OIG Report Provides Insights Into Direct Lending Transition

The Department of Education's Office of Inspector General provided an audit report of the Department's Oversight of the Direct Loan Report.  Here are the highlights:

• Federal Student Aid (FSA) had anticipated and prepared for 50% of FFEL schools to transition to Direct Lending in the 2008-09 academic year.  This led to their prediction that DL would have 62% of borrowers and 57% of originations while actual figures for DL came in at 32% of borrowers and 28% of originations as of April 15, 2009 (see Attachment 1 on page 12). 

• Regarding the number of resources dedicated to onboarding schools, I have to admit being a bit underwhelmed and frankly concerned as FSA expects that they can get by with practically the same number of employees to assist schools during a peak that will be several multiples larger than what they experienced in 2008-09: 

"During AY 2008-09’s peak volume period, FSA detailed 15 employees to assist schools
transitioning into the Direct Loan program. As of May 2009, FSA had four employees assigned to assist schools transitioning into the Direct Loan program. Should FSA need additional resources to assist schools transitioning into the Direct Loan program due to increased volume, FSA plans to deploy the employees detailed during the AY 2008-09 peak volume period."

• Almost all FFEL schools already have approval to participate in Direct Lending:

"Based on data compiled by OIG as of May 7, 2009, 4,031 of the 4,636 actively participating
FFEL schools10 (87 percent) during AY 2007-08 also had approval to participate in the Direct
Loan program. However, 443 of the 605 schools without Direct Loan program approval were
ineligible to participate because they lack statutory authorization due to their foreign school status. As a result, just 162 of the actively participating FFEL schools (3.5 percent) were eligible to participate in the Direct Loan program but had not yet been certified to participate."

• FSA is looking to automate account processing activities to enable schools to get DL funds through the COD system:

"Once a school is certified to participate in the Direct Loan program, the school contacts the Customer Relations Service Center via email to notify FSA of its intention to participate in the program. In response, FSA’s PEPS Team performs account processing activities that will enable the school to obtain Direct Loan funds through the COD system. FSA stated it is moving toward automating this activity, thus leaving minimal work for the Department to complete for FFEL schools transitioning to the Direct Loan program."

• The success of the transition to Direct Lending is reliant on the outside contractors managing the origination and servicing functions...which is outside the scope of the report (hmmm...am I the only one who wonders if maybe someone might want to create an audit report where this is within the scope?):
  • On origination:  "Contract terms appear adequate to enable FSA to expand
    origination capacity above a 50 percent FFEL volume transition. However, a determination as to whether the contractor’s system will actually work as intended was beyond the scope of this review.
  • On servicing:  "Overall, we determined FSA modified the existing DLSS contract to allow for increased servicing due to anticipated FFEL volume transition. FSA also awarded four additional contracts to provide servicing capabilities to handle 100 percent transition of FFEL volume to the Direct Loan program. However, a determination as to whether the contractors’ systems will actually work as intended was beyond the scope of this review."

• Let's hope that the Department moves forward on the report's suggestions that it tests system capability ahead of the potentially dramatic increase in volumes:

"We suggest FSA ensure effective contract monitoring practices are in place as well as provisions for appropriate system testing to ensure affected systems will perform adequately under increased processing requirements."