for that borrower's loans. 


   EDS DATA ENTRY ERRORS LED TO
   SOME PAYMENTS SENT FOR WRONG
   BORROWER OR TO WRONG LENDER
-------------------------------------------------------- Appendix II:3

Lenders' representatives said that other kinds of payment mistakes
caused them problems.  In cases in which verification certificates
were sent to the wrong lender or to an incorrect lender address, EDS
would also sometimes send its payments to the same mistaken address. 
This might happen because the lender did not correct the initial
mistaken address.  However, in other examples the lender had
corrected the address but EDS did not enter the corrected address
into its system.  A payment, or other correspondence, was then sent
to the same mistaken address to which the certificate had been sent. 

Another source of mistaken payments concerned misidentification of
loans in default at the time of consolidation.  FDLP allows defaulted
loans to be consolidated under certain circumstances; any costs
incurred to collect the defaulted loan, up to 18.5 percent of
outstanding principal and interest, are to be added to the borrower's
amount to be consolidated.  Three data fields in EDS' data system
should have helped ensure that such loans could be identified.  These
fields showed (1) whether the loan was in default, (2) whether the
loan holder was a private lender or a guaranty agency, and (3)
whether collection costs were due.  EDS' records did not always
contain consistent information in these fields.  For example, for
loans that were not in default, the system should have shown that the
loan holder was a private lender and no collection costs should have
been assigned.  However, for one of the examples we analyzed, the
data system showed that the loan was not in default but it showed
that the borrower was assigned collection costs.  In this case, the
loan actually was in default but the system did not identify the
inconsistency in the data.  Because EDS' data system used only
information in the "loan default" field to compute its payment
amount, and it did not separately look at the field showing whether
any collection costs were due, the collection costs were not paid. 
EDS underpaid the lender for this loan, and it will have to process
an adjustment to pay the lender for its collection costs. 

Perhaps the most serious examples of problems were those in which
loans in two borrowers' accounts were intermingled.  In these
instances, at some point in EDS' process of entering loan data into
one borrower's account, EDS staff erroneously entered loan data
pertaining to a second borrower.  In EDS' system, the first
borrower's account then included a loan with the first borrower's
social security number (SSN) in the SSN field but a second borrower's
SSN in the "account number" field.\9 The checks EDS sent to lenders
similarly listed the first borrower's name and SSN, but they had the
second borrower's SSN in the "account number" field. 

One borrower owed less than $100,000 but signed five promissory notes
for a total of $190,000.  For this borrower, EDS made some data entry
errors, but it also entered data pertaining to a second borrower's
loans into this borrower's account.  Because of these errors, EDS
overpaid the lender by more than $90,000 on this borrower's account,
with about $47,000 of this excess stemming from loans that belonged
to the second borrower.  When the lender received the checks, it saw
the second borrower's SSN, saw that the second borrower's account had
already been paid in full, and returned the checks to EDS. 

In all, we found four examples of this type of error.  In the second
example, EDS sent three checks to a lender for a borrower with two
loans.  The third loan had a different nine-digit account number,
which was the SSN of a different borrower whose loans were with the
same lender.  In the third example, a lender received five checks,
each for less than $500, for one borrower but with another borrower's
SSN.  In this example, the second borrower did not have any loans
with that lender, so the lender did not recognize the account number
as another borrower's SSN.  In the fourth example, only one check,
for less than $1,000, was sent for the first borrower with the second
borrower's SSN.  In this example, however, EDS sent a loan
verification certificate for the second borrower that included the
first borrower's SSN in the "account number" field, so EDS apparently
confused these two borrowers' applications before the certification
stage. 


--------------------
\9 EDS' data system had fields for both "SSN" and "account number" to
record data about borrowers that EDS received from the lender.  Many
lenders used the borrower's SSN as the account number, so these
fields should have contained the same data.  Some lenders assigned a
completely different account number, so these fields would differ. 
For checks issued after August 1997, both the SSN and the account
number pertaining to a loan, as well as the first disbursement date,
were printed on the check paying off that loan. 


   SYSTEM GLITCHES LED TO
   OVERPAYMENTS NOT PROMPTLY
   CORRECTED IN THE FDLP SERVICING
   SYSTEM
-------------------------------------------------------- Appendix II:4

Mistakes in transferring completed consolidations to the FDLP
servicing system meant that overpayments returned by lenders were not
always corrected in a borrower's servicing account.  According to
Education officials, data on completed consolidations are not always
smoothly transmitted between the system maintained by EDS and two
systems maintained by the loan servicing contractor.  Because the
systems have different edit checks, data on completed consolidations
can be rejected by the system receiving the information and are
placed in a "suspense" file of rejected transactions.  Some of these
transactions can eventually be applied automatically, while others
must be dealt with manually.  Education officials said that EDS has
been working on cleaning up this file of rejected transactions since
October 1997. 

