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

II. Characteristics of the Sample

Type, Control, Size, and Level of Direct Loan Program Participation

A sample of schools was drawn from lists of schools participating in the first, second, and third Direct Loan cohorts.⁽⁴⁾ The Macro team selected schools that varied by type and control, region of the country, and estimated loan volume. The proprietary schools included in the sample were divided between technical and cosmetology schools, because those two types of schools serve different student populations.

School 22 was deleted from the sample. The selection criteria for that school required it to be a 4-year public institution, a member of the third cohort of Direct Loan schools, and located in ED's Region 10. The Macro team identified and contacted eight schools meeting those criteria. Four schools had decided not to participate in Direct Lending; two schools were delaying participation 1 year; one school's participation decision was still pending; and one school's Financial Aid Director could not be reached until the last week in March. The Macro Project Manager and ED Project Officer jointly decided to drop one school from the sample because time constraints precluded waiting to visit either of the last two schools or selecting a school from another region.

The case study sample contains three public 4-year, four public 2-year, four private 4-year, and eight proprietary schools (four cosmetology schools and four technical schools), representing all regions of the country. Variation in the sizes of the schools, as measured by approximate volume of loans, was considered an important selection criterion in differentiating between approaches to implementing Direct Lending. Larger schools, such as the 4-year schools with 5,000 to 8,000 borrowers, could take advantage of economies of scale in planning and implementing the Program. Planning processes, administration of financial aid, and resources for the larger, more complex schools were thought to differ greatly from those of the small schools with fewer than 100 borrowers or midsize schools with a few hundred borrowers. Table 2 summarizes the institutional type and control, the region of the country, the 1994-95 student loan volume, and the percentage of loan volume in Direct Lending in 1995-96 (and planned percentage participation of Year Three schools for 1996-97) of the sampled schools.

*1994-95 loan volume includes Subsidized and Unsubsidized Direct and FFELP Loans. PLUS Loans are excluded.

**Proprietary schools often do not follow standard academic year calendars; Accurate loan volume may not be available.

***Initially planned at 90 percent; may drop to 50 percent by July 1996.

****Planned level of participation in 1996-97.

Of the four first-cohort schools (Schools 1, 3, 4, and 5) phasing in Direct Lending, approximately 10 percent of the loans of Schools 4 and 5 remain in the FFELP. Two second-cohort schools planned to phase in Direct Lending--School 14 and School 19. At the time of the site visit, School 19 had 75 percent of its loan volume in Direct Loans; School 14 will not begin administering Direct Loans until fall 1996. All other schools were participating in Direct Lending at 100 percent of the volume of student loans. Third-cohort schools (Schools 21, 23, 24, and 25) were phasing the Direct Loan Program in with all or a portion of their entering students.

With the exception of Schools 4, 17, and 24, schools in the sample were performing all Direct Loan operations. Those three schools were designated by ED as Level 2 schools, which are required to have the Direct Loan Servicer perform some of the Direct Loan operations. School 20 contracted with a third-party servicer (TPS) to perform all Direct Loan processes except disbursement.

Loan Volume 1994-95 and 1995-96

In view of the fact that data collection began in October 1995 and ended in March 1996, only partial data were reported on loan volume for 1995-96 (Year Two of the Direct Loan Program). The period of data collection had the greatest effect on reported total loan volume at the proprietary schools. The majority of students in public and private 2-year and 4-year schools tend to borrow in the fall semester for the full year. In comparison, proprietary schools have a steady stream of new students borrowing as they enter school. Therefore, the loan volume reported for proprietary schools may have been substantially below the yearly total, while the loan volume for public and private schools was a closer estimate of yearly totals. (See Table 3.)

Although Subsidized Stafford Loan volume at most schools increased less than 5 percent, the reported volume of Unsubsidized Stafford Loans at some schools increased dramatically during 1994-95 (the last year in which complete data were available). For example, even with partial data, School 16 had a 34 percent increase in the volume of Unsubsidized Loans from 1994-95 to 1995-96; School 1 had a 14 percent increase; and Schools 2 and 11 each had a 12 percent increase. Between 1991-92 and 1994-95, School 4 experienced a 275 percent increase in loan volume. The Financial Aid Officer (FAO) at School 4 attributed much of that increase to greater student awareness of the availability of Unsubsidized Loans. She pointed out that although the rate of increase appeared to have slowed in 1995-96, yearly totals will probably rise again.

The trend in student borrowing is clear: students are borrowing more money, regardless of which loan program schools participate in. FAOs attributed increased borrowing to the following factors:

• Higher levels of need brought on by increased school costs;
• Lower proportion of school costs met by Pell Grants, State aid, and institutional aid;
• Lower proportion of cost met by publicly funded training programs; and
• Poor local economic conditions (e.g., unemployed workers borrow for living expenses while enrolled).

*NA signifies data were not applicable.

Proprietary and 2-year public schools have a high percentage of independent students; therefore, those schools administered very few PLUS loans. Only six of the sampled schools had more than 25 parent borrowers. Four of the six schools (see Table 4) reported a higher volume of PLUS loans from 1994-95 to 1995-96. Total PLUS loan volume at School 1 grew by 250 percent, at School 11 it almost doubled, and at School 2 it grew by more than 25 percent. The FAO at School 1 attributed the increase to higher out-of-state fees and parents experiencing a "credit squeeze" due to over-extended credit. The FAO at School 2 said that the typical calculated parental contribution based on Federal Methodology (FM),⁽⁵⁾ was higher this year than in many years and that parents were borrowing to meet it. Both FAOs said that PLUS interest rates are very competitive with those that most lenders offer, making PLUS loans particularly attractive. Other FAOs noted that the credit criteria of Direct PLUS Loans are more liberal than those of many private lenders, making it easier for parents to borrow in this Program. A greater extent of borrowing by students and parents was also attributed to the raised eligibility limits allowed by the 1992 Reauthorization of the Higher Education Act; however, most loan volume increases resulting from these raises in loan limits took place prior to 1994-95 or 1995-96.

*Table 3 lists the date on which the loan volume was calculated for these schools.

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