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

United States General Accounting Office:

GAO:

November 2003:

DIRECT STUDENT LOAN PROGRAM:

Management Actions Could Enhance Customer Service:

Direct Student Loan Program:

GAO-04-107:

GAO Highlights:

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

Why GAO Did This Study:

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

What GAO Found:

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

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

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

What GAO Recommends:

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

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

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

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

[End of section]

Contents:

Letter:

Results in Brief:

Background:

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

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

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

Conclusions:

Matters for Congressional Consideration:

Recommendation for Executive Action:

Agency Comments:

Appendix I: Scope and Methodology:

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

Survey of Schools That Have Participated in the Direct Loan Program:

Analysis of Benefits Offered by FFELP Lenders:

Site Visits:

Telephone Interviews:

Appendix II: Comments from the Department of Education:

Appendix III: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Staff Acknowledgments:

Tables:

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

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

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

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

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

Figures:

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

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

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

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

Figure 5: Estimated Percentages of Direct Loan Schools' Usage of 
Certain FSA Web Sites:

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

United States General Accounting Office:

Washington, DC 20548:

November 20, 2003:

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

Dear Senator Kennedy:

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

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

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

To address the first question, we analyzed data from three Education 
databases and identified schools that provided loans through either the 
Direct Loan Program or FFELP in each school year from 1994-95 to 2001-
02. To address the second question, we surveyed financial aid officials 
at schools that participated in the Direct Loan Program in 2001-02, of 
whom 57 percent responded to our survey. [Footnote 2] We also surveyed 
schools that had participated in the program for at least one school 
year from 1994-95 to 2000-01 but did not participate in 2001-02. 
Twenty-three percent of these schools responded to our survey, and 
because of their low response rate we do not provide estimates for this 
group. We conducted site visits and telephone interviews with 20 Direct 
Loan public and private, 4-year, 2-year, and less-than-2-year schools 
located in the Boston, New York, San Francisco, and Washington, D.C., 
metropolitan areas. These schools were selected on the basis of school 
type and loan volume. We also interviewed financial aid officials at 
three schools that had once participated in the Direct Loan Program but 
were no longer doing so. To learn about benefits available to 
borrowers, we reviewed the terms of loans provided through the Direct 
Loan Program as well as the terms of loans provided through selected 
FFELP lenders. To address the third question, we gathered information 
about schools' experiences through our survey and site visits at Direct 
Loan schools. In addition, we interviewed FSA staff at headquarters and 
three regional offices. We also reviewed the Higher Education Act of 
1965, as amended, and related regulations; contracts for FSA's 
information systems; FSA planning documents; and FSA Web sites. We 
conducted our work from February through October 2003 in accordance 
with generally accepted government auditing standards.

Results in Brief:

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

Similar factors influenced a large majority of schools' decision to 
participate in the Direct Loan Program, whereas the factors that led 
schools to leave the program varied. Four factors--(1) streamlined loan 
delivery, (2) greater control over loan processes, (3) timely delivery 
of money to students, and (4) ease of tracking loans over time--were 
extremely or very important in influencing 70 percent of Direct Loan 
schools' decision to participate in the program. While recognizing that 
improvements have since occurred in FFELP, financial aid officials at 
Direct Loan schools we visited explained that prior to joining the 
Direct Loan Program, they had to follow separate and distinct loan 
processes for each of the many FFELP lenders and guaranty agencies used 
by their students. In contrast, Direct Loan schools have only one 
lenderóthe federal governmentóand one process to follow. The factors 
that led many schools to end their participation in the Direct Loan 
Program varied. For example, some experienced difficulties meeting the 
Direct Loan Program requirement that they match the schoolís loan 
records with the loan origination and disbursement contractorís records 
and resolve any discrepancies. Other schools stopped participating 
because some FFELP lenders offered better loan terms for borrowers. For 
example, some FFELP lenders did not charge borrowers loan origination 
fees and offered interest rate reductions that were unavailable to the 
schoolsí students under the Direct Loan Prog Ed[Footnote 3]ucation has 
reduced the origination fees for Direct Loan borrowers, but a coalition 
of FFELP lenders has challenged its regulatory authority to do so and 
the case is still pending in court. Financial aid officials at Direct 
Loan schools we visited expressed concern about the continued viability 
of the Direct Loan Program in light of FFELP lendersí ability to offer 
more attractive terms to borrowers. The extent to which FFELP lenders 
will continue to offer such benefits is unknown. FSA does not 
systematically collect information from schools about the reasons why 
they stop participating in the Direct Loan Program, although this 
information could be used to identify needed program improvements.ram.

