Archived Information

DEPARTMENT OF EDUCATION

Statement by David A. Longanecker
Assistant Secretary for Postsecondary Education
on
Student Financial Aid Delivery Systems
before the
Committee on Labor and Human Resources
United States Senate
May 15, 1997

Mr. Chairman and Members of the Committee,

I am pleased to be here today to discuss what the Department of Education is doing to improve the delivery of student financial aid. This year more than $40 billion in financial assistance in the form of grants, loans, and work-study aid will be awarded to over seven million undergraduate and graduate students at about 7,000 postsecondary schools. In addition to overseeing the delivery of most of that aid, the Department is responsible for monitoring the repayment of nearly $100 billion in federal direct and guaranteed student loans made in previous years. In relation to these sums, the $320 million referred to in the title of this hearing, though certainly a large amount of money, is not an unreasonable sum to be spending to deliver and protect the federal investment in student assistance. The central issue is whether this $320 million is being well spent in protecting the federal interest.

We at the Department believe those funds are being spent wisely. Let me begin by sharing with you what that sum--and it's actually closer to $305 million--goes for. We will spend that amount this year for contracts supporting the student aid system. That appropriated amount will pay, first, for processing approximately 10 million FAFSAs--the Free Application for Federal Student Aid--used in the award of federal, state, and institutional aid, as well as for customer support services for students and their families, schools, states, lenders, guaranty agencies, and secondary markets. Second, it will cover origination and disbursement costs associated with Pell Grants, Campus-Based aid (Perkins loans, Supplemental Educational Opportunity Grants, and Work-study Aid), and Direct Loans. Third, it will pay for servicing and collections costs associated with the Ford Direct Loan Program and the Federal Family Education Loan Program (FFELP). Finally, it will go for expenses incurred in program management and oversight of the 7,000 or so schools participating in federal aid programs plus the approximately 6,000 entities (lenders, guaranty agencies, loan servicers, etc.) involved in administering the FFEL program.

THE CHALLENGE

When I joined the Department of Education four years ago as the Assistant Secretary for Postsecondary Education, Secretary Riley invited me to his office and gave me a GAO document entitled High Risk Report: Guaranteed Student Loans, which had just been issued in December 1992. That report identified the FFEL program as one of 17 federal programs considered to be at "high risk" of fostering waste, fraud, abuse, and mismanagement. GAO said that the structure of FFELP "is overly complex, and many participants have little or no incentive to prevent loan defaults. Lenders and state agencies [that guarantee the loans] benefit from making loans, but generally do not bear any financial risk.... Nearly all the risk falls to the federal government...." Because of the high number of guaranteed student loans in default, GAO concluded that the Department had not been protecting the financial interest of the federal government and U.S. taxpayers.

After considering this criticism--and the GAO was not alone in making it--we agreed that FFELP was structurally flawed. The incentives in FFELP did not operate properly to prevent defaults, and the information available to administer the program was inadequate. All the Department could do was audit what occurred after the fact. One of the ways GAO suggested improving accountability was through a direct loan program, which was being considered in the Congress. President Clinton proposed and the Congress enacted the Student Loan Reform Act of 1993, which created the William D. Ford Federal Direct Loan Program. In that system, electronic data would be available on how much money schools were drawing down to make loans and how much they were disbursing to students, allowing us to actually manage the program. At the same time, we recognized that we were also responsible for improving the woefully inadequate management of the FFEL program.

This Department continues to manage two strong loan programs, and has proposed to Congress in its fiscal year 1998 Budget a number of changes to ensure equity for borrowers in both programs, including increased benefits to FFEL borrowers such as flexible repayment options, competitive interest rates on consolidation loans, and retention of interest subsidy upon consolidation. These benefits are in addition to large reductions in origination fees for borrowers in both programs. The Presidents' Budget will also strengthen the FFEL program by streamlining functions and creating financial incentives that will reduce the need for regulation and will save taxpayer funds.

IMPROVEMENTS IN OVERSIGHT AND MANAGEMENT

Our determined efforts to better manage the FFEL program, with help from the Congress through legislative changes, resulted in significant improvement, as demonstrated by a few numbers. The national FFEL cohort default rate declined from 22.4 percent for the 1990 cohort to 10.7 percent for the 1994 cohort. Federal payments for defaulted FFELs have declined about 40 percent, from $3.6 billion in fiscal year 1991 to $2.2 billion in fiscal year 1996, despite a 60 percent increase in the volume of loans in repayment during the same period. And collections on defaulted FFELs increased from $1 billion in fiscal year 1992 to $2.2 billion in fiscal year 1996.

