NASFAA Members Testify on Successes and Challenges of Direct Loan Program
NASFAA Incoming National Chair Ron Day, NASFAA Federal Issues Committee member Mark Bandre, and NASFAA member and Direct Loan Coalition Past Chair Nancy Hoover testified on the successes and challenges of the transition to 100 percent Direct Loans before the House Subcommittee on Higher Education and Workforce Training yesterday.
“As a board member of NASFAA, I heard from schools on an ongoing basis who were struggling to make the transition successfully,” Day testified. “However, when it was all said and done, I am proud to say that I am not aware of any student who was denied access to student loans due to a school not successfully transitioning into the Direct Loan program.”
The transition to Direct Loans began in 2008, when the economic downturn caused cash shortages for Federal Family Education Loan Program (FFELP) lenders prompting the federal government to provide lenders with cash by buying more than $24.5 million outstanding FFELP loans. This reduced the outstanding portfolio of FFELP loans by more than $100 billion. In 2010, Congress ended the FFEL program in the Healthcare and Education Reconciliation Act so all new loan originations had to be made in the Federal Direct Loan Program.
Despite the overall success of the transition, Day and Bandre highlighted weaknesses in the program that need to be addressed. They highlighted the need to increase the user-friendliness of the Direct Loan website, improve timeliness of data reporting, eliminate duplication or inconsistency in servicing processes and the compensate for the loss of services previously provided by FFELP lenders and servicers. The government has launched two initiatives to bring not-for-profit agencies and guaranty agencies back into default prevention, financial literacy and counseling and repayment services.
According to Day, Kennesaw State University financial aid director, and Bandre, Vice President for Enrollment Management and Student Development at Baker University, other challenges include:
- Reconfiguring computer system(s) to accommodate new processes
- Increased workload in training and retraining of staff
- Increased staff time spent in customer service, including assisting students with new requirements and tracking down and understanding the details of their loans
- The Direct Loan website does not clearly direct borrowers to required tasks, including both completing a promissory note and loan counseling
"This was no easy task for schools to undertake in such a short amount of time and many schools were shifted from liaison to liaison at the U.S. Department of Education as ED increased their operational capacity to help schools transition and implement the program successfully,” Day said.
Bandre praised the Department for trying to do what it could to help schools transition, but said he ultimately relied on similar schools running similar financial aid software to make the transition happen.
Day and Bandre also expressed some dissatisfaction with the Department’s customer service, including processing delays, website glitches, and lack of adequate security measures. Additionally, institutions have criticized the department’s handling and distribution of important private student data. Recently, for example, a website malfunction may have jeopardized the personal information of about 5,000 students. ED said it has taken the necessary steps to resolve the problem and inform those affected.
Day specifically made the following suggestions to the Subcommittee:
- Provide better and more accurate reporting: Quite often the data is not reported in a timely fashion from multiple servicers to our national, central database - the National Student Loan Data System (NSLDS). Delays in reporting data adds to the student confusion and could have negative ramifications for disbursement of funds.
- Additionally streamline services: With a single federal loan program, many of the processes that used to be in place during the FFEL program could be updated to make the entire student aid process easier for students.
- Provide additional college access and default prevention materials and assistance: Recently the Department announced it would allow guarantors to operate under new flexible arrangements to compensate them based on metrics like keeping students out of default or participating in other college access initiatives. However, the timeframe to get these programs up and running has some schools scrambling to fill in the gaps, all while a sour economy is leading to ever increasing student loan defaults. Schools and students need these services sooner rather than later.
- Increase standardization of loan servicing: Perhaps one of the most disconcerting parts of the Direct Loan program has been the lack of standardization in loan servicing. Under the FFEL program, lenders and guaranty agencies came together to create a "Common Manual" that clearly outlined lender policies, procedures, and practices. It is disappointing that a similar effort has not been spearheaded by the Department, who oversees these contracts.
- Provide great assistance in finding loans caught in between servicers: Because of multiple servicers of the Direct Loan Program, students are often uncertain about where their loans are being serviced. There have been scattered reports that some loans have gone "off the grid" entirely for multiple weeks, sometimes over a period of time when a borrower was expecting to make payments. This process must be smoother for students and they must be informed in an expeditious way the unique phone numbers and websites where they can obtain assistance. NSLDS is not updated in real-time, and that time lag can cause angst and possibly missed payments for students.
Subcommittee Chair Rep. Virginia Foxx (R-NC) expressed concern about the federal government’s ability to effectively and efficiently oversee the distribution of 100 percent of federal student loans.
“When the transition to the Direct Loan program began, critics warned of a possible increase in student loan default rates,” Foxx said. “In today’s economic climate, with reports of loan default rates on the rise, this is something the Committee should take seriously.”
While overall default rates have risen, Federal Student Aid (FSA) Chief Operating Officer James W. Runcie said that the Direct Loan program currently has a lower default rate than the FFEL program had, even when broken down by institution type, but also acknowledged that more data analysis is needed to compare default rates between the programs over the long-term.
“The large numbers mask the individual identities and characteristics of the institutions, so the ability to dig into the details - we have a pretty substantial database that has a lot of information, so I think there’s a possibility that we can look at that data and provide more actionable information,” Runcie said.
Runcie also reinforced the idea that current servicing contract reward Direct Loan Servicers for keeping loans out of default.
Rep. Foxx concluded the hearing with her thoughts on access to higher education and the effectiveness by which the government can educate students about how they finance and the level of indebtedness with which they finance their education.
“I have great concern over the number of people that are going to school and taking on huge loans because they lack financial literacy, and I will always be concerned about our government taking on a function that the private sector has always been able to do and do well,” she said.
However, Hoover noted in her testimony that that the FFEL program has always been a federal loan program since its beginning.
"The costs of both programs have always been borne by the taxpayers," she said. "Instead of the government paying dollars to lenders to make the loans, the government is spending some of these dollars on students to improve the aid programs that provide them access to college."