Direct Student Loan Program:

Management Actions Could Enhance Customer Service

GAO-04-107: Published: Nov 20, 2003. Publicly Released: Nov 20, 2003.

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

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.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The Deficit Reduction Act made statutory changes to the origination fees paid by borrowers under the Direct Loan Program that made it more clear what borrower origination fees should be. Under the Act, Direct Loan origination fees would gradually decrease from 4 to 1 percent between now and July 1, 2010.

    Matter: In light of questions about provisions in the HEA concerning Direct Loan Program origination fees, Congress may wish to 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

  1. Status: Closed - Implemented

    Comments: FSA Direct Loan Operations and Customer Service have developed a Direct Loan School Withdrawal--an Exit Interview Summary Sheet that is used when schools complete final data reconciliation steps after withdrawing from the program. The interviewer asks four questions about the school's reasons for withdrawing from the Direct Loan Program, anything that could have been done to prevent withdrawal, and aspects of the Direct Loan Program liked most and least. FSA reported that this process has been in place since early June 2004, but no schools have notified FSA that they are withdrawing since that time.

    Recommendation: To improve knowledge of its Direct Loan customers and meet its goal of increasing customer satisfaction, FSA's Chief Operating Officer should 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 Affected: Department of Education: Office of Federal Student Aid


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