A r c h i v e d  I n f o r m a t i o n

William D. Ford Direct Loan Program: Myths and Facts

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|  What Critics Say the        | What the Program Really Does        |
|  Program Does *              |                                     |
+------------------------------+-------------------------------------+
| Hires hundreds of new        | The Department is planning on       |
| bureaucrats at the           | making significant reductions in    |
| Department of Education.     | both total staff and staff needed   |
|                              | to manage and operate the student   |
|                              | loan programs.  Between 1995 and    |
|                              | 1999, staff needed to operate the   |
|                              | Direct Loan and FFEL programs is    |
|                              | expected to decline from 809 to 732 |
|                              | while total ED staff is expected to |
|                              | decline from 5,131 to 4,698.        |
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| Institutes a federal         | Both FFEL and Direct Loans are      |
| takeover of the program's    | federally managed programs the cost |
| funding and management.      | of which are paid for by the        |
|                              | federal government.  Direct lending |
|                              | merely eliminates useless middlemen |
|                              | greatly simplifying administration  |
|                              | and saving taxpayers billions of    |
|                              | dollars.  Under Direct Loans, the   |
|                              | vast majority of work will still be |
|                              | conducted by private contractors,   |
|                              | many of whom will be the same       |
|                              | organizations currently conducting  |
|                              | this work in the FFEL program.      |
+------------------------------+-------------------------------------+
| Issue top-down mandates and  | On the contrary, Direct Loans       |
| rules for students and       | provides much greater flexibility   |
| colleges.                    | to schools to manage their loan     |
|                              | programs so as to better serve      |
|                              | borrowers.  One of the primary      |
|                              | reasons schools want to participate |
|                              | in the Direct Loan program is the   |
|                              | freedom and control it gives them   |
|                              | over their financial aid operation. |
|                              | The overwhelming satisfaction       |
|                              | expressed by participating schools  |
|                              | is evidence that the program        |
|                              | delivers on this promise.  In       |
|                              | addition, all regulations issued in |
|                              | the Direct Loan program were        |
|                              | negotiated with institutions        |
|                              | through the negotiated rulemaking   |
|                              | process.                            |
|                              |                                     |
+------------------------------+-------------------------------------+
| Burdens colleges with more   | Direct Loans is less burdensome and |
| regulations and eliminates   | provides greater incentives for     |
| performance incentives.      | high performance than FFEL.  Due to |
|                              | the additional responsibilities     |
|                              | given to schools under the Direct   |
|                              | Loan program, they are subject to   |
|                              | some additional regulations.        |
|                              | However, schools are compensated    |
|                              | for this burden (schools receive a  |
|                              | $10 fee for preparing the           |
|                              | promissory note) and the vast       |
|                              | majority find it much less          |
|                              | burdensome then the FFEL program.   |
|                              | All Direct Loan contracts have      |
|                              | performance incentives built in.    |
|                              | This is in contrast to FFEL where   |
|                              | lenders make large profits          |
|                              | regardless of their performance.    |
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| Introduces open-ended        | In both Direct Loans and FFEL, the  |
| budgets based on political   | cost to the Government is based on  |
| objectives.                  | loan volume and interest rates.  By |
|                              | replacing higher cost private       |
|                              | capital with Government funds, the  |
|                              | Direct Loan program saves taxpayers |
|                              | billions of dollars.  Our savings   |
|                              | estimates are consistent with those |
|                              | reached independently by the non-   |
|                              | partisan Congressional Budget       |
|                              | Office.                             |
+------------------------------+-------------------------------------+
| Eliminates private sector    | We encourage competition in the     |
| competition in the student   | Direct Loan program.  All contracts |
| loan industry.               | to help operate the Direct Loan     |
|                              | program are competitively awarded   |
|                              | based on the offeror providing the  |
|                              | greatest value to the Government.   |
|                              | Our only consideration is what is   |
|                              | in the best interest of students    |
|                              | and taxpayers.  This in contrast to |
|                              | the FFEL program where there is no  |
|                              | requirement that contractors be     |
|                              | competitively selected.             |
+------------------------------+-------------------------------------+
| Abolishes the role of states | The vast majority of work in the    |
| and the private sector in    | Direct Loan program will be         |
| student credit programs.     | conducted by private contractors--  |
|                              | many of whom will be the same       |
|                              | organizations currently involved in |
|                              | the FFEL program.                   |
+------------------------------+-------------------------------------+
| Replaces competing local,    | The Direct Loan program is not      |
| private customer-service     | centrally administered but rather   |
| organizations with one       | relies on thousands of schools and  |
| federal bureaucracy.         | allows them to determine how best   |
|                              | to serve their students.  This is   |
|                              | in contrast to lenders who have no  |
|                              | real involvement or interest in the |
|                              | student.  In terms of servicing     |
|                              | loans, ED's contractors will be     |
|                              | competing based on how well they    |
|                              | serve borrowers.  Those that fail   |
|                              | to continue to perform at           |
|                              | acceptable levels will be           |
|                              | terminated.  This compares to the   |
|                              | FFEL program where there is no      |
|                              | incentive to provide high quality   |
|                              | service to borrowers and loans are  |
|                              | sold at the lender's convenience.   |
+------------------------------+-------------------------------------+
| Forces the Internal Revenue  | Apart from offsets against tax      |
| Service to collect student   | refunds, the IRS has no current     |
| loans and imposes new wage   | role in the collection of student   |
| reporting burdens.           | loans and there are no changes in   |
|                              | wage reporting requirements created |
|                              | by the Direct Loan program.  IRS'   |
|                              | only involvement in the Direct Loan |
|                              | program is to provide income data,  |
|                              | with borrower's permission, to the  |
|                              | Department for those borrowers      |
|                              | choosing income-contingent          |
|                              | repayment.                          |
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