Direct Student Loan Program: Management Actions Could Enhance Customer Service
Published: 2003-11-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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. 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  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.  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  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.
subsections: section_title: Background
paragraphs: 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.
subsections: section_title: Borrower and School Benefits
paragraphs: 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  program. 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.
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  to its graduate students. 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.
section_title: Schools’ Administrative Responsibilities
paragraphs: 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. 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.
section_title: About One-Third of Postsecondary Schools That Provided Federal Loans since 1994-95 Have Participated in the Direct Loan Program
paragraphs: 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.
subsections: section_title: 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
paragraphs: 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).
section_title: Since 1998-99, More Schools Have Stopped Participating in the Direct Loan Program than Have Joined
paragraphs: 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.
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.
section_title: Similar Factors Influenced a Majority of Schools’ Decision to Participate in the Program but the Factors That Influenced Schools’ Decision to End Participation Varied
paragraphs: 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.
subsections: section_title: Four Factors Were Very Important in Influencing Schools’ Decision to Participate in the Program
paragraphs: 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.
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  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.
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.
section_title: A Variety of Factors Influenced Schools’ Decision to End Participation in the Direct Loan Program
paragraphs: 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.  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.
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. 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.
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. 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.
section_title: FSA Does Not Collect Information on the Factors Influencing Schools’ Decision to Stop Participating
paragraphs: 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,  which, in turn, might help FSA achieve its goal of improving customer  service.
section_title: 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
paragraphs: 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.
subsections: section_title: Direct Loan Schools Reported That FSA’s Web Sites Have Helped Them Administer the Program, but Navigating among Multiple Sites Can Be Challenging
paragraphs: 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.
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-than-  2-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-than-  2-year schools reported that a corporate office or a third party servicer  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.
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.
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.
section_title: Direct Loan Schools Were Generally Satisfied with FSA’s New Information System, which Delivers Loans Faster to Students
paragraphs: 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. 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.
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. 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.
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.
section_title: FSA’s Regional Offices Offer Direct Loan Schools Training, Technical Assistance, and Other Services
paragraphs: 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  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.
section_title: Conclusions
paragraphs: 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.
section_title: Matters for Congressional Consideration
paragraphs: 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.
section_title: Recommendation for Executive Action
paragraphs: 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  the factors that influenced this decision and use this information to make  improvements to the program.
section_title: Agency Comments
paragraphs: 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.
section_title: Appendix I: Scope and Methodology
paragraphs: 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.
subsections: section_title: Analyzing Loan Volume and Identifying Schools That Participated in the Direct Loan Program and FFELP
paragraphs: 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.
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.
section_title: Survey of Schools That Have Participated in the Direct Loan Program
paragraphs: 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. 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.
Table 4 summarizes the population size of and responses received from  Direct Loan schools, by school type.
subsections: section_title: Estimation
paragraphs: 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.
section_title: Sampling and Nonsampling Error
paragraphs: 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.
section_title: Analysis of Benefits Offered by FFELP Lenders
paragraphs: 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.
section_title: Site Visits
paragraphs: 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. 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.
section_title: Telephone Interviews
paragraphs: 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.
section_title: Appendix II: Comments from the Department of Education
section_title: Appendix III: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: 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.