Title IV of HEA authorizes federal student aid programs, including the Direct Loan Program and FFELP. FFELP originated in the HEA of 1965, while the Direct Loan Program was created in 1993. Originally, the Direct Loan Program was expected to replace FFELP over a 5-year period with the amount of loans provided through the Direct Loan Program rising from 5 percent in 1994-95 to 60 percent in 1998-99. In reauthorizing HEA in 1998, Congress removed the provisions that called for the phase-in of the program, thus keeping two federal loan programs. In the ensuing years, competition between the two loan programs has been credited with improving service to schools and benefits for borrowers. Under the Direct Loan Program, students and families borrow through one lender—the federal government—which also provides repayment services to borrowers. In contrast, students and families can borrow through thousands of FFELP lenders, who may or may not continue to provide repayment services to students and families. FFELP lenders may receive a subsidy, called a special allowance payment, from the federal government to ensure that they receive a guaranteed rate of return on the student loans they make. Additionally, under FFELP, state-designated guaranty agencies perform a variety of administrative functions and guarantee payment to lenders if borrowers fail to repay their loans; the federal government subsequently reimburses guaranty agencies for these payments to lenders. Both the Direct Loan Program and FFELP offer the same loans to students and their families: unsubsidized and subsidized Stafford and PLUS loans, but the loan origination fees and repayment options can differ under each 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. 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. Of the schools that provided federal student loans in each year since 1994-95, approximately 1,200—or 29 percent—provided loans through the Direct Loan Program, and most of those schools continued to participate in the Direct Loan Program in school year 2001-02. Since 1998-99, the Direct Loan Program’s share of total new loan volume has steadily decreased from its peak of 34 percent to 28 percent in 2001-02. During this same time period, the number of schools that began to participate in the program was smaller than the number of schools that stopped participating. Of the 941 schools that were still participating in the Direct Loan Program in school year 2001-02, public 4-year schools provided most of the program’s loan volume. About an equal number of public and private 4-year, 2-year, and less-than-2-year schools participated in the Direct Loan Program in 2001-02, with many schools beginning participation in the early years of the Direct Loan Program. Public 4-year schools provided the largest share of Direct Loan volume, about $6.9 billion, or 67 percent of total 2001-02 Direct Loan volume (see figure 1). 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. Similar factors influenced a large majority of schools’ decision to participate in the Direct Loan Program, whereas the factors that led schools to leave the program varied. Four factors—(1) streamlined loan delivery, (2) greater control over loan processes, (3) timely delivery of money to students, and (4) ease of tracking loans over time—were extremely or very important in influencing 70 percent of Direct Loan schools’ decision to participate in the Direct Loan Program. The factors that led many schools to end their participation in the Direct Loan Program varied and included, for example, difficulties meeting program requirements, the availability of lower loan origination fees under FFELP, and repayment incentives offered by FFELP lenders, which were unavailable to Direct Loan Program borrowers. FSA does not collect information on reasons why schools stop participating in the Direct Loan Program; thus it may be unaware of improvements that could be made to better serve schools and borrowers. A substantial majority of schools reported that four factors were extremely or very important in influencing their decision to participate in the Direct Loan Program. Figure 3 shows, for each of these factors, the percentage of schools that reported them as very or extremely important. 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.