Archived Information

DEPARTMENT OF EDUCATION

Statement of David A. Longanecker, Assistant Secretary
to the Subcommittee
on Postsecondary Education, Training and Life-Long Learning
United States House of Representatives Committee
on Education and the Workforce
July 22, 1997

Mr. Chairman and Members of the Subcommittee,

I am pleased to appear before you to discuss the student loan programs as we prepare to reauthorize the Higher Education Act (HEA). In previous meetings with you, Secretary Riley and I have stressed that reauthorization must focus first and foremost on the individual students who receive the benefits of postsecondary education. Our reauthorization proposals will build upon the President's proposed Hope Scholarship, tax credit for lifelong learning, and increases in Pell Grants and Work Study to help ensure universal access to postsecondary education and lifelong learning for all students.

The focus of this hearing is on the student loan programs. We are determined to make both the Direct Loan program and the Federal Family Education Loan (FFEL) program as strong as possible. As you know, President Clinton and Secretary Riley consider the Direct Loan program to be one of this Administration's greatest successes, and among its highest priorities, because of the benefits it provides to student borrowers, as well as taxpayers.

Since its inception in 1994, direct lending has revolutionized the student loan industry by fundamentally changing the paradigm for student loan delivery. The Direct Loan program provides a simpler, more automated, and more accountable system to borrowers and participating institutions. In just under three years, students and schools have witnessed the development of a level of customer service not previously experienced in financial aid delivery. Institutions are now able to process student loans more quickly and efficiently than under the FFEL program, and borrowers are able to receive these funds in a more timely fashion. Furthermore, when the time comes to repay the loans, borrowers can better manage their debt by choosing from multiple repayment options.

Too often, students began the semester worrying more about their financial aid than their studies. The Direct Loan program has significantly alleviated these concerns for some students by combining technological advancements with our commitment to our customers to set the industry standard for the delivery of student aid. We have received an overwhelmingly positive response from participating schools and students, and we were recognized for our efforts by being named a finalist in the 1996 Innovations in American Government Awards Program.

Direct Loans account for one-third of the total new student loan volume of $27 billion in 1996-97. Starting with just over 100 institutions in 1994, we now have about 1,300 schools participating. The total cumulative volume of Direct Loans rose from $1.6 billion after the first academic year to an estimated $18 billion today, going to about 2.3 million borrowers. About 718,000 borrowers are now in repayment, holding loans with balances of about $5.6 billion. Total collections from all borrowers amount to approximately $1 billion. This tremendous growth is a tribute to the benefits Direct Lending has to offer. The growth is particularly impressive in light of the fact that the future of the program has been debated continuously, thereby dissuading some schools from joining the program.

I would like to clear up a few misconceptions about direct lending. In terms of actual loans made to students, 90 percent of Direct Loans are made to students attending traditional four-year public and private institutions. Two-year institutions and proprietary institutions represent only four and six percent of the total Direct Loan volume, respectively. Direct lending is anything but a safe haven for proprietary institutions. Furthermore, reports that schools are increasingly dropping out of the program and returning to the FFEL program are simply false. During the past three years, only 14 institutions that actually made Direct Loans have withdrawn from the program. In that same time, about 1,300 schools have joined direct lending.

Schools and students have embraced the direct lending program for numerous reasons. First, the program eases administrative burden by eliminating paperwork from a variety of banks and guaranty agencies. Direct lending employs one application, one source of funds, and one loan origination center. All loan information, except for the promissory note, is transmitted and acknowledged electronically. Schools do not wait for, or process checks from, multiple lenders, therefore improving cash flow and reducing -- frequently even eliminating -- the need for short-term emergency loans for students.

Second, schools can disburse loan proceeds and adjust loan amounts much more quickly and efficiently because they no longer need to obtain lender and guaranty agency approvals. Similarly, borrowers only have to interact with a single servicing center for all questions concerning their loan status and repayment.

Third, direct lending provides schools more flexibility in administering the loan program. Schools decide how much administrative responsibility they wish to assume, how to divide work between their financial aid and business offices, and how they will carry out their day-to-day operations. Direct Loans can be tailored to meet an institution's automation needs, whether the institution operates in a PC or mainframe environment.

Fourth, schools benefit from the training and customer support provided by the Department of Education from the moment they decide to join the program. We conduct training sessions throughout the year, both on- and off-site, to ensure that schools are comfortable using the Department-provided software and training materials. Questions can be answered quickly and accurately. In addition, schools know when funds will be received from the Department and know within a few days whether records and promissory notes have been accepted, allowing them to better plan and incorporate direct lending into their admission and enrollment cycle.

