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

	Direct Loan Evaluation Report
	Case Study Summary Report: Year Three of the Direct Loan Program August 1997
U.S. Department of Education - Postsecondary Education Division

Executive Summary

I. Introduction--The Case Study Component

II. Characteristics of the Sample
Type, Control, Size, and Level of Direct Loan Program Participation
Loan Volume 1994-95 and 1995-96

III. Planning for Direct Lending
New Planning Assistance Available
Schools Planning for Year Three
Using a Third-Party Servicer

IV. Computer Systems
Hardware Used for Processing Direct Loans
Software Used for Processing Direct Loans
Title IV WAN

V. Implementing Direct Lending
Packaging Financial Aid
Originating Loans
Promissory Notes
Drawdown, Disbursement, and Refunds to Borrowers
Changing and Canceling Direct Loans
The Importance of Sequence of Loan Processing Actions
Borrower Counseling
Reconciliation
Quality Assurance

VI. Services Provided by the U.S. Department of Education
Training
Manuals and User's Guide
Electronic Bulletin Board
Teleconferences
Policy Concerns
Direct Loan Regional Office

VII. Regional Office Account Managers
Staffing, Staff Background, and Office Structure
Account Manager Training
Principal Activities
Training for Schools
Relationship With ED

VIII. Summary of Institutional Costs
Followup With Year One Schools
Year Two Schools
Year Three Schools

IX. Perceptions of Direct Lending
Overall Ease of Implementation
Level of Effort
Experiences With FFELP
Overall Satisfaction

X. Ongoing Issues for Program Year Three
Computer Systems
Loan Processing
Training
Counseling
Customer Service

Foreword

The purpose of the case study component of the William D. Ford Federal Direct Loan Program Evaluation is to gather detailed information about schools' experiences with the Direct Loan Program. In this third year of conducting case studies, a total of 19 schools were visited: five schools from the first cohort; ten from the second; (five being visited for the first time and five being revisited); and four from the third cohort. Institutional case studies are one facet of Macro's 5-year evaluation of the Direct Loan Program. They provide the opportunity to describe in detail the diversity of approaches used by schools in planning for and implementing the Direct Loan Program. The findings of this report are based on our observations at a limited number of schools and thus are not meant to be representative of the universe of Direct Loan schools. Rather they are complementary to findings disseminated in other Macro evaluation components, including a Survey of Institutions Participating in the Direct Loan and Federal Family Education Loan Programs and an Assessment of Department of Education Administration of the Direct Loan Program.

Executive Summary

Introduction

This Case Study Summary Report is part of the evaluation of the William D. Ford Federal Direct Loan Program commissioned by the U.S. Department of Education (ED). Institutional case studies have been included as one element of this evaluation. Case studies provide the opportunity to describe in detail the diversity of approaches used by schools in planning for and implementing the Direct Loan Program. The results of the case studies are used to inform the development and refinement of questions and response categories in full-scale surveys of institutions and borrowers conducted annually as part of the evaluation. In addition, case studies allow for the early identification of best practices and of recurring problems in implementing the Direct Loan Program. This may assist other institutions by suggesting ways in which they can benefit from the experiences of those who entered the Direct Loan Program earlier. Annual data collection will also provide opportunities for early feedback to be used by institutions and ED officials in improving the Program. Sampled schools are revisited to obtain a longitudinal view of the implementation of the Program and of changes in perceptions.

In this third year of the study (fall 1995 through spring 1996), Macro assessed the Direct Loan Program's second year of operation. A total of 19 Direct Loan institutions were visited--five selected for participation in the first year of the program, ten from the second year, and four from the third year. Schools include public and private two- and four-year institutions and proprietary schools from each region of the country.

In addition, five Regional Direct Loan Offices were visited.

Overall Satisfaction

Of the 19 schools visited, 15 were Direct Loan participants in 1995-96, with the other 4 planning to enter the program in 1996-97. Fourteen of the 15 schools administering the Direct Loan Program reported a high level of satisfaction with the Program, despite encountering difficulties during implementation. Realized benefits included improved service to students, more control over the loan process, and improved school cash flow.

Two-thirds of the case study schools described the transition to Direct Loans as moderately easy or easier than expected; one-third said it was moderately difficult or more difficult than expected. After an increase in effort during the transitional phase, most schools reported an overall decrease in workload compared to the Federal Family Education Loan Program (FFELP).

