It is an honor for me to appear before you today to explain our request for administrative funding to support the Office of Student Financial Assistance (SFA) in Fiscal Year 2001. Our mission is simple and direct: to help put America through school. We expect to help 8.6 million students make their dreams come true in 2001 by providing $54.2 billion in grants, direct loans and guaranteed bank loans.

Along with that important mission, we have the great opportunity of being the Federal Government's first Performance-Based Organization-an opportunity to prove that government can deliver customer service and financial performance that equals the best in business. It will be easy for all to see whether we succeed, because we have chosen three simple measures of success for our Five-Year Program Plan- increased customer satisfaction and employee satisfaction and reduced unit cost. It is a balanced scorecard used by America's best-run businesses. And more importantly, these three simple measures of success were derived from discussions with, and were validated by, our customers and partners through extensive outreach last year by our Customer Service Task Force. Our goals:

• Customer satisfaction increased to 73 percent-as measured by the University of Michigan's American Customer Satisfaction Index--equal to the private sector service industry average.
• Employee satisfaction among the top five in the Federal Government.
• Unit cost--derived by taking our annual costs to process and service loans and grants divided by the number of loan and grant recipients--reduced by 19 percent.

We have just begun our second year as a PBO. This past September I reported to our customers and partners on our progress in achieving our Interim Performance Plan goals. We introduced new products such as Direct Loan entrance and exit counseling for student applicants, a website that allows students to correct their aid applications online, complete toll-free customer service, and electronic direct loan servicing support. To date, we have issued over 5.1 million Personal Identification Numbers (PINs) to students for direct access to information on their SFA loans or grants. We improved our core business processes-processing aid applications faster and more accurately, consolidating loans faster and helping more borrowers to avoid defaulting on their loans.

We also met all the major milestones that our Interim Performance Plan spelled out for making the transformation to a Performance Based Organization. We found out from our customers what they wanted. We then realigned our organization and business processes to meet their needs. We completed a Systems Modernization Blueprint (a "first" for this organization in publishing a detailed information technology and systems modernization plan), and hired a modernization partner to help us use information technology, as do the best in business, to cut costs and satisfy customers.

Problems Highlight Need for Modernization

We have made some well-publicized mistakes recently--like making duplicate payments to some schools, temporarily posting some ridiculously large and obviously wrong amounts to students' loan accounts, and most recently, by wording a new FAFSA question on drug use in such a way that confused enough of the applicants that around 16 percent just left it blank. We have made sure that the duplicate payments have been returned, made clear that our financial systems never reflected obviously wrong loan amounts and that no borrower was overcharged, and revised our approach to the drug question so that no student would be denied aid to which he or she is entitled and we are still identifying people who are ineligible under the law. The errors or mischaracterizations are symptoms of the old way of doing business from which we are still breaking free. The quick action we've taken to admit the mistakes, to know how to quickly correct our legacy systems, and to set mistakes right in a way that protects our customers and the taxpayers is a positive sign of the beginning of the new culture of the PBO.

We take our fiduciary responsibilities very seriously. We do a good job of managing our funds and our loan and grant portfolios. We do not do a great job. Our 1999 financial audit resulted in a qualified opinion on four statements and a disclaimer on the fifth statement. The 1999 opinion does represent an improvement over last year's disclaimer opinion. We were nonetheless disappointed in the results. The PBO and other parts of the Department are developing a plan to improve our performance in 2000 and ensure that the issues raised in the reports are appropriately addressed. Our plan assumes continued reliance on stovepipe legacy systems and the workarounds needed to prepare auditable financial statements using the Department's financial management systems. More critical, however, are our plans to implement a state-of-the-art financial management system, using off-the-shelf systems, commencing in fiscal year 2000 with phased releases of modules to support our various business processes. That system, combined with enhanced financial management expertise, now on board at the PBO, will provide us with the basic systems support we need to secure an unqualified opinion.

