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 

GAO-04-107 
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. 

Highlights of GAO-04-107, a report to the 

Ranking Minority Member, Committee on 

Health, Education, Labor, and Pensions, 

U.S. Senate 

November 2003 

DIRECT STUDENT LOAN PROGRAM

Management Actions Could Enhance 

Customer Service 

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. 

Schools Join the Direct Loan Program for its Streamlined Process 

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. 

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. 
Page i GAO-04-107 Direct Student Loan Program 

Letter 1

Results in Brief 3

Background 5

About One-Third of Postsecondary Schools That Provided Federal 

Loans since 1994-95 Have Participated in the Direct Loan 

Program 8

Similar Factors Influenced a Majority of Schools’ Decision to 

Participate in the Program but the Factors That Influenced 

Schools’ Decision to End Participation Varied 11

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 18

Conclusions 26

Matters for Congressional Consideration 26

Recommendation for Executive Action 26

Agency Comments 27

Appendix I Scope and Methodology 28 

Analyzing Loan Volume and Identifying Schools That Participated 

in the Direct Loan Program and FFELP 28

Survey of Schools That Have Participated in the Direct Loan 

Program 29

Analysis of Benefits Offered by FFELP Lenders 32

Site Visits 32

Telephone Interviews 33

Appendix II Comments from the Department of Education 34 

Appendix III GAO Contacts and Staff Acknowledgments 36 

GAO Contacts 36

Staff Acknowledgments 36

Tables 

Table 1: Comparison of Responsibilities for Schools That 

Participate in the Direct Loan Program and FFELP 8

Contents 
Page ii GAO-04-107 Direct Student Loan Program 

Table 2: Fees and Repayment Incentives Available to Borrowers in 

the Direct Loan Program and Selected FFELP Lenders in 

2003 15

Table 3: Estimated Percentages of Direct Loan Schools’ Opinions 

about FSA Web Sites for Schools 20

Table 4: Response Rates of Schools That Participated in the Direct 

Loan Program in 2001-02 30

Table 5: Characteristics of Schools Selected for Site Visits and 

Interviews 33

Figures 

Figure 1: Number of Direct Loan Schools and Direct Loan Volume 

(in billions of dollars) in School Year 2001-02, by School 

Type 9

Figure 2: Number of Schools Beginning and Ending Participation in 

Each School Year between 1996-97 and 2001-02 10

Figure 3: Factors That Were Extremely or Very Important in 

Schools’ Decision to Join the Direct Loan Program 11

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 13

Figure 5: Estimated Percentages of Direct Loan Schools’ Usage of 

Certain FSA Web Sites 19

Figure 6: Estimated Percentages of Direct Loan Schools That Refer 

Their Students to Certain FSA Web Sites 22

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Page 1 GAO-04-107 Direct Student Loan Program 

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 government’s 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.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 Education’s 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 

 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. 

United States General Accounting Office

Washington, DC 20548 
Page 2 GAO-04-107 Direct Student Loan Program 

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 

schools’ decision to participate in the Direct Loan Program, and if 

applicable, what factors influenced schools’ 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. 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 

 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. 
Page 3 GAO-04-107 Direct Student Loan Program 

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. 

Of the schools that provided federal student loans in each year since 

1994-95, approximately 1,200—or 29 percent—provided 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 participated. 

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. During this period, only 34 schools began participating in the 

program, while 166 schools have stopped. 

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 lender—the 

federal government—and 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 school’s loan records with the loan 

origination and disbursement contractor’s 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 

Results in Brief 
Page 4 GAO-04-107 Direct Student Loan Program 

interest rate reductions that were unavailable to the schools’ students 

under the Direct Loan Program.3

 Education 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 lenders’ 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. 

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 FSA’s 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 schools’ satisfaction with FSA’s Web sites, they 

reported that it is challenging to navigate among multiple Web sites. FSA 

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 FSA’s 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 Program’s 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 than 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. 

 3

Although FFELP lenders did not charge fees to borrowers, they still paid the loan 

origination fees to the federal government. 
Page 5 GAO-04-107 Direct Student Loan Program 

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 FSA’s 

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. Education’s 

written comments appear in appendix II. Education also provided 

technical clarification, which we incorporated where appropriate. 

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 

lender—the federal government—which 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. 

