United States General Accounting Office 

GAO Report to the Honorable 

James M. Jeffords, U.S. Senate 

March 2002 DIRECT STUDENT 

LOANS 

Additional Steps 

Would Increase 

Borrowers' Awareness 

of Electronic Debiting 

and Reduce Federal 

Administrative Costs 

GAO-02-350

United States General Accounting Office 

Washington, DC 20548 

March 29, 2002 

The Honorable James M. Jeffords 

United States Senate 

Dear Senator Jeffords: 

In November 1999, the Department of Education (Education) began 

offering a 0.25 percent interest rate reduction under the William D. Ford 

Federal Direct Loan Program (FDLP) to borrowers who agree to have 

their monthly loan payments automatically withdrawn from a bank 

account via its electronic debit account (EDA) program. While borrowers 

would benefit by paying a reduced interest rate on their loans, the federal 

government would benefit from receiving fewer late payments. The Higher 

Education Act of 1965, as amended, requires that such interest rate 

reductions be “cost neutral and in the best financial interest of the Federal 

Government” and that Education offset any higher subsidy costs1

 resulting 

from the interest rate reduction through reductions in funding for 

administrative costs. 

In a cost justification it submitted to the Congress in August 1999, 

Education stated that the loss of revenue to the federal government from 

offering the reduced interest rate would be more than offset by a gain in 

revenue because some EDA borrowers who had previously paid by check 

would stop making periodic payments in excess of their scheduled amount 

due. By ceasing to make these prepayments, these borrowers would not 

pay off their loans as soon as they would have without signing up for EDA 

and, therefore, incur additional interest costs over the life of their loans. 

Education assumed about half of the borrowers making prepayments prior 

to enrolling in EDA would discontinue making prepayments after enrolling 

in EDA. Education found that eliminating these prepayments could 

potentially extend the time some borrowers were repaying their loans by 

1

 Subsidy costs are the net present value, at the time a direct loan is disbursed, of the cash 

flows for loan disbursement, repayments of principal, and payments of interest and other 

payments by or to the government over the life of the loan after adjusting for estimated 

defaults, prepayments, fees, penalties, and other recoveries. Present value is the worth of 

the future stream of returns or costs in terms of money paid immediately—prevailing 

interest rates provide the basis for converting future amounts into their “money now” 

equivalents. 

Page 1 GAO-02-350 Direct Student Loans 
1-1⁄2 years. In effect, EDA borrowers who stopped prepaying would lose 

some portion of their interest savings from the rate reduction. Thus, 

Education’s analysis appeared to justify savings to the government at 

additional cost to some borrowers enrolling in the EDA program, rather 

than by reducing administrative costs associated with processing 

payments by check. Because of your concern about the possibility that 

some borrowers would pay additional interest under EDA, you asked us to 

determine the following: 

•	 To what extent have assumptions concerning borrower behavior used in 

Education’s cost justification materialized? 

•	 To what extent has Education informed borrowers of the possible cost 

implications of EDA participation and the options that are available to 

them for prepaying their loans? 

•	 To what extent has Education achieved administrative cost savings as a 

result of the program? 

In conducting this work, we interviewed Education officials and collected 

and analyzed cost and other pertinent information. To examine the extent 

to which Education’s cost justification assumptions about borrower 

behavior—the percentage of EDA borrowers that would enroll in EDA and 

the percentage that would change their prepayment patterns after 

enrolling—materialized, we reviewed Education’s cost justification, 

discussed its preparation and methodology with the Education officials 

who developed it, and obtained and analyzed available information about 

the repayment behavior of borrowers who have enrolled in the EDA 

program. To identify the information Education had provided borrowers 

about possible cost implications of EDA participation and prepayment 

options associated with EDA, we obtained and reviewed all Education 

direct loan repayment information available to borrowers. To estimate 

administrative cost savings, we reviewed Education and Department of the 

Treasury (Treasury) cost data associated with billing EDA and non-EDA 

borrowers and processing their payments. We discussed our analysis with 

officials at both agencies to ensure that we included all appropriate cost 

items. We conducted our work between March 2001 and February 2002 in 

accordance with generally accepted government auditing standards. 