We analyzed some examples in which lenders' overpayment refunds to
EDS were not applied to the borrower's account in the FDLP servicing
system.  The borrower we discussed earlier who had signed promissory
notes totaling about $190,000, for example, was shown in FDLP
servicing system records in February 1998 as owing $190,000, even
though the lender who received the overpayments made refund payments
to EDS totaling over $90,000, in May and September 1997.  Also, for
one borrower whose $58,000 loan EDS had paid twice, FDLP servicing
system records continued to show the additional $58,000 as part of
her loan balance in February 1998, although EDS received the lender's
refund in May 1997. 

In most examples we analyzed in which borrowers had not been credited
for refunds made on their behalf, we verified that EDS received a
refund, but we could not determine whether the refund transaction had
been forwarded to the direct loan servicer, CDSI/AFSA, for posting in
the FDLP servicing system.  However, in one case we determined that
information reached the FDLP servicing system but had not been
properly recorded.  In this case, a lender sent 15 refund checks to
EDS for overpayments it had received.  The whole dollar amounts for
13 of the 15 checks--but not the cents amounts--were recorded in the
servicing system in June and July 1997.  The cents amounts for all 15
checks were recorded in December 1997 but not the whole dollar
amounts for the remaining 2 checks, totaling about $19,000.  Thus,
all 15 checks were received by the FDLP servicing center, but the
whole dollar amounts for the 2 unrecorded checks had not been
credited to the borrower's account as of February 1998.  As a result,
the borrower's outstanding balance was about $19,000 more than it
should have been. 

Also, the system did not always ensure that subsidized loans
correctly retained their subsidy after consolidation.  Consolidation
loans can contain a subsidized and an unsubsidized portion.  If a
borrower were to return to school or obtain certain other deferments,
interest would accrue on the unsubsidized portion but not on the
subsidized portion.  The borrower described earlier with a net
overpayment of about $114,000 because of two data entry errors had
refunds properly posted to his account.  His account showed that he
owed about $65,000, the correct amount.  However, his entire balance
was shown as unsubsidized, even though about $40,000 of the $65,000
should have been subsidized.  The two EDS data entry errors, and the
manner in which refunds were applied, resulted in his subsidized loan
being overwritten. 


   COMMUNICATION PROBLEMS
   ATTRIBUTED TO EDS UNFAMILIARITY
   WITH PROGRAM AND LACK OF
   PRIORITY PLACED ON
   CONSOLIDATION
-------------------------------------------------------- Appendix II:5

Some lenders' representatives also expressed frustration at what they
believed was a lack of communication from Education and EDS.  Lenders
attributed this to EDS' newness to the student loan arena and
apparent lack of familiarity with lenders.  Lenders also said that
while they had complained to Education staff about various problems
with the consolidation process, no resolution had yet been reached. 

One lender's representative said that lenders were provided no
advance notice from either Education or EDS of the August 1997
shutdown of the FDLP consolidation program.  After the shutdown,
lenders were not provided any information about when consolidation
operations might resume.  The lender's representative also said that
toward the end of the shutdown, with no advance warning, the lender
suddenly received an avalanche of loan payoff checks--far more than
the usual volume--which it found difficult to process. 

Lenders also said that EDS' customer service to lenders had been
uneven.  One lender's representative said that after her contact at
EDS left the company, she had had difficulty for more than 2 months
finding another contact to help resolve problems.  Another lender's
representative said that EDS did not provide follow-up to her calls
and that she usually had to initiate follow-up calls.  A third
lender's representative said that he had difficulty finding someone
at EDS to assume responsibility for resolving his problems.  His
calls to EDS were transferred from person to person, ultimately
leaving his problem unresolved. 

Lenders' representatives said that while they had discussed problems
with Education officials during EDS' first year of direct loan
consolidations, they had not heard back about any resolution. 
Education officials acknowledged that during EDS' first year of
direct loan consolidation, it did not do a good job of working with
lenders on the consolidation process.  These officials suggested that
consolidation did not receive needed staff time to ensure the process
was running smoothly because of other priorities within Education. 




(See figure in printed edition.)Appendix III
COMMENTS FROM THE DEPARTMENT OF
EDUCATION
========================================================== Appendix II



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


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