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 

Background 

Borrower and School 

Benefits 
Page 6 GAO-04-107 Direct Student Loan Program 

program.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 repayment—borrowers pay a fixed monthly amount of at least 

$50 up to 10 years; 

• Graduated repayment—borrowers pay smaller monthly amounts initially 

and in later years the monthly amount is larger; 

• Extended repayment—borrowers 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.5

Last, borrowers in both loan programs have the option of choosing a 

repayment plan that is adjusted according to the borrower’s 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 

 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. 
Page 7 GAO-04-107 Direct Student Loan Program 

to its graduate students.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.7

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.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. 

 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. 

Schools’ Administrative 

Responsibilities 
Page 8 GAO-04-107 Direct Student Loan Program 

Table 1: Comparison of Responsibilities for Schools That Participate in the Direct 

Loan Program and FFELP 

 Who’s responsible in 

Administrative task 

Direct Loan 

Program FFELP 

Determine students’ eligibility for federal loan School School 

Obtain completed promissory note from 

borrower 

School Lender 

Provide entrance and exit counseling to 

borrowers 

School School 

Disburse money to students School Lender and 

school 

Perform monthly loan reconciliation School Not required 

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

Of the schools that provided federal student loans in each year since 

1994-95, approximately 1,200—or 29 percent—provided 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 Program’s 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. 

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 

program’s 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). 

About One-Third of 

Postsecondary 

Schools That 

Provided Federal 

Loans since 1994-95 

Have Participated in 

the Direct Loan 

Program 

Among Schools That 

Participated in the Direct 

Loan Program during 

School Year 2001-02, 

Public 4-Year Schools 

Provided Most of the 

Program’s Loan Volume 
Page 9 GAO-04-107 Direct Student Loan Program 

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

Type 

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 program’s 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. 

Since 1998-99, More 

Schools Have Stopped 

Participating in the Direct 

Loan Program than Have 

Joined 

Public 4-year

Less than 2-year

•

2-year 

Private 4-year

272

240

219 •

210 •

Private 4-year

•

• •

6.9

2.7

0.1

Less than 2-year

0.6

2-year

•

Public 4-year

• •

•

Source: GAO analysis of Education data.
Page 10 GAO-04-107 Direct Student Loan Program 

Figure 2: Number of Schools Beginning and Ending Participation in Each School 

Year between 1996-97 and 2001-02 

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. 

1996-97

School year

1997-98 1998-99 1999-2000 2000-01 2001-02

Number of schools

Schools beginning participation

Schools ending participation

Source: GAO analysis of Education data.

0

20

40

60

80

100

120

140

160
Page 11 GAO-04-107 Direct Student Loan Program 

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. 

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 

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 

Similar Factors 

Influenced a Majority 

of Schools’ Decision 

to Participate in the 

Program but the 

Factors That 

Influenced Schools’ 

Decision to End 

Participation Varied 

Four Factors Were Very 

Important in Influencing 

Schools’ Decision to 

Participate in the Program 

0 10

Estimated percentage of schools

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

Streamlined loan delivery

Timely delivery of money to students

Greater control over loan processes

Ease of tracking loans over time

20 30 40 50 60 70 80

90

90

89

82

90 100
Page 12 GAO-04-107 Direct Student Loan Program 

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. 
Page 13 GAO-04-107 Direct Student 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 

Note: The 95-percent confidence interval for the estimated percentage of less-than-2-year schools is 

from 56 to 69 percent. 

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. 

0 10 20 30 40 50 60 70

Estimated percentage of schools

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

Less-than-2-year

2-year

4-year private

4-year public

62

52

22

7
Page 14 GAO-04-107 Direct Student 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.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. 

 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. 

A Variety of Factors 

Influenced Schools’ 

Decision to End 

Participation in the Direct 

Loan Program 
Page 15 GAO-04-107 Direct Student Loan Program 

Table 2: Fees and Repayment Incentives Available to Borrowers in the Direct Loan 

Program and Selected FFELP Lenders in 2003 

Lender 

Origination 

fee 

Repayment incentives 

Department of 

Education 

(Direct Loan 

Program) 

3% 

(Stafford 

loan) 

4% 

(PLUS loan) 

• 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. 

FFELP lender A 0% 

(Stafford 

loan) 

3% 

(PLUS 

loan)a

• 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 

FFELP lender B 0% 

(Stafford 

loan) 

3% 

(PLUS 

loan)a

• 0.25 % interest rate reduction for repaying 

electronically 

• interest rate reduced to 0% after 36 monthly ontime payment for Stafford or PLUS loans 

FFELP lender C Up to 3% 

(Stafford 

and PLUS 

loans) 

• 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 

FFELP lender D 3% 

(Stafford 

and PLUS 

loans) 

• 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. 
Page 16 GAO-04-107 Direct Student Loan Program 

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.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 lenders’ 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.11

 10Student 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. 