Results in Brief	 While actual EDA enrollments have exceeded its original assumptions, 

Education lacks readily accessible data showing how borrowers have 

changed their prepayment patterns after enrolling in the program. In its 

cost justification, Education assumed, on the basis of reported private 

sector experiences with electronic debit payments, that 5 percent of direct 

Page 2 GAO-02-350 Direct Student Loans 
loan borrowers would enroll in its EDA program. As of September 2001, 

the actual percentage of direct loan borrowers who enrolled in the EDA 

program was almost 12 percent. On the other hand, whether Education’s 

other assumption about borrower behavior has materialized is unknown. 

Because private lenders’ experiences with EDA-like programs varied 

widely, Education assumed a random distribution of borrowers likely to 

continue to prepay, with 50 percent of those who had prepaid continuing 

to do so and 50 percent discontinuing prepayment. However, Education 

lacks readily accessible data needed to determine whether and how EDA 

borrowers changed their prepayment patterns. As a result, the extent to 

which EDA borrowers have been less likely to prepay is unknown. 

Education has not informed borrowers of the possible cost implications of 

EDA participation nor has it systematically informed borrowers of their 

prepayment options. Specifically, Education has not informed EDA 

borrowers that they may pay more interest over the life of the loan than 

they would have paid without EDA because only the scheduled payment 

amount is withdrawn when EDA is initially established. In May 2001, 

Education posted information on the direct loan servicing Web site 

indicating that EDA borrowers could mail supplemental payments to the 

direct loan servicer. However, Education has not systematically 

disseminated information about this and other prepayment options 

available to all borrowers. Moreover, when we reviewed Education 

publications to identify the EDA disclosures made to borrowers, we found 

that Education has not updated information to reflect the reduced interest 

rate borrowers receive if they repay their loans through EDA, even though 

Education began offering the discount in November 1999. 

We estimate Education achieved administrative cost savings of about $1.5 

million in fiscal year 2001, primarily because it did not have to mail and 

generate bills to EDA borrowers. While reviewing Education’s cost data to 

estimate its administrative cost savings from EDA, we identified an 

unrelated potential opportunity for additional administrative cost savings. 

The direct loan servicer charges Education a separate fee for servicing 

delinquent accounts. Even though the servicer does not take any action to 

collect on past due accounts until they are 7 days late, it still assesses this 

fee for the first six days any payment is overdue. In addition to savings to 

Education, we also identified savings associated with EDA to the 

Department of the Treasury, which processes direct loan payments for 

Education and incurs most of the associated costs. In fiscal year 2001, we 

estimate Treasury saved about $1.2 million because processing payments 

electronically, according to Treasury, costs approximately 99 percent less 

than processing payments by check. 

Page 3 GAO-02-350 Direct Student Loans 
Background 

In this report, we make recommendations that Education take steps to 

better inform borrowers of the options available to them to prepay their 

loans, to better publicize EDA in order to maximize administrative savings, 

and to consider renegotiating certain fees its pays its loan servicer. 

In written comments on a draft of this report, the Department of 

Education generally agreed with the information presented as well as our 

conclusions and recommendations. Education’s comments are reprinted 

in Appendix I. Education also provided technical comments, which we 

incorporated where appropriate. 

The FDLP legislation was enacted in August 1993 as part of a broader 

reform of the federal student loan programs. The first direct loans were 

made in fiscal year 1994. FDLP makes it possible for students and their 

families to borrow directly from the federal government through the 

colleges or other postsecondary institutions the students attend. As of 

September 30, 2001, about 3.6 million borrowers were repaying more than 

$45 billion in direct loans. Education services FDLP loans through a 

contract with Affiliated Computer Services, Inc. (ACS), an information 

technology systems and services company. As prime contractor, ACS has 

overall responsibility for FDLP loan servicing. ACS has a subcontract with 

Academic Financial Services Association Data Corporation (AFSA), under 

which AFSA has the main responsibility for FDLP loan-servicing 

operations. 2

 Education has an interagency agreement with Treasury for 

processing direct loan payments. Treasury, in turn, has agreements with 

and compensates certain commercial banks for processing both paper and 

electronic payments made by the public to federal agencies. Treasury bills 

federal agencies only for those services that it considers outside the basic 

level of service negotiated with the designated commercial banks. In fiscal 

year 2000, Treasury charged Education $26,353 for these ancillary services. 

