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

   FOR RELEASE             Contact:  Stephanie Babyak (202) 401-2311    March 27, 1995                       Jane Glickman (202) 401-1307

Direct Student Loans Receive "Clean" Audit

A report released today by the U.S. Education Department concludes that President Clinton's new direct student loan program is "more efficient, less costly and more customer-friendly" than the old guaranty loan system.

"To have this program up and running in less than a year and then receive the first clean audit ever for a federal student aid program is quite an accomplishment," said Leo Kornfeld, senior advisor to the secretary for direct lending. "The first-year schools have praised our attention to customer service, and we look forward to continuing this strong relationship."

Under direct lending, the federal government issues loans to students through schools, bypassing the more than 7,500 private lenders, 41 guaranty agencies and 90 secondary market participants that make up the old Federal Family Education Loan Program (FFEL).

The report gives the William D. Ford Federal Direct Student Loan Program an unqualified "clean" audit opinion on its September 30, 1994, financial statements. The financial statements were audited by the independent certified public accounting firm Urbach Kahn & Werlin (UKW), Washington, D.C.

"The audit confirms that direct lending offers increased accountability, reduced paperwork, and an improved capacity to manage when compared to the lender-run program," said Donald Wurtz, the department's chief financial officer. "From a financial management standpoint, that's a strong justification for going to 100 percent direct loans."

The Clinton Administration has proposed to phase out the FFEL program by 1997-98 in favor of the new direct student loan program. Accelerating the move to direct lending would save taxpayers some $12 billion, according to department estimates.

Since the direct student loan program began on July 1, 1994, the department has made approximately $1.5 billion in loans to students at 104 schools. In the first year of the program, direct lending will account for approximately five percent of all federal student loans. This will increase to 40 percent for the 1995-96 academic year and will involve more than 1,400 schools.

"It's working, and working well," Kornfeld said. "Direct lending offers students and schools better service -- and its simplicity means it is easier to manage." Kornfeld cited the findings of a survey of participating direct lending schools conducted by Education Daily. As reported in its March 17 edition, the trade publication found that 92 percent of schools rate the new direct loan program as "exceptional."

Today's audit report also includes recommendations to strengthen management of the new program. For example, UKW suggests that schools be encouraged to transmit same-day loan disbursement information to the loan servicer.

"The auditors offer ideas for further improvements," Kornfeld said, "and we expect to take full advantage of their expertise." The audit, conducted pursuant to the Chief Financial Officers Act of 1990, reviews the direct loan program's financial situation, internal control structure, and compliance with laws and regulations for the period ended September 30, 1994.