The student aid delivery system is also better today than it was four years ago for a number of reasons. One is that the Department committed itself to reforming the delivery system and to listening to constructive suggestions for doing so. A recent GAO report (Department of Education: Status of Actions to Improve the Management of Student Financial Aid,, July 1996) noted that between April 1991 and July 1995 the Congress, the GAO, and the Department's Office of the Inspector General made 205 recommendations for improving the delivery of student aid. The Department has acted on over 90 percent of those recommendations. Of those we did not implement, many require legislative changes.

One of the major ways we acted to improve the delivery system and better guard taxpayers' money was to strengthen gatekeeping procedures to keep unscrupulous schools from participating in federal student aid programs. Over the past four years, the Department's actions have led to the removal of 875 schools, including 672 schools from all student aid programs and an additional 203 from federal loan programs. These actions are the result of legislation enacted by Congress in 1990 and 1992 that gave the Department more tools to manage federal student aid.

Postsecondary institutions must now meet rigorous certification standards to become eligible to participate in federal student aid programs. The Department has denied about 33 percent of the initial school applications to participate in aid programs in the last three years, double what the percentage was in 1990. Approved schools must also meet higher standards of financial responsibility and administrative capability. Schools of questionable capacity are given only provisional certification and are subject to expedited administrative review so that the Department can move quickly to eliminate them from participating in aid programs should problems arise. Over 1,000 schools have been placed on provisional certification during the past four years. 20

The Department has also brought stable leadership to student aid programs. Before I arrived, the Office of Postsecondary Education was notorious for having "revolving door" leaders. In contrast, we have established a stable, capable team, including Betsy Hicks, who serves as Deputy Assistant Secretary for Student Financial Aid Programs. She brings to her job extensive expertise as a nationally respected financial aid administrator at Harvard University and has transformed the Office of Student Financial Aid (OSFA) into a performance driven organization. During her tenure in the Department she has selected an able group of experienced career officials to run the programs. Before she arrived, half of the senior managers in her office were in temporary assignments. None of her senior managers is now acting, rather they are doing. Jerry Russomano, Director of the Program Systems Service which oversees federal student aid computer systems, is an example of this new leadership in OFSA. Mr. Russomano, who was hired last year, has over 20 years experience in information technology in the Departments of Defense and Commerce, and most recently was Director of Business Process Reengineering at the U.S. Patent and Trademark Office.

Modern technology is also helping the Department transform the delivery of student aid. The National Student Loan Data System (NSLDS) is an example of this. In a way, its name is a misnomer. It is really more a "National Student Aid Data System" because it is not only the first source of national data on student loans--including FFEL, Direct, and Perkins loans--it also has data on Pell Grant recipients and will in the future have data on recipients of other federal grants and work-study. Although implemented only two and one-half years ago and still growing, this system contains over one billion records with information on over 34 million current or past students, almost 90 million loans, and 14 million Pell Grants.

NSLDS now plays a central role in delivering student aid. It is routinely used in prescreening applicants for federal aid to eliminate those who are ineligible. From January 1995 through the first half of 1996, NSLDS identified more than 125,000 applicants as prior defaulters who were applying for additional financial aid, helping to prevent as much as $310 million in future defaults and denying about $75 million in Pell Grants to ineligible students. For almost a year, NSLDS also has been providing schools with electronic financial aid transcripts (so-called FATs) to help their transfer students get federal aid. Although many schools still request paper FATs because they do not yet have the technological capacity to exploit NSLDS fully, the system provided 45,000 electronic FATs last month alone. NSLDS is also being used to enhance accountability in the delivery system. After initiating pilot testing last year, the Department has used NSLDS since February to send Student Status Confirmation Reports (SSCRs) to schools to ensure that aid recipients are properly enrolled. Previously, schools had to send these Reports in paper format to every guaranty agency used by one of their students. As you can imagine, this new process of electronically confirming student enrollment is saving schools a lot of work.

