Department of Education Launches Direct Loan Source Newsletter

I was waiting for this.  With the rhetoric heating up as student loan reform bills swirl around the Capitol, a talking point that has increased in frequency is this transition risk of switching all 4,000+ FFELP schools to the Direct Lending Platform by July 1, 2010:

• Sallie Mae Investor conference (September 16, 2009):  "In order for them [government] to generate savings, they have to transition 4,500 schools to their system or 600 schools/month.  Not sure they have done 600 schools in a year.  We see and we believe they tend to overlook the massive transition risk.  If they put off transition for even a year, some $10-$15 billion of savings would go away so the $13 billion difference would evaporate."

• Finaid.org website:  "The transition risk is associated mostly with the prospect of quadrupling of origination volume in the Direct Loan program and not with the volume of loans entering repayment. Since loans enter repayment as students graduate, the number of new borrowers entering repayment in the Direct Loan program will increase more gradually. That gives the US Department of Education more time for hiring and training servicing staff. The Obama administration has also proposed contracting with some of the larger FFEL program lenders to service the Direct Loan program loans to mitigate this risk. Even so, maintaining a bit of redundancy will help avoid future disruptions caused by a single point of failure."

• Edfinancial Services press release (July 8, 2009):  "Furthermore, the proposal meets these goals without the significant transition risk assumed by 4,500 schools that comes from the Administration's planned government takeover of more than $60 billion in private-sector-originated student loans."

Today, a newsletter went out to the financial aid community from the FSA Chief Operating Officer, William Taggart with this introduction:

"As you know, there has been considerable public debate regarding the future of federal student loan policy. What is sometimes lost in the discussion and the competing rhetoric is the welfare of the students and parents who rely on this assistance to help fund their education.

Regardless of your position on the issue or the ultimate outcome of the debate, it is imperative that your school is prepared to accurately and efficiently deliver federal student loans for the 2010-2011 academic year. The Department of Education has gone to great lengths to update our systems and increase capacity in preparation for whatever outcome is reached by Congress. Today, we are ready to support each and every institution that chooses to participate in the Direct Loan Program. I ask you to ensure that your school is equally prepared. Even if the Direct Loan Program is not your first choice, please plan for any possible outcome.

To assist you, we are sending you the first in a series of monthly updates on the Direct Loan Program and the resources we are offering to help your institution prepare to participate in it should you choose, or be required, to do so. I encourage you to begin your preparations now to allow your students to remain focused on what's truly important – their education."

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In the spirit of full transparency, it would be great to get a few questions answered to ease some anxiety in the financial aid community:

• Describe in a bit more detail about how "systems have been updated and capacity increased."
  • How many new people have been hired to assist on the implementation front?
    • Does the Department intend to subcontract to consultants to handle the on-site implementation issues?  
    • Will the National Direct Loan Coalition and their mentoring program be mobilized to assist in this effort? 
      
      • One challenge here might be that there will be roughly 3 new DL schools for each existing DL school
  • What about call center staffing to manage day to day operational issues?  What is the peak volumes that you estimate you will be able to handle on a daily basis?
  • Describe how the Department is ensuring the quality of new hires as well as the training regimen to get all new hires up to speed.

• The House SAFRA bill had an amendment to provide $50 million to the Department for technical support and training for schools transitioning to DL. 
  
  • How is that Dept. intending to spend the money to ensure that it meets the immediate needs of schools transitioning to DL?
    • Will it be spent by the Department or disbursed to schools through some sort of formula (if all FFEL schools got equal amount, it would work out to about $12,500; probably makes more sense to allocate based on loan volume)? 
  • What if the $50 million isn't included in any final bill?  Does the Dept. have adequate funding for this effort and where would it come from?

• What are contingency plans should the legislative outcome drag beyond December?  

• In terms of knowing where the financial aid community is, it would be nice to know what the current pipeline looks like:
  • # (number of) FFEL schools contacting DL to get initial set-up
  • # FFEL schools who have been trained/attended various DL webinars put on by the Department
    • The  upcoming webinar suite offered in October-December is probably a better indicator of commitment given the number of sessions it involves
  • #FFEL schools planning mid-year implementation for 2009-10
  • #FFEL schools already committed to DL switch for 2010-11
    
    • Not sure how you get this but it would seem important piece of information

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Something I often wondered about was what the distribution of loan recipients looks like when analyzing schools in the FFEL program.  In other words, a school with 100 federal loan recipients will likely have a very different transition process than one that has 100,000 recipients. 

I went to the FSA Data Center and looked at federal loans (Stafford, PLUS, Grad PLUS) at FFELP schools for 2008-09 and here is what the distribution looks like

Loan Recipients # of Schools Percentage Less than 100            1,220 27.6% 100 to 249               553 12.5% 250 to 499               433 9.8% 500 to 999               590 13.3% 1,000 to 2,499               855 19.3% 2,500 to 4,999               432 9.8% Over 5,000               338 7.6% TOTAL            4,421 Note:  For purposes of this analysis, each Stafford loan recipient assumed to take out 1.5 loans (Sub. and Unsub.)

So, depending on which side of the argument you are on, you might emphasize that over 40% of FFELP schools have less than 250 federal loan recipients so implementation shouldn't be too difficult at those schools.  On the other hand, you might emphasize that there are over 300 schools that have over 5,000 loan recipients which are likely to be more complex operations.  I know if I was in the Department of Education where I would be focusing my attention to ensure smooth transitions! 

Which raises another interesting question, given the limited timeframe and limited resources, will the Dept. choose to segment FFEL schools and provide a differential level of implementation services and attention to them.  For example, if you are under 100 loan recipients, you get a toll-free number.  If you are over 5,000 loan recipients, you get an on-site consultant/project manager to ensure that the transition goes well.  Given the task at hand, I think the more communication the better. 

Comments

[Anon]

Actually, it is likely the small schools (less than 250 loans) that will have the biggest problem because of problems associated with scale (there'a a base-level of work that needs to be done in any transition - 5 loans or 5,000) amd those small schools can least make resources available to make the transition.