Specifically, this amount was charged for the cost of shipping reports and 

other material by overnight mail to Education. 

In February 1998, Education implemented EDA to allow FDLP borrowers 

to have their loan payments automatically withdrawn from a bank account 

each month. Then, in November 1999, Education began offering a 0.25-

percentage point reduction in the interest rate to borrowers who agreed to 

2

 AFSA also provides student loan servicing for banks and secondary markets under the 

Federal Family Education Loan Program—the largest federal student loan program. 

Page 4 GAO-02-350 Direct Student Loans 
repay their loans this way. The number of borrowers who made their loan 

payment through EDA went from 40,023 in October 1999, before the 

discount went into effect, to 364,704 in September 2001. 

The cost justification model Education developed used eight key 

assumptions. These assumptions included such things as the interest rate 

charged to borrowers, the number of outstanding loans, and two 

assumptions concerning borrower behavior—estimates of how many 

borrowers would likely enroll in the program once it was established and 

the likelihood that borrowers would continue to prepay their loans after 

enrollment. As the basis for developing these assumptions, Education 

relied on a variety of factors, including prevailing Treasury interest rates, 

private sector experiences with electronic debit repayments, conventions 

economists generally use in the absence of data, and analysis of its student 

loan portfolio. Table 1 shows the eight key assumptions used in 

Education’s cost justification model and the basis of each assumption. 

Page 5 GAO-02-350 Direct Student Loans 
Table 1: Key Assumptions Used in Education’s Cost Justification Model and Their Basis 

Assumption Basis of assumption 

Borrower interest rate—Average loan interest rate across all 

borrower cohorts in the FDLP. 

Analysis of loan portfolio data maintained in the National 

Student Loan Data System (NSLDS), and the Direct Loan 

Servicing System (DLSS), and interest rates published by 

Treasury. 

Discount rate—Interest rate used to calculate the net present valuea 

of FDLP student loans over time. 

Average rate for credit accounts as published by Treasury. 

EDA program enrollment rate—Rate at which FDLP borrowers Behavioral assumption made by Education based upon 

would enroll in the EDA program. reported private sector experience. 

Continued borrower prepayment—Percent of FDLP borrowers 

likely to continue to prepay their loans. 

Behavioral assumption made by Education under conditions of 

uncertainty. Education assumed a random distribution in light 

of mixed results reported by private sector lenders. Borrowers 

whose student loan payment histories showed they were 

ahead of schedule in their loan payments were identified as 

borrowers who were prepaying. 

Average total time to maturity—Average time in years to loan 

maturity for borrowers both assumed to continue and assumed to 

discontinue prepaying under EDA. 

Analysis of loan portfolio data maintained in the NSLDS and 

the DLSS. 

Time since entering repayment—Average time in years since a 

borrower entered loan repayment. 

Analysis of loan portfolio data maintained in NSLDS and DLSS. 

Average balance for loans—Average outstanding FDLP borrower Analysis of loan portfolio data maintained in NSLDS and DLSS. 

loan balances. 

Number of loans outstanding—Actual total number of outstanding Analysis of loan portfolio data maintained in NSLDS and DLSS. 

FDLP loans. 

a

Net present value is the worth of the future stream of returns or costs in terms of money paid 

immediately. In calculating net present value, the discount rate provides the basis for converting 

future amounts into their “money now” equivalents. 

Borrowers have the right to prepay their loans.3 If a borrower repays any 

amount in excess of the amount due, the excess amount is a prepayment. 

Loan repayments, including prepayments, are credited first to any accrued 

charges or collection costs and then to outstanding interest and principal. 