I also want to take this opportunity to address concerns about NSLDS. Some have alleged that NSLDS has had a cost overrun of $50 million based on the original budget request submitted by the Bush Administration. That request of $39 for a five-year contract was based on the underlying assumption that neither the scope of the work nor loan volume would increase throughout the period. Both assumptions quickly became outdated. New legislation significantly expanded loan eligibility and loan limits, resulting in a doubling of loan volume in the last four years. The scope of work also increased as a direct result of increased customer demand for the enhanced capabilities of the system. In 1995, the Department determined that the actual costs of operating NSLDS would be higher than budgeted. Since then, all materials to Congressional appropriations and authorizing committees have reflected the revised (higher) estimates. We expect that at the end of the five-year contract, which occurs in September 1997, that the actual costs for NSLDS will be approximately $86 million. Since the current contract was awarded in 1992, technology has evolved to reduce considerably the cost of computer processing and storage, and a recompetition would take advantage of these improvements. 20

The quality of the data in NSLDS has also been a matter of legitimate concern. The data in NSLDS come primarily from guaranty agencies (or their servicers). The guaranty agencies, in turn, receive data from banks and other lenders (or their servicers). For many years, the Department did not pay adequate attention to the quality of the data agencies (and banks) provided about FFEL loans. When the Department started calculating guaranteed loan cohort default rates for individual schools, many errors were identified. Under Secretary Riley's leadership, my office has worked with the Office of the Chief Financial Officer to take vigorous steps to address those problems, and we have made progress. For example, just since January, the cumulative error rate on data submitted by guaranty agencies has declined from about 15 percent to 6 percent. This is still too high, and we will continue working with our data suppliers to help them improve.

The Department is using technology to improve aid delivery in other ways as well. Since 1995 we have encouraged students to send in the Free Application for Federal Student Aid (FAFSA) electronically using the EDExpress software that the Department provides schools to automate their interchange of data with the Department. About two percent of students now apply for aid using FAFSA Express, software provided directly to the applicant, which allows the Department to receive the data over a modem. Students' applications for aid are also matched electronically with data from the Immigration and Naturalization Service, the Selective Service, the Social Security Administration, and the Department of Justice to assess their eligibility for aid. Last year, about nine percent of students were identified this way for additional review of their eligibility. The Department is also planning to put FAFSA on the World Wide Web next month. We have been working on this project since last summer and provided a demonstration to representatives of the postsecondary education community two months ago. We believe this innovation will prove very popular. We are emphasizing data security because of the sensitive nature of the information students and parents must provide, but we believe that the strong security measures we have taken, including the personal identification number (PIN) codes, will make this innovation safe.

Perhaps the most effective use the Department has made of modern technology is in the Ford Federal Direct Loan Program. With enactment of the Direct Loan program in 1993, the Department set about creating a way to make it easy for students to get loans through their schools, and that way involved extensive use of technology. Essentially, the Direct Loan program is totally electronic. We have electronic data on student loan volume, delinquencies, and defaults for all direct loans. It is only for guaranteed loans that others administer that we don't have this type of information, which is equally important in managing the FFEL program well. And the taxpayers' financial interest in the Direct Loan and FFEL programs is virtually identical.

In just three years of operation, the Direct Loan program has come to account for over 35 percent of loan volume. In any other industry, an organization that took over more than one-third of its market in such a short period of time would be properly celebrated for its innovativeness. 20 Indeed, it took AT&T nine years to lose 30 percent of its long-distance telephone market to new competitors like MCI and Sprint.

Many schools have realized the benefits of participating in the program, and the number of schools in the program making loans has increased from 104 in the first year to 1,295 currently. The total cumulative volume of Direct Loans rose from $1.6 billion in the first year to an estimated $18 billion today, going to about 2.3 million borrowers. About $5.2 billion in Direct Loans are in repayment now, with 550,000 borrowers currently making payments. Total collections from all borrowers amount to about $700 million. 20

While we are proud of the Department's performance in implementing Direct Lending, we recognize that we can improve our management of it. For just that reason we recently began a two-stage move from our original contractor to separate, new contractors, one for origination and another for servicing. We made these changes to use more advanced technology in running the program and to reduce federal costs, both of which will occur under the new contracting arrangements.