All Financial Aid Officers (FAOs) expressed concern about the proposed Congressional cap on Direct Lending.⁽²⁾ A number of schools have invested substantial resources and effort into redesigning their student loan system to administer Direct Loans. They are concerned that a cap would eliminate them from participation, forcing them to return to FFELP.

Planning for Direct Lending

Schools reported that enhancements to Direct Loan Program training have resulted in an easier implementation for Year Two and Year Three schools. These changes helped smooth the planning and implementation of Direct Lending at Year Two schools. However, in comparison to Year Two schools, Year Three schools lagged behind in planning for 1996-97 implementation.

Because of concern about the future of the Program, some Year Two and Year Three schools changed full implementation plans to incremental phase-in plans, while others considered reducing the proportion of loan volume phased in to Direct Lending.

Computer Systems

Case study schools operated under one of four types of computer environments--mainframe to mainframe, mainframe to PC with EDExpress interface, independent mainframe and PC, and PC only. It was reported that each system had advantages and drawbacks related to the volume of loans processed, resources devoted to system development and maintenance, and compatibility of databases.

FAOs commented that having a computer-literate person with an understanding of financial aid (or a computer consultant to the financial aid staff) facilitated implementation of Direct Lending. Regional Account Managers supported this, saying that schools need to know that Direct Lending is technology-dependent.

Software

While two schools used their own software programs for administering Direct Loans, most used EDExpress on PCs or commercially purchased software for their mainframes or PCs. Improvements in EDExpress and the availability of Direct Lending modules in commercial software greatly eased Direct Loan processing. New internal edits built into EDExpress, in particular, improved efficiency and reduced reconciliation effort.

Schools reported satisfaction with the attitude and helpfulness of the Servicer's support staff; however, they qualified this by saying that some staff lacked sufficient technical expertise and an understanding of financial aid.

A number of schools praised the EDExpress software contractor for working to see a problem through until it was resolved; however, some were dissatisfied with having to leave voice mail messages and wait for callbacks.

FAOs complained that the Servicer and the EDExpress software contractor often referred schools to the other, rather than fixing the problem themselves. In these situations, the Regional Office Account Managers often acted as liaisons.

Schools using mainframe computers reported that they had not received adequate technical support or training and that the Servicer's system was not designed to receive mainframe transmissions. FAOs suggested that the Direct Loan Servicer and the software contractor may need to provide additional support to these schools.

Implementing Direct Lending

In order to best understand the administration of Direct Lending, Macro obtained a description of each step involved in processing a Direct Loan and administering the Program at each school. These steps are described below.

Originating Direct Loans

In comparison to the first year of Direct Lending, FAO staff reported that loan origination had become relatively simple once institutional staff became familiar with the procedures. Once the transition period was over, schools reported that originating Direct Loans usually required less effort than processing FFELP loan applications.

Some schools experienced a six- to eight-week "learning period" when mistakes were common and new skills were mastered. During this transition period, FAOs became aware of exceptions to the typical origination process taught during training. Manuals, training materials, and guides did not adequately prepare staff for day-to-day operations associated with the loan origination process. Most FAOs reported frequent calls to the Servicer during this period.

Promissory Notes

FAOs reported that processing promissory notes has become routine. However, promissory notes are not acknowledged by the Servicer in the order of the transmitted batches and cannot be easily tracked. To overcome this, one school used a bar code system and scanner for tracking promissory notes.

Drawdown, Disbursement, and Student Refunds

Almost all case study schools chose to draw down the exact amount of funds disbursed to avoid problems associated with excess cash. Five of the schools credited student accounts and then drew down the total credited amount; the other schools drew down the funds using an estimate of funds needed before disbursement and then refunded any excess cash to ED within the prescribed seven days.

All schools reported a very high level of satisfaction with this aspect of Direct Lending. Schools using a paper check system under FFELP reported a dramatic reduction in effort, shorter lines of students waiting to sign checks, and greatly improved student satisfaction. Schools using electronic funds transfer (EFT) under FFELP reported that Direct Lending was easier to administer than FFELP because all loans came from one source and there were no guarantee agency delays. The most appreciated factor was the speed with which loan funds were received and disbursed to students--there were very few delays. Additional benefits included:

• Substantially fewer students needed short-term emergency loans; and
• Cash flow for the school was improved, improving the administration's planning capacity.

FAOs also noted that schools, which under FFELP endorsed the loan check over to the student and accepted a personal check for tuition, found the problem of bounced student checks to be greatly reduced under Direct Lending.