Because prepayments generally reduce a borrower’s principal balance 

outstanding, the amount of interest that accrues in subsequent months is 

also reduced, decreasing the amount of interest the borrower pays over 

the life of the loan. Borrowers who pay by check can easily make 

repayments in excess of the amount due, for example, by rounding up 

their repayment, but EDA borrowers have to take extra steps to prepay 

because only the scheduled repayment amounts are withdrawn from EDA 

borrowers’ accounts. In practice, the amount due without regard to the 

0.25 percent discount is withdrawn. Therefore, EDA borrowers do not 

receive a reduction in the amount they repay each month, but more of 

3

 20 U.S.C. 1077(a)(2)(F) 

Page 6 GAO-02-350 Direct Student Loans 
While More than 

Twice as Many 

Borrowers Enrolled in 

EDA than Education 

Assumed, the Extent 

to Which They Have 

Continued to Prepay 

Their Loans Is 

Unknown 

each repayment is applied to the principal balance and they will repay 

their loans faster as a result. 

A variety of factors can affect a borrower’s decision about whether to 

prepay a loan. Given that FDLP interest rates for direct loans cannot 

exceed 8.25 percent and the interest paid is tax deductible for borrowers 

who do not exceed certain income limits, prepaying may not be the best 

option for all borrowers. For instance, borrowers who have recently 

entered the workforce when they begin repaying their loans may not have 

sufficient resources to prepay their loans. Rather than prepay their direct 

student loans, some borrowers may also decide to instead repay any 

higher-interest debt they have accumulated, for which interest paid is not 

tax deductible, such as credit card debt. 

While more than twice as many borrowers have enrolled in the EDA 

program than originally assumed, the percentage of EDA borrowers who 

have continued to make prepayments remains unknown. In developing its 

cost justification of the EDA program, Education assumed that a certain 

percentage of borrowers would likely enroll in the program and that a 

certain percentage of these borrowers would continue to prepay their 

loans. Education based these assumptions on reported private sector 

experiences with electronic debit repayments and on conventions 

economists use in the absence of data. Education lacks data showing 

borrowers’ prepayment patterns before and after enrolling in the program, 

thus it cannot determine the extent to which its assumption has 

materialized. 

Education’s assumption that 5 percent of direct loan borrowers would 

enroll in the EDA program was an estimate based on the experiences of 

large, national private sector guaranteed loan lenders’ programs similar to 

EDA. As of September 2001, the actual percentage of EDA enrollees is 

closer to 12 percent, which, according to Education’s cost justification, 

would increase the savings to the government to over $19 million.4

 Table 2 

shows government savings at the originally assumed 5 percent enrollment 

rate and our estimates of the savings that Education’s cost justification 

model would project if higher EDA enrollment rates were to materialize, 

keeping the prepayment assumption constant. 

4

 As of September 2001, 424,209 borrowers were enrolled in EDA. 

Page 7 GAO-02-350 Direct Student Loans 
Table 2: Estimated Government Subsidy Cost Savings with Different Rates of EDA 

Enrollment 

Enrollment rate Government savings 

5 percent $7.2 million 

12 percent $19.1 million 

20 percent $31.5 million 

Source: Education’s cost justification model and GAO analysis based on the model. 

Education also obtained information from private sector lenders on their 

experiences with continued prepayment by borrowers after enrolling in 

EDA-like programs. Private lenders reported mixed results. For example, 

one lender reported that 20 percent of borrowers who previously prepaid 

continued to prepay after enrolling in such a program while another lender 

reported that 80 percent continued prepaying, according to Education 

officials. Given the wide variance in reported experience, Education 

officials concluded that they could not make an assumption based on 

these data. Therefore, Education assumed a random distribution of 

borrowers likely to continue to prepay, with 50 percent of those who had 

prepaid continuing to do so and 50 percent discontinuing prepayment. 

While we were able to determine the extent to which Education’s 

assumption about EDA enrollment materialized, we were unable to 

determine the extent to which its assumption for continued borrower 

prepayment materialized. Limitations in Education’s Direct Loan Servicing 

System prevented us from obtaining data on borrower history of 

repayment activity. Education can identify borrowers who are paying their 

loans ahead of schedule and, therefore, likely to be prepaying. However, it 

cannot identify EDA participants from this data and it lacks trend data 

showing how frequently and by how much borrowers prepay their loans. 

Individual borrower payment activity data are available for only the most 

recent 2 months. Given that borrowers change their prepayment patterns 

at their convenience throughout their loan repayment period, these data 

would not have covered a long enough time period to determine how 

prepayment patterns have changed. Consequently, we could not compare 

the overall patterns of borrowers’ prepayment behavior before or after 

enrolling in the EDA program. 