11When 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. 
Page 17 GAO-04-107 Direct Student Loan Program 

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.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 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, 

 12Schools that participate in FFELP may designate one or more lenders as a preferred 

lender from which students can borrow. 

FSA Does Not Collect 

Information on the Factors 

Influencing Schools’ 

Decision to Stop 

Participating 
Page 18 GAO-04-107 Direct Student Loan Program 

which, in turn, might help FSA achieve its goal of improving customer 

service. 

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 FSA’s Web sites are 

effective in helping them administer the program, 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. 

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. 

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 

Direct Loan Schools 

Reported That FSA’s Web 

Sites Have Helped Them 

Administer the Program, 

but Navigating among 

Multiple Sites Can Be 

Challenging 
Page 19 GAO-04-107 Direct Student Loan Program 

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

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). 

Sources: GAO Survey of Postsecondary School Experiences with the Direct Loan Program and U.S. Department of Education, Office of Federal Student Aid, Washington, D.C.

FSA school Web sites Purpose Survey results

NSLDS

Schools verify students 

eligibility to receive loans 

and view loan history.

https://www.nsldsfap.ed.gov/secure/logon.asp

http://www.ed.gov/DirectLoan

https://cod.ed.gov/cod/LoginPage

Estimated percentage of Direct Loan schools that 

reported using Web sites very often or often

4-year public

4-year private

2-year

Less-than-2-year

Overall

Common Origination and

Disbursement

Schools can view and 

process data for Direct Loan 

and other student aid 

programs and obtain 

technical assistance.

Direct Loan home page

Schools can review 

information and guidance 

specific to the Direct Loan 

program.

97

83

89

77

87

84

68

51

26

57

58

48

42

19

42

Types of schools

0 10 20 30 40 50 60 70 80 90 100

‘
Page 20 GAO-04-107 Direct Student Loan Program 

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-than2-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-than2-year schools13 reported that a corporate office or a third party servicer14

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 

Estimated percentage of Direct Loan schools that reported Web sites were 

excellent or good in 

FSA Web sites for schools 

Providing relevant 

information

Providing timely 

information 

Answering 

questions 

Using language 

that is easy to 

understand 

NSLDS 

https://www.nsldsfap.ed.gov/secure/logon.asp 

91 81 70 86 

Common Origination and Disbursement 

|https://cod.ed.gov/cod/LoginPage 

Direct Loan Servicing Online 

https://schools.dssonline.com/index.asp 

73 69 63 72 

Direct Loan home page 

http://www.ed.gov/DirectLoan 

80 78 68 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. 

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

14A 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. 
Page 21 GAO-04-107 Direct Student Loan Program 

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. 
Page 22 GAO-04-107 Direct Student Loan Program 

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

Sources: GAO Survey of Postsecondary School Experiences with the Direct Loan Program and U.S. Department of Education, Office of Federal Student Aid, Washington, D.C.

FSA student Web sites Purpose Survey results

Electronic promissory note

Students or parents can 

electronically sign master

promissory note.

NSLDS

Students can review information

regarding their loan and financial

aid history.

 http://www.dlssonline.com/index.asp

 http://www.nslds.ed.gov

https://lo-online.ed.gov/empn/unsecure/

Estimated percentage of Direct Loan schools that 

report referring students to Web sites very often or often

0 10 20 30 40 50 60 70 80

4-year public

4-year private

2-year

Less-than-2-year

Overall

Online Direct Loan servicing

Students can fulfill requirements 

that they understand the 

responsibilities of borrowing. 

Students can also access this 

site to obtain information about 

repayment options and 

electronically repay their loans.

41

64

49

30

19

36

68

41

28

7

33

53

30

27

24

Types of schools
Page 23 GAO-04-107 Direct Student Loan Program 

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. 

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.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. 

 15As 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. 

Direct Loan Schools Were 

Generally Satisfied with 

FSA’s New Information 

System, which Delivers 

Loans Faster to Students 
Page 24 GAO-04-107 Direct Student Loan Program 

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.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.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. 

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

17Macro International, Inc., Direct Loan Program Administration: 1993-1998, 

(Washington, D.C. 1998). 
Page 25 GAO-04-107 Direct Student Loan Program 

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 

FSA’s Regional Offices 

Offer Direct Loan Schools 

Training, Technical 

Assistance, and Other 

Services 
Page 26 GAO-04-107 Direct Student Loan Program 

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. 

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. 

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. 