Borrower Counseling

Almost all case study schools were using ED-produced counseling materials. With two exceptions, brochures were supplied to schools in adequate numbers and on a timely basis. FAOs reported a high level of satisfaction with the quality of the Entrance and Exit interview brochures. However, not all FAOs were aware of the availability of ED-produced handouts describing the various repayment options.

Reviews of the ED-produced videos were mixed. While some FAOs used and liked the entrance and exit counseling videos, many FAOs suggested less emphasis on drama and more concrete, specific information about repayment options and consolidation.

Reconciliation

Schools reported that the reconciliation process in 1995-96 was substantially smoother than in 1994-95. Many case study schools reported that they were up-to-date in 1995-96 monthly reconciliations.⁽³⁾ Many Year One reconciliation problems were caused by computer difficulties and lack of training, requiring intensive intervention on the part of the Servicer or the Task Force. Year Two case study schools had few if any unreconciled records. In addition, the reconciliation problems they encountered appeared substantially easier to resolve.

A number of FAOs recommended monthly reconciliation over annual reconciliation. Monthly reconciliation served as a means of checking the school's loan records and allowed errors to be identified more quickly.

Changing and Canceling Direct Loans

Once FAOs learned the procedures for changing loans, most found that changing or canceling loans was easier under Direct Lending than under FFELP. This was due, in part, to the fact that schools did not have to submit change notification forms to lenders and guarantors and did not have to follow up to reaffirm the status of the loan. Most FAOs said that under Direct Lending, changing a loan became completely automated, required the same action for all loans, and allowed them to easily check loan status. Once FAOs understood the Direct Loan change process, most found it easier to track the changes. However, a number of FAOs were not satisfied with the procedure of changing loans under Direct Lending.

Services Provided by the Department of Education

Training

Most Year One and Year Two schools participated in ED's Direct Loan training. Satisfaction with these presentations was mixed, depending on the session attended. The proximity of training conducted by Regional Offices permitted attendance at Title IV update sessions, which otherwise may have been foregone because of travel costs. Account Managers were commended for their positive attitude and efforts in these sessions. All participating schools appreciated the opportunity for hands-on training sessions and expressed a desire for more. As in past years, schools suggested training in problem identification and solution, increased sharing of other schools' experiences, and improved training for mainframe schools.

By the end of March 1996, the four Year Three case study schools had received introductory training in Direct Lending at their Regional Office. None had participated in the more detailed three-day training session on EDExpress and Direct Loan administration.

Manuals and User's Guide

Some FAOs reported that the instructional manuals and user's guide were useful resources but were limited in scope. Topics such as loan changes and explanations of Servicer error codes either were not addressed or were not covered with sufficient detail or clarity. Others found them difficult to use because the language was too technical or because they were not arranged in a user-friendly fashion. Many FAOs did not use these documents for solving technical loan processing problems because there was no problem solving section. Instead, they called the Direct Loan Servicer for assistance.

To assist with processing loans, schools suggested that ED develop a "trouble shooting guide" and a "quick reference" similar to those available for other financial aid programs. At the time of the site visits, development of these materials was under consideration by the Regional Offices.

Direct Loan Implementation Costs

Direct Loan implementation costs ranged from $3,000 to over $80,000 per school. As reported last year, the most extensive expenditures per school occurred in the areas of computer equipment and programming--primarily at large, mainframe schools. Except for one school, travel for training costs appeared to be less for Year Two schools than for Year One schools. Schools anticipated that these costs will continue to decline as schools take advantage of more convenient training at Regional Offices.

Additional staff were hired at one school to administer both loan programs during the transition to Direct Lending; two other schools reported staff reductions. Four case study schools reported lower than estimated implementation costs. None of the Year Three case study schools provided estimated cost information because planning had not proceeded to that point.

Regional Office Account Managers

Training

One or two Account Managers in each Regional Office had experience in postsecondary education or financial aid; most were hired from other government agencies or were recent college graduates. Almost all Account Managers received intensive training in financial aid, Direct Lending, and EDExpress prior to assuming their current roles. Some reported that training sessions were often conducted under the assumption that the Account Managers had a greater understanding of financial aid than they actually did; therefore they did not gain a thorough understanding of the information presented. Account Managers and Regional Office Directors all said that additional ongoing training was needed.

Principal Activities

Account Managers reported providing technical assistance and training to schools as their principal activities. In addition, they often served as a liaison with the school, the Servicer, and the software contractor in solving technical problems.