Page 8 GAO-02-350 Direct Student Loans 
Education Has Not 

Informed Borrowers 

about the Possible 

Cost Implications of 

EDA Participation or 

Prepayment Options 

Education has not informed borrowers of the possible cost implications of 

EDA participation nor has it systematically informed borrowers of their 

prepayment options. Education has not told borrowers that because 

repayment through EDA may take longer, they may incur more interest 

cost over the life of the loan than if they previously prepaid without EDA. 

While Education has made some information available to borrowers online 

about where to send supplemental repayments, it has not systematically 

informed all borrowers of their prepayment options. Further, Education 

has not updated its borrower publications to inform borrowers of the 

option and benefits of repaying their loans through EDA. 

Borrowers Are Not 

Informed about Cost 

Implications of EDA 

Participation 

Education has not taken steps to inform EDA borrowers that—even with a 

reduced interest rate—they could pay more interest over the life of the 

loan. This could happen if prior to enrolling in EDA, they made 

repayments that exceeded the scheduled amount due, but after enrolling 

paid only the amount due. When borrowers establish an EDA, there is no 

place on the application form to designate an amount in addition to the 

scheduled payment to be withdrawn each month. To continue their 

prepayments, such borrowers would have to send a check for any 

prepayment or make arrangements to continue making prepayments 

through EDA. 

Borrowers Are Not 

Systematically Informed of 

Their Prepayment Options 

The Higher Education Act of 1965, as amended, requires that student loan 

borrowers be informed that they may prepay all or part of their loans at 

any time without penalty, but it does not require the disclosure of specific 

prepayment options. In documents such as the master promissory note 

and borrower publications, Education informs borrowers that they may 

prepay their loans. In May 2001, after we began our work, Education 

added information to the direct loan servicing Web site indicating where 

EDA borrowers wishing to prepay their loans could send supplemental 

payments. While this information may help borrowers with Internet 

access, Education has not disclosed this information in EDA brochures, 

the EDA application, or the confirmation notice sent to borrowers who 

establish EDAs. Further, Education does not inform EDA borrowers that 

they may make routine prepayments, by contacting the direct loan servicer 

at any time and increasing the amount withdrawn from their bank account 

each month. 

In addition to not disclosing prepayment options, Education had not 

updated two of its borrower publications to fully reflect the option 

borrowers have to repay through EDA. One publication, Exit Counseling 

Page 9 GAO-02-350 Direct Student Loans 
Use of EDAs 

Generated Estimated 

Administrative Cost 

Savings of More than 

$2.7 Million in Fiscal 

Year 2001 for 

Education and 

Treasury 

Guide for Borrowers, does not provide details about how EDA works, the 

advantages of EDA for making loan payments, or the reduced interest rate 

EDA borrowers receive.

5

 The other publication, Repayment Book, which is 

available to help borrowers understand and select from the available 

repayment plans, makes no reference to EDA. 

Education and Treasury achieved administrative cost savings because 

EDAs reduced the costs associated with billing and processing payments. 

Education saved an estimated $1.5 million in fiscal year 2001 as a result of 

generating and mailing fewer bills to EDA borrowers. Additional savings 

are also possible with respect to costs associated with servicing past due 

accounts. Treasury, which processes direct loan payments and incurs 

most of the associated processing costs, saved an estimated $1.2 million in 

fiscal year 2001. 

Education Saved on 

Administrative Costs by 

Not Sending Monthly 

Billing Statements to EDA 

Borrowers 

As a result of EDA, Education reduces administrative costs associated 

with generating and mailing billing statements to borrowers. According to 

our review of Education cost data, in fiscal year 2001, Education saved 

about $1.5 million or $0.39 per month for each borrower who used EDA. 

This savings includes the cost of things such as the paper billing 

statement, the mailing envelope, and postage. Through EDA, Education 

avoided sending out more than 3.6 million billing statements over the 

course of fiscal year 2001. The other administrative costs Education incurs 

for servicing direct loan accounts are the same for all borrowers, 

regardless of their payment method. Table 3 shows the specific costs 

Education incurs for routine servicing of FDLP accounts. EDA should 

result in additional administrative cost savings by reducing the potential 

for late payments and accompanying collection efforts, according to an 

Education official. 