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

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

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

Background:

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

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

Borrower and School Benefits:

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

* Standard repaymentóborrowers pay a fixed monthly amount of at least 
$50 up to 10 years;

* Graduated repaymentóborrowers pay smaller monthly amounts initially 
and in later years the monthly amount is larger;

* Extended repaymentóborrowers pay a fixed monthly amount that can be 
repaid over a time period as long as 25 years under FFEL and 30 years 
under the Direct Loan Program[Footnote 5].

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

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

Schoolsí Administrative Responsibilities:

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

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

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

Administrative task: Determine studentsí eligibility for federal loan; 
Who's responsible in: Direct Loan Program: School; Who's responsible 
in: FFELP: School.

Administrative task: Obtain completed promissory note from borrower; 
Who's responsible in: Direct Loan Program: School; Who's responsible 
in: FFELP: Lender.

Administrative task: Provide entrance and exit counseling to borrowers; 
Who's responsible in: Direct Loan Program: School; Who's responsible 
in: FFELP: School.

Administrative task: Disburse money to students; Who's responsible in: 
Direct Loan Program: School; Who's responsible in: FFELP: Lender and 
school.

Administrative task: Perform monthly loan reconciliation; Who's 
responsible in: Direct Loan Program: School; Who's responsible in: 
FFELP: Not required.

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

[End of table]

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

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

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

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

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

[See PDF for image]

[End of figure]

Since 1998-99, More Schools Have Stopped Participating in the Direct 
Loan Program than Have Joined:

Since 1998-99, the number of schools that stopped participating in the 
Direct Loan Program is greater than the number that have joined. During 
this same time, the programís share of total new loan volume has 
decreased, despite annual increases in total Direct Loan volume. As 
shown in figure 2, 166 schools have stopped participating in the 
program since 1998-99, while only 34 began participating.

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

[See PDF for image]

[End of figure]

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

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

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

Four Factors Were Very Important in Influencing Schools' Decision to 
Participate in the Program:

A substantial majority of schools reported that four factors were 
extremely or very important in influencing their decision to 
participate in the Direct Loan Program. Figure 3 shows, for each of 
these factors, the percentage of schools that reported them as very or 
extremely important.

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

[See PDF for image]

[End of figure]

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

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

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

[See PDF for image]

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

[End of figure]

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

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

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

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

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

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

Lender: Department of Education (Direct Loan Program); Origination fee: 
3%; (Stafford loan); 4%; (PLUS loan); Repayment incentives: * 
0.25% interest rate reduction for repaying electronically; * 1.5% 
rebate of loan amount borrowed applied at the time loan is disbursed. 
Borrowers must make 12 consecutive on-time payments or amount will be 
added back to borrower's account..

Lender: FFELP lender A; Origination fee: 0%; (Stafford loan); 3%; (PLUS 
loan)[A]; Repayment incentives: * 0.25% interest rate 
reduction for repaying electronically; * PLUS loans interest-free for 
the first year; * portion of loan debt cancelled when student graduates 
with degree; amount varies by degree type; * 2% rate reduction for 48 
consecutive on-time monthly payments.

Lender: FFELP lender B; Origination fee: 0%; (Stafford loan); 3%; (PLUS 
loan)[A]; Repayment incentives: * 0.25 % interest rate 
reduction for repaying electronically; * interest rate reduced to 0% 
after 36 monthly on-time payment for Stafford or PLUS loans.