At the beginning of operations, Account Managers provided much of the training and technical assistance in the field. Although Account Managers cited numerous advantages to onsite efforts, emphasis was placed on providing telephone-based technical assistance. Some Regional Offices were asked to limit or cease travel to schools because of budgetary restrictions. Most Account Managers were enthusiastic and dedicated to supporting the Direct Loan schools and were very customer service oriented. It was reported that some schools did not differentiate between the Account Managers and the Institutional Participation and Oversight personnel. Account Managers felt that this led to schools' reluctance to call for assistance for fear of prompting an institutional review.

Direct Loan Regional Offices

Of the 19 schools visited, five used their respective Regional Offices for technical assistance, and were very satisfied with this service. The reasons cited by other schools for not calling the Regional Office for technical assistance included: 1) the FAO was not sure what help the Account Managers would provide, 2) the FAO did not perceive the Account Manager to be sufficiently knowledgeable, and 3) the FAO called the Direct Loan Servicer, commercial software vendor, or a Direct Loan Task Force member to obtain assistance.

National Question and Answer Database

At the time of the site visits, the Regional Offices were collaborating to develop a National Question and Answer (Q&A) database. The objective was to combine all school-based questions and appropriate responses into a single resource that could be used by all Account Managers to provide uniform responses to schools.

Training for Schools

Eventually, each Regional Office will have a state-of-the-art training facility onsite. At the time of the five site visits, three of the training facilities were operational. Two of the three operating facilities were offering regularly scheduled sessions in Title IV updates and Direct Loan training for Year Three schools.

Relationship With ED

Account Managers reported regular, ongoing communication with ED and the Task Force through weekly conference calls. Most offices had a single member of the Task Force designated as their liaison to call with technical questions. The Account Managers said they need to be more informed about activities taking place at ED. They would like to receive ED communications before the schools do and more frequent updates on policy and software changes so that when schools have questions, they are better prepared to respond.

Ongoing Issues for Program Year Three

While case study schools were generally satisfied with Direct Lending, issues have emerged that may affect future satisfaction with the program. These issues have either emerged during the first two years of program implementation but have not been fully addressed by ED, or they are issues stemming from new initiatives such as the Title IV WAN. They are briefly discussed below, and will be further examined in Year four of Macro's evaluation.

Computer Systems

Many of the case study schools' suggestions for improvement focused on computer systems and increased opportunity for technical training on all ED-supplied software, including any new versions. To address this, it was suggested that enhanced training be provided to schools on backing up data; installation and use of the Title IV WAN; and special EDExpress modules such as QUERY, report generation, and SSCR reporting.

Schools suggested that ED stress that Direct Lending is technology-dependent, commenting that schools need a strong technical support staff with detailed knowledge about financial aid processing in order to successfully implement the program.

Loan Processing

The main source of frustration for case study schools in all areas of loan processing (including loan origination, loan changes and cancellations, and reconciliation) stemmed from a lack of clear communication from the Servicer to inform schools when there were problems. For example, during Program Year One, schools did not receive PLUS Loan denial notices directly from the Servicer, but rather the notices were self-reported by students. Thus, alternative loan processing was often delayed for these students. At the time of the visits, the Servicer was sending this information directly to schools, solving the problem for Year Two.

Problems that could be rectified by timely, clear communication to schools included: erroneous loan origination transmissions; partial batch transmissions (by designing a batch system on EDExpress which reports the number of records in the batch to the Servicer and allows the Servicer to immediately notify schools of partial batch transmission); loan changes and cancellations (by sending a list of canceled or changed loans to schools on a regular basis); and reconciliation (by acknowledging each month's data separately).

Training

In addition to clearer communication, many of the problems that occurred during loan processing could be addressed with enhanced training and reference material. Schools expressed the desire for a "quick reference" as used in other ED programs and a "troubleshooting handbook" listing explanations of Servicer acknowledgment report codes and common errors and problems with possible solutions or corrective actions to take. Training on procedures for canceling loans--both before and after disbursements--was also suggested.

Counseling

Counseling has been an area of enhanced concern by schools and ED. The initial set of counseling material was reported to be excellent by schools. It was suggested that ED further refine some of this material--particularly the entrance and exit counseling videos and loan consolidation materials.