Finally, the Direct Loan program offers the feature of four distinct repayment options, including the option for students to repay as a percentage of their income. Currently, eight percent of the Direct Loan borrowers in repayment are enrolled in the income contingent option. While the vast majority of borrowers have remained in the traditional 10-year repayment plan, Direct Loan borrowers can better manage their student loan debt by having the opportunity to choose a repayment schedule that best suits their circumstances.

Reauthorization of the Higher Education Act

We have an enormous opportunity before us in the coming year to maximize the effectiveness of our investment in postsecondary education. In part because of the diminishing value of the Pell Grant in real terms throughout the 1980s, many students and families increasingly rely on student loans to finance postsecondary education. This places even more significance on our discussion today.

We cannot lose sight that our primary responsibility is to the student. To that end, we will not consider any proposal that would increase the cost of borrowing for students and parents. On the contrary, the President's 1998 budget proposed substantial reductions in the loan origination fees that student borrowers must pay, and we will continue to work to reduce or eliminate these fees within the framework of a balanced Federal budget. Furthermore, we will again propose to extend most of the Direct Loan repayment options to FFEL borrowers, improve the terms of FFEL consolidation loans, and prohibit lenders from offering different benefits to selected borrowers. We are very concerned that some guaranty agencies are using Federal funds to offer discounts to some groups of students, primarily to undermine the Direct Loan program. These budget provisions, like the President's Hope Scholarship proposal, would provide students additional assistance and flexibility in financing postsecondary education.

In thinking about the future of the student loan system, we should not fall prey to the misconception that the Direct Loan program is a "public" loan program and that the FFEL program is a "private" program. Both are public-private partnerships, and borrowers in both receive federal benefits. The underlying issue is how to deliver these loans to borrowers most efficiently and effectively while providing accountability to taxpayers.

While we work to provide equal benefits for students in direct lending and FFEL, we will also strive to ensure strong management of the student loan programs and simplify program delivery. It is important that we work to make both loan programs operate as efficiently as possible. One benefit of direct lending is that it has spurred improvements in the FFEL program. In the President's 1998 budget, we suggested further improvements by proposing economic incentives for guaranty agencies that would reduce the need for regulation, lower costs to the taxpayers, and improve performance. Our proposal clarifies that guaranty agencies administer guarantees paid by the Federal government. The Department would pay 100 percent of lender default claims, compensate guaranty agencies through a set of fees related to the functions they perform, and recall Federal funds unnecessarily held in reserve by the agencies. This proposal will strengthen, not harm, the FFEL program. More importantly, it will benefit students, families, and taxpayers in ways that are not realized today.

We also believe that the delivery of other forms of Federal student aid is linked to, and as important as, the fundamental structure of the loan programs. The current financial aid system is effective in serving the seven million students now receiving aid and in protecting the taxpayers' dollars, yet we recognize that more can be done and have taken additional steps in this direction. In consultation with students, schools, lenders, guaranty agencies, and secondary markets, the Department is developing Project Easy Access for Students and Institutions (EASI), an electronic, student-centered delivery system through which students will be able to quickly apply for aid, determine their eligibility, and have their aid delivered to the school of their choice. As envisioned, EASI would also enable borrowers to check on their loan balances 24 hours a day after leaving school, assist institutions in tracking enrollment and repayments, as well as fulfilling reporting requirements, and help the Department with program management, reporting, and oversight in a real-time environment.

We are modernizing other aspects of the delivery system consistent with the EASI vision and working them into our reauthorization proposal, as well. Students and families can now complete the financial aid application via the Internet. Furthermore, we are considering the use of multi-year promissory notes for both the Direct Loan and FFEL programs, as well as expanding the use of electronic imaging, which could greatly reduce administrative burden for the schools, lenders, and the Department. It is important, however, to recognize that policy and programs are inextricably linked. Without simplifying the programs and policies, it will make it more expensive, more time consuming, and more difficult to achieve the EASI vision.

Conclusion

Mr. Chairman, the student loan programs are vital to ensuring access to postsecondary education for all students. With recent bipartisan support in Congress, we have increased funding for Pell Grants and Work Study; for many students, however, these funds alone can not cover the cost of college. It is imperative, therefore, that we make the student loan programs even more efficient and effective. The Direct Loan program has set a world standard for delivering loans, and provides exceptional value to students, schools, and taxpayers. We remain committed to making it the centerpiece of a reinvented, integrated student aid system that provides the finest service available anywhere. Students deserve the highest quality of customer service, and it is in all of our interests to see that they receive it.

I appreciate the invitation to appear before you again and I look forward to continuing our work to craft a Higher Education Act that will allow us to meet the challenges of the next century. I am happy to respond to any questions you may have.

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