The transition to new contractors has not been problem free. With respect to the new loan origination contractor (Electronic Data Systems, or EDS), we experienced some unfortunate but temporary degradation of service to the Direct Loan community. We knew there would inevitably be some disruption in the transition. That is why we began the transition during the period of lowest program activity (February and March). We worked very hard to make a seamless transition. However, both the Department and our contractor did not live up to our expectations regarding computer systems activity and general customer service. This computer systems conversion involved moving nearly five million student loan records to a new computer environment. And it required doing so in a way that allowed the new system to interface with the different computer systems managed by the nearly 1,300 schools participating in Direct Lending.

The difficulties that we experienced in this process were regrettable. We hope that those conversion problems are now mostly behind us. One consequence is that we have a much stronger management information system that provides rapid feedback on what is going on in the program. This now gives us greater checks and balances in the Direct Loan program than we had in the original contract, and than we have ever had in the FFEL program.

The conversion to new student loan servicing contractors has proceeded much more smoothly. Again, some context is useful in understanding our current circumstances. The number of loans entering repayment will increase substantially this fall when the loans for students leaving school this spring enter repayment. We recompeted the loan servicing contract to achieve the cost savings and performance enhancements that result from competitive servicing. These new contractors are scheduled to come on line in mid-August before the influx of new loans entering repayment this fall. While the Department had originally established a target date of July 1, 1997, for bringing the new contractors on line, we moved this to mid-August to extend the time available to thoroughly test the new loan servicing systems to gain confidence that they are totally functional before coming on line. We want to be sure that we continue to provide quality service in this program.

Direct Lending remains a superb program, providing exceptional value to students, schools, and the federal government. We remain committed to making it the centerpiece of a reinvented, integrated student aid system that provides the finest service available anywhere.

MODERNIZING THE AID SYSTEM

While the Department believes that the current financial aid system is effective in serving the seven million students now receiving aid and in protecting the taxpayers' dollars, we believe it can do much better. Today, the various systems delivering student aid are incompletely integrated, financial data from aid programs are only partially consolidated at the student level, and too many contractors use different operating systems in delivering aid.

The Department is committed to redesigning and modernizing the aid system to address those issues using the latest information engineering and computer systems technology. We have taken a number of steps in that direction. The most important step is Project EASI, which stands for Easy Access for Students and Institutions.

Project EASI is a collaborative initiative to reengineer student aid delivery and improve customer access to information and funding for education beyond high school. For about two years now, the Department has been meeting with a group of representatives of students, schools, lenders, guaranty agencies, and secondary markets (along with OMB) to design a state-of-the-art, comprehensive, and integrated financial aid delivery system. Leadership has been provided by the Project EASI Steering Committee chaired by Anna Griswold, Assistant Vice Provost for Student Financial Aid, Pennsylvania State University, and Kay Jacks, Executive Director for Enrollment Services, Colorado State University. Under the direction of Deputy Assistant Secretary Betsy Hicks, the Department has also established a special team to work on this project and hired several contractors to help design the system.

Let me explain EASI briefly to you. Project EASI foresees the Department creating a student-centered delivery system with a single point of contact for information on student aid. Initially, it will involve the delivery of just federal assistance, but the notion is to develop it in such a way that it will apply to all aid. Through EASI, students will be able to apply for aid, determine their eligibility, and have their aid--whether a Pell Grant; Direct, Perkins, or FFEL loan; work-study assistance; or institutional or state aid--delivered to the school of their choice almost immediately. After leaving school, borrowers will be able to check on their loan balances 24 hours a day. Schools will be able to use EASI for enrollment tracking and reporting as well as for repayments. The Department will have access to a management information system that will enable us to carry out program management, reporting, and oversight in a real-time environment. The use of common data definitions conforming to electronic data interchange standards will ensure the highest quality performance. If you are interested in more information on EASI, I encourage you to look on the World Wide Web at www.ed.gov/EASI/vision.html.

The breadth and direction of the EASI vision has raised concerns in a number of quarters. Some institutions with limited computer capacity and skills are worried they will be cut out of student aid. While we are taking steps to encourage all schools participating in federal student aid programs to use computers to exchange data with the Department, access to EASI will be available by telephone or in writing, as well as by computer. Others are concerned that EASI will be prohibitively expensive. In fact, because EASI will streamline and simplify aid delivery, we expect EASI to reduce costs not only to the Department but also to schools. Finally, some people are frustrated that EASI is not a reality today. We have considerable sympathy for this concern, but making sure that the seven million students now getting aid at 7,000 schools continue to get their aid while we modernize the delivery system must be a paramount concern. Changing from a "stovepipe" structure of 16 different federal systems using 12 different contractors to a comprehensive, integrated delivery system involving a true partnership between the federal government and our numerous public and private associates requires careful planning and deliberate implementation.