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

Lender: FFELP lender D; Origination fee: 3%; (Stafford and PLUS loans); 
[Empty]; Repayment incentives: * 0.25 % interest rate reduction for 
repaying electronically; * credit on origination fees if Stafford loans 
are owned and serviced by lender minus $250 after the first 24 
consecutive payments; * 2% interest rate savings after first 48 months 
of on-time payments if loan is owned and serviced by lender.

Source: GAO analysis of borrower benefits under the Direct Loan Program 
and selected FFELP lenders.

[A] PLUS loan origination fees are credited back to the borrower's 
account.

Note: FFELP lenders include banks and guaranty agencies that also serve 
as lenders.

[End of table]

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

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

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

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

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

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

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

Direct Loan Schools Reported That FSA's Web Sites Have Helped Them 
Administer the Program, but Navigating among Multiple Sites Can Be 
Challenging:

Many Direct Loan schools reported on our survey that FSA's Web sites 
helped them administer the Direct Loan Program but that navigating 
among FSA's Web sites was challenging. Schools reported that the Web 
sites were effective in that they helped them perform various 
administrative functions, such as determining student eligibility for 
Direct Loans. Figure 5 provides information about key Web sites FSA 
developed for schools, the purpose of the Web sites, and the extent to 
which Direct Loan schools reported using the Web sites very often or 
often.

Figure 5: Estimated Percentages of Direct Loan Schools' Usage of 
Certain FSA Web Sites:

[See PDF for image]

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

[End of figure]

The various school types reported Web site usage that differed. For 
example, a larger percentage of 4-year public and private schools 
reported that they used the NSLDS Web site very often or often than did 
less-than-2-year schools. At a large public 4-year school with a number 
of satellite campuses worldwide, financial aid officials stated that 
the ability to use FSA's Web sites to verify that students have met 
certain program requirements has been useful because many of its 
students are unable to visit the financial aid office in person. Almost 
64 percent of less-than-2-year schools[Footnote 13] reported that a 
corporate office or a third party servicer[Footnote 14] handled the 
administrative processes for the Direct Loan Program, thus they did not 
need to use the Web sites. Furthermore, some schools were not aware of 
all the FSA Web sites that provided information about the Direct Loan 
Program.

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

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

FSA Web sites for schools: NSLDS: https://www.nsldsfap.ed.gov/secure/
logon.asp; Estimated percentage of Direct Loan schools that reported 
Web sites were excellent or good in: Providing relevant information: 
91; Estimated percentage of Direct Loan schools that reported Web sites 
were excellent or good in: Providing timely information: 81; Estimated 
percentage of Direct Loan schools that reported Web sites were 
excellent or good in: Answering questions: 70; Estimated percentage of 
Direct Loan schools that reported Web sites were excellent or good in: 
Using language that is easy to understand: 86.

FSA Web sites for schools: Common Origination and Disbursement: https:/
/cod.ed.gov/cod/LoginPage; Direct Loan Servicing Online: https://
schools.dssonline.com/index.asp; Estimated percentage of Direct Loan 
schools that reported Web sites were excellent or good in: Providing 
relevant information: 73; Estimated percentage of Direct Loan schools 
that reported Web sites were excellent or good in: Providing timely 
information: 69; Estimated percentage of Direct Loan schools that 
reported Web sites were excellent or good in: Answering questions: 63; 
Estimated percentage of Direct Loan schools that reported Web sites 
were excellent or good in: Using language that is easy to understand: 
72.

FSA Web sites for schools: Direct Loan home page: http://www.ed.gov/
DirectLoan; Estimated percentage of Direct Loan schools that reported 
Web sites were excellent or good in: Providing relevant information: 
80; Estimated percentage of Direct Loan schools that reported Web sites 
were excellent or good in: Providing timely information: 78; Estimated 
percentage of Direct Loan schools that reported Web sites were 
excellent or good in: Answering questions: 68; Estimated percentage of 
Direct Loan schools that reported Web sites were excellent or good in: 
Using language that is easy to understand: 84.