5

 FDLP schools are responsible for ensuring that borrowers who are graduating, 

withdrawing, or otherwise ceasing to attend school at least half time, receive exit 

counseling. 

Page 10 GAO-02-350 Direct Student Loans 
Table 3: FY 2001 Monthly Costs Associated with Routine Servicing of FDLP 

Accounts by Payment Method (per borrower) 

Non-EDA 

EDA account account 

Service accounts $0.909 $0.909 

Post payments 0.475 0.475 

Generate and mail bills 0.000 0.063 a Envelopes used in billing 0.000 0.054 

Postage 0.000 0.270 

Total $1.384 $1.771 

a

Includes two envelopes per statement mailed. Beginning in May 2001, the cost of envelopes was 

reduced from $0.094 to $0.074. In July 2001, the cost of envelopes was further reduced to $0.054. 

Some of the administrative savings Education achieves with EDA are 

offset with expenses that Education incurs at Treasury. Education pays 

Treasury for processing EDA applications. In fiscal year 2000, Treasury 

charged Education about $128,900 for processing 253,000 EDA 

applications. 

In the course of doing our work, we identified a potential opportunity for 

additional administrative cost savings unrelated to EDA. Education 

adheres to a price structure for servicing delinquent accounts that may not 

be appropriate. Currently, the direct loan servicer assesses Education a 

separate fee for each day a borrower’s account is at least 1 day past due. 

This fee applies to all late direct loan payments, but because EDA 

payments are credited on the due date—provided sufficient funds are 

available in the borrower’s bank account—this fee would generally not 

apply to EDA borrowers. The late fee Education is assessed for past due 

accounts covers additional work the direct loan servicer performs, such as 

sending second billing statements to borrowers, and making reminder 

phone calls. These collection activities occur at regularly scheduled 

intervals as part of Education’s default prevention initiatives. 

As previously stated, Education is assessed a fee for each day a borrower’s 

account is at least 1 day past due. Education officials stated that this 

contract provision has been in place since FDLP implementation. In the 

past, the direct loan servicer sent late payment notices to borrowers as 

soon as payments were one day late. However, according to Education 

officials, borrowers who had already mailed their payments found these 

notices confusing. As a result, Education decided to delay late payment 

notification to allow additional time to receive those payments made by 

borrowers close to or on the due date. Presently, the direct loan servicer’s 

first collection activity—sending a second billing statement—does not 

Page 11 GAO-02-350 Direct Student Loans 
take place until a payment is 7 days late. However, Education is still 

assessed fees on payments that arrive 1 to 6 days late. In fiscal year 2001, 

Education paid $12.2 million or about $0.05 per day for each account that 

was at least 1 day past due. Because of limitations of data in the DLSS, 

Education is unable to determine the extent to which it is paying this fee 

each month for payments received between 1 and 6 days late. 

Treasury Achieved Savings 

by Processing Loan 

Payments Electronically 

Conclusions 

In fiscal year 2001, we estimate Treasury, which has an interagency 

agreement with Education to process direct loan payments, saved about 

$1.2 million as a result of EDA. These savings are based on the dollar 

volume of payments received. Treasury estimates that processing 

payments electronically costs less than 1 percent of the cost of processing 

paper payments. For example, it costs about $16 to process $1 million 

through EDA; processing the same amount in paper payments costs about 

$1,897. According to officials from Treasury’s Financial Management 

Service, Treasury processes payments for federal agencies to ensure 

efficient and timely processing of payments, and because Treasury can 

achieve economies of scale by providing this service throughout the 

federal government. 