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 

Conclusions 

Matters for 

Congressional 

Consideration 

Recommendation for 

Executive Action 
Page 27 GAO-04-107 Direct Student Loan Program 

the factors that influenced this decision and use this information to make 

improvements to the program. 

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 

Agency Comments 
Appendix I: Scope and Methodology 

Page 28 GAO-04-107 Direct Student Loan Program 

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. 

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. 

Appendix I: Scope and Methodology 

Analyzing Loan 

Volume and 

Identifying Schools 

That Participated in 

the Direct Loan 

Program and FFELP 
Appendix I: Scope and Methodology 

Page 29 GAO-04-107 Direct Student 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. 

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.1

 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.2

Table 4 summarizes the population size of and responses received from 

Direct Loan schools, by school type. 

 1

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. 

2

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. 

Survey of Schools 

That Have 

Participated in the 

Direct Loan Program 
Appendix I: Scope and Methodology 

Page 30 GAO-04-107 Direct Student Loan Program 

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

2001-02 

School type 

Direct

Loan school 

population

Number of Direct

Loan schools that 

responded to survey

Percentage 

of schools 

responding 

4-year public 210 141 67.1 

4-year private 240 133 55.4 

2-year 268 153 57.1 

Less-than-2-year 217 110 50.7 

Total 935 537 57.4 

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

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. 

Estimation 
Appendix I: Scope and Methodology 

Page 31 GAO-04-107 Direct Student Loan Program 

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. 

Sampling and 

Nonsampling Error 
Appendix I: Scope and Methodology 

Page 32 GAO-04-107 Direct Student Loan Program 

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. 

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.3

 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. 

 3

We visited a university official at the City University of New York, because Direct Loan 

Program operations are centralized for its campuses. 

Analysis of Benefits 

Offered by FFELP 

Lenders 

Site Visits 
Appendix I: Scope and Methodology 

Page 33 GAO-04-107 Direct Student Loan Program 

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

Name of school School type 

Student 

enrollment, 

fall 1998 

Direct Loan 

volume, 

2001-02 

FFELP 

volume, 

2001-02 

Boston area, located in FSA Region I 

Suffolk University 4-year private 6,445 $15,791,907 $27,789,571 

Benjamin Franklin Institute of Technology 4-year public 279 $1,166,773 $0 

Harvard University 4-year private 24,373 $77,643,462 $0 

New England College of Optometry 4-year private 422 $9,535,668 $0 

Porter and Chester Institute Less-than-2-year 1,072 $5, 421,063 $0 

New York City, located in FSA Region II 

City College of New York 4-year and 2-year 

public 

194,746 

(total at 17 

campuses) 

$87,598,773 

(total at 17 

campuses) $0 

Cornell University Medical College 4-year private 692 $6,966,706 $200,931 

Technical Career Institute 2-year private 3,545 $538,731 $6,744,374 

New York International Beauty School Less-than-2-year 168 $528,310 $25,282 

DC Metro area, located in FSA Region III 

Bowie State University 4-year public 5,024 $14,789,515 $0 

University of Maryland, University College 4-year public 14,142 $44,038,905 $0 

Johns Hopkins University 4-year private 17,111 $37,382,682 $4,702,746 

Northern Virginia Community College 2-year public 36,216 $1,766,193 $0 

RETS Technical Training Center 2-year private 476 $391,581 $2,227,900 

Sanz School Less-than-2-year 611 $1,895,126 $0 

San Francisco area, located in FSA Region IX 

San Francisco State University 4-year public 27,446 $57,413,020 $3,817,165 

Sonoma State University 4-year public 7,003 $19,346,287 $0 

University of California, Berkeley 4-year public 31,011 $92,029,808 $0 

University of San Francisco 4-year private 7,990 $46,255,625 $0 

Napa Valley College 2-year public 5,646 $348,260 $0 

Source: GAO Analysis of Education data. 

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. 

Telephone Interviews 
Appendix II: Comments from the Department 

of Education 

Page 34 GAO-04-107 Direct Student Loan Program 

Appendix II: Comments from the Department 

of Education 
Appendix II: Comments from the Department 

of Education 

Page 35 GAO-04-107 Direct Student Loan Program 
Appendix III: GAO Contacts and Staff 

Acknowledgments 

Page 36 GAO-04-107 Direct Student Loan Progr

Jeff Appel, Assistant Director (202) 512-9915 

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

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. 

Appendix III: GAO Contacts and Staff 

Acknowledgments 

GAO Contacts 

Staff 

Acknowledgments 

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