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

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

[End of table]

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

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

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

[See PDF for image]

[End of figure]

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

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

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

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

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

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

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

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

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

In July 2003, FSA reorganized its staff in headquarters and in the 
regional offices to improve its program delivery and customer service. 
Under the reorganization, DLSRO has been renamed the School Relations 
Office, and its mission has been broadened from assisting Direct Loan 
schools to assisting all schools participating in Title IV programs. 
FSA officials reported that this change was made because the number of 
schools participating in the Direct Loan Program has decreased and they 
believed that schools in the Direct Loan Program no longer need 
individual attention. To address agency needs, several former DLSRO 
staff have been temporarily reassigned to other offices, where they 
perform such tasks as providing training to COD contractor staff, 
developing FSA program software, or working in FSA headquarters 
operations. FSA officials reported that changes under the 
reorganization would not adversely affect customer service provided to 
Direct Loan schools.

Conclusions:

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

Matters for Congressional Consideration:

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

Recommendation for Executive Action:

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

Agency Comments:

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

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

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

Sincerely yours,

Cornelia M. Ashby: 

Director, Education, Workforce, and Income Security Issues:

Signed by Cornelia M. Ashby: 

[End of section]

Appendix I: Scope and Methodology:

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

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

To identify loan volume and schools that have provided loans through 
the Direct Loan Program or FFELP, we analyzed institutional-level data 
on loans in three Department of Education databases--(1) the Committed 
Loan Volume Report, which includes loan data reported by schools and 
contractors; (2) the National Student Loan Data System (NSLDS), a 
national repository of information about federal loans and grants 
awarded to students; and (3) the Integrated Postsecondary Education 
Data System (IPEDS), a collection of information obtained from surveys 
of all institutions whose primary purpose is to provide postsecondary 
education and provides institutional-level data for a variety of 
characteristics. The Committed Loan Volume Report was used to determine 
the loan volume and schools in the Direct Loan Program for school years 
1994-95 to 2001-02. NSLDS was used to determine the loan volume and 
schools in FFELP. IPEDS was used to identify school characteristics. To 
assess the reliability of the Committed Loan Volume Report, NSLDS, and 
IPEDS, we reviewed existing information about the data, including 
documentation produced by officials at Education. Education officials 
also reported performing data accuracy, validity, and integrity tests 
to ensure data are reliable. We performed validity tests of key 
variables. We determined that the Direct Loan, NSLDS, and IPEDS data 
were sufficiently reliable for our purposes.

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

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

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

* Former Direct Loan school--279 schools participated in the Direct 
Loan Program for at least one school year from 1994-95 to 2000-01 but 
not in school year 2001-02. These schools provided loans through FFELP 
in 2001-02.

Survey of Schools That Have Participated in the Direct Loan Program:

We administered a Web survey to financial aid officials at schools we 
identified as participating in the Direct Loan Program from the 1994-95 
to 2001-02 school years. These schools consisted of four school types: 
4-year public, 4-year private, 2-year, and less-than-2-year schools. We 
excluded a small number of schools from the population, and e-mailed 
the survey to all remaining 1,196 schools in our study 
population.[Footnote 18] We conducted the survey between June and 
August of 2003.

Because most of our survey questions asked schools about their 
experiences in the Direct Loan Program in 2001-02, we divided the study 
population into two groups--Direct Loan and former Direct Loan schools. 
We obtained responses from 57 percent of Direct Loan schools and 23 
percent of the former Direct Loan schools. Because of the low response 
rate of former Direct Loan schools, we do not produce estimates for 
this group of schools in this report.[Footnote 19]

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

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

School type: 4-year public; Direct Loan school population: 210; Number 
of Direct Loan schools that responded to survey: 141; Percentage of 
schools responding: 67.1.

School type: 4-year private; Direct Loan school population: 240; Number 
of Direct Loan schools that responded to survey: 133; Percentage of 
schools responding: 55.4.