Regardless of the conclusions Education reached in its cost justification, 

borrowers who enroll in EDA will benefit from paying a reduced interest 

rate on their loans and the federal government will achieve administrative 

cost savings. Data limitations make it difficult to assess whether 

borrowers have changed their prepayment behavior as Education assumed 

in its cost justification, and thus, the extent of the benefit for both 

borrowers and the federal government is unknown. Even if data were 

available and showed borrowers’ had changed their behavior, it would not 

tell us that this behavior changed as a result of entering EDA. Rather, 

borrowers could be making sound economic decisions such as choosing to 

prepay a higher rate loan rather then their federal student loan. By fully 

informing borrowers of the consequences of paying through EDA as well 

as their prepayment options, Education could ensure that borrowers have 

all the information they need to make sound economic choices. However, 

the limited disclosures Education currently makes to borrowers 

concerning their prepayment options under EDA are not sufficient to 

ensure that borrowers have all essential information to make informed 

decisions. Education does not make clear that, in spite of the 0.25 

percentage-point interest rate reduction, borrowers might incur more 

interest cost over the life of their loans under EDA than they would if they 

Page 12 GAO-02-350 Direct Student Loans 
continued to sometimes make payments in excess of the scheduled 

amount due. 

Although Education did not include estimated administrative cost savings 

associated with EDA in conducting its cost justification, clearly, these 

savings would help offset the expense of offering borrowers a reduced 

interest rate. EDA can further reduce administrative costs associated with 

loan processing if more borrowers use it. Education has not promoted the 

benefits of EDA to borrowers as much as possible to maximize 

administrative cost savings to the federal government. Promoting the 

benefits of EDA to borrowers when they are considering their repayment 

options could achieve even greater administrative cost savings if more 

borrowers were to participate in EDA as a result. Moreover, EDAs should 

reduce the amount of higher fees that Education incurs for servicing past 

due accounts, because EDA payments are generally credited on time. 

Although not related to EDA, Education may be able to achieve additional 

administrative cost savings. At present, Education is paying a fee for 

servicing EDA and non-EDA accounts that are at least 1 day past due. We 

believe that those fees may be unjustified because no action is taken to 

collect late payments until they are 7 days past due. 

Recommendations
 To help make the EDA program more useful and understandable to 

borrowers and take greater advantage of its potential savings to the 

taxpayer, we are making several recommendations to the secretary of 

education. 

•	 To better publicize EDA and help Education achieve additional 

administrative cost savings, we recommend updating the Exit Counseling 

Guide for Borrowers to reflect the repayment incentives for direct loan 

borrowers who repay their loans through EDA as well as borrowers’ 

prepayment options. 

•	 To address concerns that borrowers may unknowingly pay more total 

interest over the life of their loans by not making prepayments if they 

make their loan payments through EDA, we recommend Education take 

steps to inform EDA borrowers about steps they can take to prepay their 

loans. Such steps could include modifying EDA applications to allow 

borrowers interested in prepaying their loans to designate withdrawal 

amounts in excess of their scheduled payments when they initially 

complete the EDA application. 

•	 To ensure that the fees Education pays for servicing delinquent accounts 

appropriately reflect current collection activity practices, we recommend 

Page 13 GAO-02-350 Direct Student Loans 
Education consider renegotiating the fee provision in its contract with the 

direct loan servicer to eliminate the servicing fee for accounts with 

payments less than 7 days late. 

In comments we obtained, Education generally agreed with the 

information presented in the report. In response to our recommendation, 

Education said that it would explore updating the Exit Counseling Guide 

for Borrowers and explore taking other steps to better inform borrowers 

of their prepayment options. In addition, Education said it would 

consider renegotiating the direct loan servicing contract to move in the 

direction of paying for results rather than processes. Education also 

provided technical comments, which we incorporated where appropriate. 

We are sending copies to the secretary of education, the secretary of the 

treasury, and the director of the Office of Management and Budget and 

will also make copies available to others on request. This report is also 

available on GAO’s home page at http://www.gao.gov. 

If you or your staff have any questions or wish to discuss this material 

further, please call me at (202) 512-8403 or Jeff Appel at (202) 512-9915. 

Other staff who made key contributions to this report include Barbara 

Alsip, Joel Marus, Scott McNabb, and Debra Prescott. 

Cornelia M. Ashby 

Director, Education, Workforce and 

Income Security Issues 

Agency Comments 

Page 14 GAO-02-350 Direct Student Loans 
Appendix I: Comments from the Department 

of Education 

Page 15 GAO-02-350 Direct Student Loans 
Appendix I: Comments from the Department 

of Education 

(130028) Page 16 GAO-02-350 Direct Student Loans 
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