FY 2001 Administrative Funding Levels

Funding for student aid administration comes from a number of sources. Of these, the largest is the permanent definite appropriation under Section 458 of the Higher Education Act, which will total $770 million in FY 2001. In addition, the Department is requesting $48 million to partially support the administration of the Federal Family Education Loan program. Lastly, $59.2 million of the Department's request for the Program Administration account would support student aid activities for a grand total of $877.2 million. Nearly 93 percent of these funds (or $811.8 million) support activities of the Office of Student Financial Assistance. Other offices in the Department use the balance--$65.4 million--primarily for central services such as postage, rent and support services. My testimony will focus on SFA activities.

The appropriation request for SFA in FY 2001 totals $811.8 million. That comprises $641.8 million for our own operations, and $170 million for account maintenance fees that are required by statute to be paid to guaranty agencies. Our portion of the Department's request is 7 percent ($41.6 million) greater than our budget for FY 2000. We plan that $58.7 million, or approximately 9 percent of our operations funding, will be used for critical information technology investments in order to support our service improvement goals. Approximately 67 percent of our operations funding request, or $428.5 million, will support contractor-provided loan and grant processing and information technology systems. Personnel related costs total $99.8 million or approximately 16 percent of our operations. The remaining funds, 9 percent or $54.8 million, are planned for basic business costs such as supplies, equipment, travel, and transportation.

Dramatic Increases in Workload

With this modest increase in funding, SFA will serve more students than ever before, accommodate the beginnings of a shift in workload to an unavoidably more expensive mix of tasks, and aggressively invest to modernize our antiquated information technology systems so that we can provide fully integrated services to the nation's postsecondary students. The number of students receiving grants or loans, or whose loans are still being serviced, will grow dramatically in the next several years. Our workload is growing because the number of high school graduates is growing--and will continue to grow over the next decade--while the cost of college continues to climb. This is just the beginning of a sharply growing demand for student aid.

On top of a growing workload, the makeup of our work is shifting to a more costly mix. The shift has two important components. First, the Direct Loan portfolio, for which SFA bears all the servicing costs, is growing at a faster rate than the FFEL portfolio, for which we bear only the cost of oversight and financial transactions.

Second, the relatively young Direct Loan portfolio--which when all taxpayer costs are considered is less expensive for taxpayers than guaranteed student loans--is maturing. Right now, most Direct Loan borrowers are still in school and we don't spend much servicing their loans. But in the coming years, more and more of them will graduate and begin repaying their loans. Since servicing costs for loans in repayment are roughly twice those for loans that are in-school, costs will rise.

A Move to Paperless Processing

Overall per-loan Federal costs for the Direct Loan program are dramatically lower than those for guaranteed loans even when higher Federal Direct Loan administrative costs are considered. However, our administrative costs will grow dramatically unless we undertake radical change. Modern information technology is our solution. Let me give you an example. We process about 10 million applications for student aid each year--last year, seven million of them came in on paper, and three million were electronic. Estimates informed by data from the Federal Reserve member banks show that electronic applications for installment loans cost less than two dollars each compared with more than $40 for paper applications. So this year, we set a goal of attracting four million electronic applications--one-third more than last year. The more we can switch from paper to electrons, the more we can stop cost growth.

Electronic applications are much easier on the applicants, too. They aren't even shown questions that don't pertain to them. And paper applications have 25 times more errors than e-applications--errors that mean delays in getting aid to the students.

But we have to give people lots more easy-to-use electronic services. Otherwise, they won't use them and we won't cut costs. So, we have secured a modernization partner, Andersen Consulting; have developed a Modernization Blueprint based on the technology used by the best banks, we have instituted a rigorous Investment Review Board process to evaluate information technology investments, and we are investing aggressively to get out of the paper-pushing business.

There have been some misunderstanding and controversy over the way we are modernizing, so I want to take a minute to explain our approach. Our focus is service integration for our customers--to make it as easy and modern as the best service providers on the Internet. The problem we face is a bunch of old, stand-alone systems that were created over time as each grant and loan program was enacted. It is bad enough that we have to deal with all those old systems in the back room. But they are a real headache for our customers, too.