School type: 2-year; Direct Loan school population: 268; Number of 
Direct Loan schools that responded to survey: 153; Percentage of 
schools responding: 57.1.

School type: Less-than-2-year; Direct Loan school population: 217; 
Number of Direct Loan schools that responded to survey: 110; Percentage 
of schools responding: 50.7.

School type: Total; Direct Loan school population: 935; Number of 
Direct Loan schools that responded to survey: 537; Percentage of 
schools responding: 57.4.

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

[End of table]

Estimation:

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

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

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

Sampling and Nonsampling Error:

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

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

Analysis of Benefits Offered by FFELP Lenders:

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

Site Visits:

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

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

Name of school: Boston area, located in FSA Region I: 

Name of school: Suffolk University; School type: 4-year private; 
Student enrollment, fall 1998: 6,445; Direct Loan volume, 2001-02: 
$15,791,907; FFELP volume, 2001-02: $27,789,571.

Name of school: Benjamin Franklin Institute of Technology; School type: 
4-year public; Student enrollment, fall 1998: 279; Direct Loan volume, 
2001-02: $1,166,773; FFELP volume, 2001-02: $0.

Name of school: Harvard University; School type: 4-year private; 
Student enrollment, fall 1998: 24,373; Direct Loan volume, 2001-02: 
$77,643,462; FFELP volume, 2001-02: $0.

Name of school: New England College of Optometry; School type: 4-year 
private; Student enrollment, fall 1998: 422; Direct Loan volume, 2001-
02: $9,535,668; FFELP volume, 2001-02: $0.

Name of school: Porter and Chester Institute; School type: Less-than-2-
year; Student enrollment, fall 1998: 1,072; Direct Loan volume, 2001-
02: $5, 421,063; FFELP volume, 2001-02: $0.

Name of school: New York City, located in FSA Region II: 

Name of school: City College of New York; School type: 4-year and 2-
year public; Student enrollment, fall 1998: 194,746 (total at 17 
campuses); Direct Loan volume, 2001-02: $87,598,773 (total at 17 
campuses); FFELP volume, 2001-02: $0.

Name of school: Cornell University Medical College; School type: 4-year 
private; Student enrollment, fall 1998: 692; Direct Loan volume, 2001-
02: $6,966,706; FFELP volume, 2001-02: $200,931.

Name of school: Technical Career Institute; School type: 2-year 
private; Student enrollment, fall 1998: 3,545; Direct Loan volume, 
2001-02: $538,731; FFELP volume, 2001-02: $6,744,374.

Name of school: New York International Beauty School; School type: 
Less-than-2-year; Student enrollment, fall 1998: 168; Direct Loan 
volume, 2001-02: $528,310; FFELP volume, 2001-02: $25,282.

Name of school: DC Metro area, located in FSA Region III: 

Name of school: Bowie State University; School type: 4-year public; 
Student enrollment, fall 1998: 5,024; Direct Loan volume, 2001-02: 
$14,789,515; FFELP volume, 2001-02: $0.

Name of school: University of Maryland, University College; School 
type: 4-year public; Student enrollment, fall 1998: 14,142; Direct Loan 
volume, 2001-02: $44,038,905; FFELP volume, 2001-02: $0.

Name of school: Johns Hopkins University; School type: 4-year private; 
Student enrollment, fall 1998: 17,111; Direct Loan volume, 2001-02: 
$37,382,682; FFELP volume, 2001-02: $4,702,746.

Name of school: Northern Virginia Community College; School type: 2-
year public; Student enrollment, fall 1998: 36,216; Direct Loan volume, 
2001-02: $1,766,193; FFELP volume, 2001-02: $0.

Name of school: RETS Technical Training Center; School type: 2-year 
private; Student enrollment, fall 1998: 476; Direct Loan volume, 2001-
02: $391,581; FFELP volume, 2001-02: $2,227,900.

Name of school: Sanz School; School type: Less-than-2-year; Student 
enrollment, fall 1998: 611; Direct Loan volume, 2001-02: $1,895,126; 
FFELP volume, 2001-02: $0.