Project EASI has made progress toward specifying functional requirements and an initial cut at creating a technical architecture for a new delivery system. Meanwhile, the Department is moving ahead to modernize the delivery system with other improvements consistent with EASI's vision. FAFSA on the Web will be available in June, as I mentioned, and we are exploring the use of a multi-year promissory note with the banking community, which would be used for both the Direct Loan and FFEL programs. We are looking at industry best-practices of outstanding data processing so that the Department does not own mainframes but is still able to get the computer processing it needs. Furthermore, we are restructuring NSLDS. Although not originally conceived that way, NSLDS is becoming a transactional data base with most of the data necessary to support EASI. The Department, however, is taking steps to make it easier to use and to reduce its costs.

The desire of some to modernize student aid delivery has led them to advocate setting up new forms of organization to deliver student aid. Some, for example, are proposing a mutual benefit corporation (MBC), which as I understand it is a non-governmental corporation operating under a charter and bylaws approved by an appropriate federal agency that is set up to help run an industry. The best known example is probably the Securities Industry Automation Corporation, a private firm that administers the data exchange system on which securities trades are made for the New York Stock Exchange and the American Stock Exchange. Others have proposed delivering aid through a federal performance-based organization (PBO) which would be within a federal agency under the policy supervision of the Secretary and the President. These organizations are given substantial freedom from some of the more complex federal laws governing executive branch operations to facilitate innovation and improve performance.

The Administration believes it is premature to take a position on the desirability of an MBC or PBO or any other type of organization for delivering student aid. I would like to suggest, however, that we be careful not to put the cart before the horse in trying to improve the delivery system. The first step, as I see it, is to forge a broad consensus on what we want an improved delivery system to look like. Once we have shared objectives on what a state-of-the-art delivery system should do and how it should function, we can then address the question of the best type of organization to create and run that system.

That is exactly the approach we are taking with Project EASI. We have been working with the postsecondary education community to create a shared vision of a new aid system that meets the needs and desires of all participants. The system many people seem to want would have a single point of contact for all financial aid and provide seamless service to customers in an easy-to-use mode over either the internet or the telephone. The appropriate technology and organizational form to deliver the aid in that system have not, however, been determined.

As the title of this hearing implies, the issue of accountability for the use of federal funds in the student aid system remains central. The federal government provides about 75 percent of available financial aid. Any system set up to deliver aid must be able to account for how federal funds were spent. Because the aid system involves a partnership among the federal government, state governments, schools, banks, and other entities, ensuring adequate accountability remains a challenge because of the diversity in the way the partners operate. 20

Moreover, 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 for how federal funds are used. In the Direct Loan program, the Department is trying to harness the power of the market to make potential contractors for originating and servicing loans compete to provide the best possible service at the lowest cost to the taxpayer. The FFEL program accesses capital indirectly through a guarantee and with subsidies set in law, not through competition; the Department, however, is moving toward competitive contracting for the elements of the FFEL program that it administers. Running the FFEL program through an MBC could make effective oversight even more difficult than it is in the current system if such an organization served in an intermediary role between the federal government and the student. It could move the federal government away from the hands-on involvement that is needed to ensure proper delivery of student aid and make federal oversight of how federal funds are being used even more difficult than it is now.

I want to reiterate that the Department is still committed to reforming the FFEL program. We have submitted a number of proposals in our fiscal year 1998 budget submission to eliminate the complexity and redundancy in the current FFEL system and make it more efficient and less costly. These proposals build on the legislative changes made in 1992 and 1993, and would strengthen our ability to manage the FFEL program.

CONCLUSION

The student aid system must be modernized, and the Department is committed to doing so in partnership with the postsecondary community. We have learned through the Direct Loan program the power of harnessing new technol ogy to manage more effectively and efficiently the delivery of financial aid. The Direct Loan program has set a world standard for delivering loans, and we think every recipient of all types of financial assistance should experience the same level of quality. Students deserve no less than the highest quality of customer service, and we are working to see that they get it.

I know my testimony has ranged over a variety of topics, some quite technical, and that many of you will have questions to ask me. I would be happy to try to answer them. Thank you.

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