For example, for a student today to find out where her application stands, she must first have patience, a good memory for PIN and Social Security numbers, and plain old determination. Separate multiple log-ins and close-outs to stovepipe systems for each type of assistance, redundant entering of PIN and Social Security numbers, confirmation of name and address--these are the processes for our legacy systems. These time-consuming and redundant processes are simply unacceptable.

These problems are the same kind of problems big banks face--especially those that have grown and taken over smaller banks with all kind of different computer systems--like Bank of America, for example. They don't make their customers log in and close out of different systems to deal with their respective checking, savings, and investment accounts. They offer integrated, electronic services on-line, on one screen. They have either reengineered their stovepipe legacy systems to integrated systems or they have linked their disparate systems, seamlessly to the customer, using middleware. Customer access is provided around the clock via the Internet.

We adopted the best secrets of corporate banking and made it the heart of our Modernization Blueprint. It is a proven success. And it's quick. Highway 1--a consortium of private businesses who believe in this solution enough to work on it for free--built an on-line fully integrated student statement, using off the shelf products, with all needed information in just a few months. One log-on, one PIN and confirmation gives complete access to applications, disbursements, and balances--no matter where the data resides, no matter what the legacy system. This pilot is one proof of the concept behind our Blueprint.

We have an ambitious agenda set for this year. As I have already reported, we will implement a state-of-the-art financial management system and maintain our rigorous Investment Review Board process for information technology projects. We will reengineer Pell and Direct Loan origination and disbursement systems into a common process. Loan servicing and call centers will be reengineered as well. In addition, as we introduce new system technologies, we will be able to retire several of our existing legacy systems. We will constantly upgrade our products, introducing new ones as we go. In particular we will emphasize improving the FAFSA--making it less cumbersome, fully electronic, user-friendly--and test and retest with our customers. Lastly, we will continue to reorient our focus on students--to provide them with the assistance needed to fulfill a dream of higher education.

So this is the kind of investment we are making in technology--PINs for all of our customers so they can do more on-line--portals for students and schools and our financial partners--that is, single Web sites that have everything they might need and that they can personalize for their own specific needs. And not just on-line information--transactions too. Aid applications, loan consolidations, corrections, counseling and training-virtually everything we do--offered 7 days a week, 24 hours a day. E-business brought to the Federal Government.

But I don't want you to get the impression that I believe technology and computers will solve all our problems. If we use them in ways that have already proven successful, they will keep our costs under control. But the real key to success is to unleash the potential of the people who are now helping to put America through school--employees of SFA, our support contractors, financial aid administrators at more than six thousand schools, and the bankers and guarantors who make most of the student loans. Our biggest challenge is to create a true partnership among them all--to get everyone aligned with the same goals--everyone measuring success on the same scorecard--customer satisfaction, employee satisfaction, and cost.

We are working on a number of initiatives pointed at improving this aspect of our performance. We're planing a move from our current building, which was rated one of the five worst Federal buildings by Government Executive magazine, to provide our employees a workspace that is more consistent with a high performing organization. We have created SFA University--modeled on corporate universities. This program offers training on PBO processes at the frontline, a history of Federal financial aid, basic project management, upgrades to technical skills, and more. We have expanded the presence of our senior management at conferences run by the schools and financial aid community. We are renegotiating our contracts for our major computer systems to be performance based--aligning our key contractors with our three performance goals. In addition, we have opened up technical data exchanges with third-party software vendors who build systems that run in school offices. We have also begun using Integrated Product Teams. These teams represent the PBO's commitment to partnership--including our customers and partners in the design and development of new products. Schools, software providers, and various other partners will actually participate in front to back development of new products. We are negotiating Voluntary Flexible Authority Agreements (VFAs) to find new ways of doing business with the FFEL community. And we're holding town hall meetings with our customers and partners to get feedback and to better understand their priorities. Enabled by technology, these are the things that will align us all to do an even better job at helping put America through school--helping make dreams come true.

Mr. Chairman, this concludes my statement. I will be pleased to answer any questions you may have.

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