Customer Service

Despite the expanded resources offered to schools, case study schools reported varied levels of satisfaction with customer service staff from ED; Direct Loan contracting staff, including the Direct Loan Servicer; and the Account Managers. There were two main reasons offered by schools for not taking full advantage of the resources offered to them. The first was because they were not clear about who they needed to call for various problems. This was further exacerbated by the fact that some schools were bounced from one source to another and did not get their problems resolved in a timely fashion. The other reason was that schools did not think that customer service staff was knowledgeable about Direct Lending and other financial aid issues.

To rectify this problem, it was suggested that ED ensure that all customer service staff undergo adequate training and provide clear direction so that schools clearly know which entity to contact under various circumstances, such as reconciliation problems, hardware problems, and EDExpress problems.

Case Study Summary Report--Year Three

I. Introduction--The Case Study Component

A series of institutional case studies is part of Macro International's evaluation of the William D. Ford Federal Direct Loan Program commissioned by the U.S. Department of Education (ED). This Program consists of Federal Direct Stafford Loans (Subsidized and Unsubsidized), Federal Direct PLUS (Parent Loans for Undergraduate Students) Loans, and Federal Direct Consolidated Loans. The loan capital is provided by the Federal Government and the funds are delivered to the student through the schools. All loan payments are made to the loan servicer under contract to ED instead of to banks and credit unions.

The objectives of these case studies are to:

1) Assess schools' satisfaction with the timeliness and quality of the services and support provided by ED and its contractors;

2) Describe schools' workload under the Direct Loan Program, as compared to under the Federal Family Education Loan Program (FFELP); and

3) Describe schools' implementation processes for Direct Lending, including the following aspects:

• Determining whether the Direct Loan Program is simpler or more complex to administer at the institutional level than the FFELP;
• Identifying the most difficult and common problems that institutions experience in administering Direct Loans; and
• Identifying and highlighting best practices at institutions.

For the inaugural year of the evaluation (spring/summer 1994), five sites were selected from the first cohort of 104 institutions selected by ED to participate in Year One of Direct Lending. The case study teams collected data describing pre-implementation planning processes at those schools. The findings of the first year were reported in the Case Study Summary Report: Year One, submitted to ED in November 1994.

In the second year of the evaluation (fall 1994 through spring 1995), the initial five schools were revisited to evaluate the first year of implementation of the Program. Another 10 schools were selected: five from the first Direct Loan institutional cohort and five from the second Direct Loan institutional cohort; the latter schools were planning to implement Direct Lending in 1995-96. Both pre- and post-implementation data were collected at the five schools in the initial cohort; only pre-implementation data were collected from the five second-cohort schools. The findings of the second study year were reported in the Case Study Summary Report: Year Two, submitted to ED in May 1995.

In this, the third year of the study (fall 1995 through spring 1996), the Macro case study teams revisited the initial five schools from the first Direct Loan cohort and the five schools from the second cohort. Post-transitional implementation data were collected from the first-cohort schools; transitional implementation data were collected from the five second-cohort schools. Another 10 schools were selected: 5 from the second Direct Loan cohort and 5 from the third Direct Loan cohort (i.e., those joining the Direct Loan Program in 1996-97). As explained below, only four of the third-cohort schools were visited. Pre-implementation planning data and initial implementation data were collected from the new second-cohort schools, and preimplementation planning data were collected from the third-cohort schools. The decision to expand the sample of second-cohort schools was made in light of the larger proportion of schools that participated in the second cohort of the Direct Loan Program. Sampled schools were revisited to obtain a longitudinal view of the implementation of the Program and changes in perceptions. Table 1 summarizes the collection of case study data in the first three study years.

* Post-implementation signifies return visits to institutions by Macro.

This report is a summary of the findings from the 19 site visits completed in the third year of this study. A two-person team from Macro International visited each of the 19 schools between October 1995 and March 1996. Interviews at each school were conducted with key administrators and when possible, with students. Schools were also called back for clarification of specific points, when necessary.

Besides visiting the 19 schools in the third year of the Direct Loan Evaluation, the Macro case study teams visited five of the ten Regional Offices of the U.S. Department of Education. ED personnel at those Offices have been charged with assisting schools with Direct Lending administration. The Regional Offices selected for site visits were chosen on the basis of their proximity to schools already sampled for the study.

An individual case study report was written for each of the schools and Regional Offices visited. These reports were sent to case study sites to ensure accuracy. Each report was then submitted to the Department of Education.

To protect the confidentiality of all respondents, the schools were assigned identification numbers and the Regional Offices were assigned letters A through E. Each school and office will retain the same identification number or letter in all follow-up site visits.

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