Direct Student Loans:

Efforts to Resolve Lenders' Problems With Consolidations Are Under Way

HEHS-98-103: Published: Apr 21, 1998. Publicly Released: Apr 21, 1998.

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

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

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