Name of school: San Francisco area, located in FSA Region IX: 

Name of school: San Francisco State University; School type: 4-year 
public; Student enrollment, fall 1998: 27,446; Direct Loan volume, 
2001-02: $57,413,020; FFELP volume, 2001-02: $3,817,165.

Name of school: Sonoma State University; School type: 4-year public; 
Student enrollment, fall 1998: 7,003; Direct Loan volume, 2001-02: 
$19,346,287; FFELP volume, 2001-02: $0.

Name of school: University of California, Berkeley; School type: 4-year 
public; Student enrollment, fall 1998: 31,011; Direct Loan volume, 
2001-02: $92,029,808; FFELP volume, 2001-02: $0.

Name of school: University of San Francisco; School type: 4-year 
private; Student enrollment, fall 1998: 7,990; Direct Loan volume, 
2001-02: $46,255,625; FFELP volume, 2001-02: $0.

Name of school: Napa Valley College; School type: 2-year public; 
Student enrollment, fall 1998: 5,646; Direct Loan volume, 2001-02: 
$348,260; FFELP volume, 2001-02: $0.

Source: GAO Analysis of Education data.

[End of table]

Telephone Interviews:

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

[End of section]

Appendix II: Comments from the Department of Education:

UNITED STATES DEPARTMENT OF EDUCATION:

Federal Student Aid Chief Operating Officer:

November 13, 2003:

Ms. Cornelia Ashby:

Director, Education, Workforce, and Income Security Issues General 
Accounting Office Washington, D.C. 20548:

Dear Ms. Ashby:

Thank you for the opportunity to respond to your draft audit report 
entitled, "Direct Student Loan Program -Management Actions Could 
Enhance Customer Service" (GAO-04-107). I am responding on behalf of 
the Department.

The William D. Ford Federal Direct Loan (Direct Loan) Program has 
assisted millions of American students each year in attaining their 
higher education goals.	With the introduction of the Direct Loan 
Program, benefits for borrowers, as well as customer service for 
schools, improved in both the Direct Loan and Federal Family Education 
Loan (FFEL) Programs.

The Department continuously seeks to improve delivery of services to 
borrowers. For example, as noted in your report, the Department 
implemented a new system, the Common Origination and Disbursement (COD) 
system that originates and disburses Direct Loans to students faster, 
but is also aimed at simplifying and improving the reconciliation 
requirements of the program. We are pleased that you report, based on a 
survey, that 72 percent of Direct Loan schools are generally satisfied 
with COD. The Department will continue to find new ways to enhance the 
user-friendliness of the new system.

While it is true that the Department has not collected information from 
schools that have stopped participating in the Direct Loan Program, we 
have supported a continuous program of soliciting information from 
schools concerning program improvements. Each year, general sessions 
are offered at our Electronic Access Conferences and at our Spring 
Conference that invite schools to provide feedback on program 
operations. In addition, focus groups are held with invited schools as 
part of the annual system development process. Therefore, we suggest 
that GAO acknowledge that the Department does provide a forum for 
program improvement suggestions on a continual basis.

However, the Department concurs with your recommendation that FSA 
systematically collect information from schools that could be used to 
make improvements to the Direct Loan Program. In the future, the 
Department will conduct exit interviews of schools that notify us when 
they are 
leaving the Direct Loan Program. As appropriate, we will incorporate 
the results into requirements for the annual award year development 
process.

Again, thank you for the opportunity to comment on this draft report. 
We appreciate the professionalism of your staff as they worked on this 
engagement. If you have any questions, please contact Ms. Kay Jacks at 
(202) 377-4288.

Sincerely,

Theresa S. Shaw:

Signed by Theresa S. Shaw:

[End of section]

Appendix III: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Jeff Appel, Assistant Director (202) 512-9915:

Andrea Romich Sykes, Analyst-in-Charge (202) 512-9660:

Staff Acknowledgments:

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

FOOTNOTES

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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