Student Loans:

Direct Loans Could Save Money and Simplify Program Administration

HRD-91-144BR: Published: Sep 27, 1991. Publicly Released: Sep 27, 1991.

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Pursuant to a congressional request, GAO: (1) determined whether federal savings can be expected by replacing Stafford student loans with direct loans under a direct loan program proposed by the National Association of State Universities and Land Grant Colleges; and (2) reviewed the administrative responsibilities that would accrue to educational institutions and the Department of Education from direct lending.

GAO found that: (1) a direct loan program operating in place of the Stafford loan program could save over $1 billion, assuming the loans were made in fiscal year 1992; (2) estimated savings, which would result primarily from the absence of in-school interest and special allowance payments to lenders, ranged from $620 million to $1.47 billion; (3) although Education would acquire additional oversight roles under a direct loan program, its ability to monitor the flow of funds would improve, since it would no longer monitor lenders or guaranty agencies, make special allowance payments to lenders, or reconcile special allowance and origination fee accounts with lenders; (4) educational institutions would engage in such new activities as forecasting loan volume, requesting transfers of funds from Education, and drawing down those funds as students received their loans and paperwork in a direct loan program; (5) a direct loan program would simplify paperwork and reporting requirements for the schools, since schools would work with one or several servicers rather than hundreds of lenders and multiple guaranty lenders; and (6) a direct loan program could improve program accountability.

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