To clarify our understanding of the administration of Direct Lending, the Macro teams obtained a description of the steps involved in processing a Direct Loan and administering the Program at each school. The topics discussed during the site visit approximated the temporal order of loan processing--from packaging financial aid through Direct Loan reconciliation.
Besides describing each procedure, respondents were asked about the type and frequency of problems, changes in workload (compared to FFELP, where appropriate), general satisfaction with the administration of that procedure, satisfaction with the technical support received for that procedure, and any plans for change. This section of the report summarizes schools' responses.
Packaging Financial Aid
School policies and practices in packaging loans were examined in relation to limiting or encouraging student borrowing. Five of the schools (Schools 1, 2, 14, 16, and 17) followed practices that may increase borrowing at maximum levels--such as automatically including maximum loans in the financial aid award letter and/or including a promissory note for maximum loan(s) with the award letter.(8) One FAO at a public 4-year school said the practice of including maximum loan amounts in the award letter encourages students to enroll and reduces the effort in the Financial Aid Office.
Nine schools (Schools 4, 5, 12, 15, 18, 19, 20, 21, and 24) had policies and practices aimed at limiting student borrowing. Schools with specific policies generally limited borrowing to the amount needed to meet tuition and fees. Other schools required students to specifically request a loan--often by filling out an additional school-based loan request form. Some included only the amount of "unmet need" in the award letter and did not list it as counting toward loan eligibility; others listed only eligibility for a Subsidized Loan. When completing a school's additional loan request form, the student was encouraged to request the minimum amount needed to attend school. One school did not process any loans other than Subsidized Loans.
Originating Loans
Typical Procedures
Once a student has decided to borrow money and the amount of the loan has been determined, the next step is the creation of the loan origination record. Mainframe schools usually imported Institutional Student Information Record (ISIR) data to create student aid records and then to create the loan origination record.
Schools with mainframe systems (whether interfaced to EDExpress or mirroring EDExpress) incorporated many of the same edits used in 1995-96 EDExpress software. When there were missing data or data outside normal parameters were entered, the system prevented transmission of the record to the Servicer until the data were corrected, alerting the FAO to correct the data. Efficiency of loan administration has been improved by lowering the number of records rejected by the Servicer. In smaller schools, the most common practice was to key all origination data into EDExpress.
As origination records were created, the commands for printing a promissory note are initiated. Origination records were then batched and transmitted to the Servicer, who responded with an acknowledgment report.
In comparison to the first year of Direct Lending, the process of loan origination became relatively simple after the staff became familiar with the procedures and all software bugs were removed from the system. Not all schools struggled through a transition period. Some schools commented that, "It was so easy we couldn't believe we were doing everything right." For other schools, the first six to eight weeks of Direct Lending were described as "a nightmare." Mistakes were common and new skills were mastered during the typical learning period. During the transition period, FAOs learned of the number of cases that were exceptions to the typical origination process taught during training. At those times, the full manuals, including training materials and guides, appeared to be of little use and FAOs said a "quick reference" guide would have been helpful due to the short time frame in which they were trying to originate the majority of the year's loans. Most FAOs reported frequent calls to the Servicer during the transition period because they did not have an easy reference to consult.
Batch Transmissions
One of the frequently mentioned problems with origination was incomplete batch transmissions. The FAOs were not always sure why a batch of records did not fully transmit to the Servicer. EDExpress has no built-in system for tracking batches transmitted to and from the Servicer. Although ED designed a sample form for that purpose, each school tended to design its own system. Schools 3 and 13 maintained a manual log of important data about each loan and each batch. School 11's mainframe matched the school's records to those in the Servicer's acknowledgment report, but the school did not keep track of batch transmissions, and the mainframe system did not identify missing records. The FAO at that school said that staff identified rejected records by trial and error.
Most schools maintained a log to keep track of batch identification number, date transmitted, number of records, type of records, and date of acknowledgment. Generally, schools only recorded the total number of records contained in that batch, not a list of contents. School 5 maintained a hard copy of the contents of each batch. The Servicer's acknowledgment only listed the number of records transmitted--not which records were transmitted and received. Schools became aware of transmission problems by matching the number of records transmitted to the Servicer with the number of records in the acknowledgment report; there was no special notification from the Servicer.
Some FAOs reported having difficulty identifying which records failed to transmit and reconstructing the batch for retransmission; however, School 5 said EDExpress will reconstruct a batch. Some larger schools would like to be able to transmit larger batches than the Servicer's limit of 50; but, that is hazardous because when schools submit a larger batch, they run a greater risk of incomplete transmission and decrease their ability to check the contents of the batches.
School 18 designed a viable solution to this problem. The FAO downloaded one batch at a time from the mainframe. Each batch was maintained on a diskette after the loans were originated in EDExpress and transmitted to the Servicer. Then, if a batch ever needed to be reconstructed, the FAO could easily retrieve the data from the diskette for that batch.
Two changes were suggested to alleviate the problems of incomplete transmissions. If EDExpress had the capability to incorporate the number of records in a batch into the transmission codes, the Servicer would be able to immediately identify partial transmissions and notify the school. Another remedy would be to redesign acknowledgment reports so that they individually list all records in the batch--regardless of the status of the records, allowing the school to quickly find out which records had failed to transmit.
PLUS Loans
The processing of Direct PLUS Loans was similar to that of Stafford Direct Loans for schools. One problem, identified in the first year of Direct Lending, was resolved by the Servicer. In Year One, schools were not informed of the PLUS Loan denial status until a parent submitted the letter of denial to the school. Often, parents would not forward this notice to the FAO, delaying origination of an Unsubsidized Stafford Loan for the student. This year, the Servicer notified the school of the accepted/denied status of the PLUS Loan, but without reporting the reason for denial. This practice eliminated delays in Unsubsidized Stafford Loan processing and protected the parents' privacy as well.
School 17 reported dissatisfaction with the processing of PLUS Loans. When the initial PLUS application was denied, the FAO originated an Unsubsidized Loan for the student. At the same time, however, the parent was allowed to reapply for a PLUS Loan with a co-signer. That confluence of events could result in both the student and parent receiving loans. To prevent this in the future, the FAO will delay 30 days before originating Unsubsidized Stafford Loans. He will also send the parent the information, in hope of expediting the process. He also pointed out that the process of switching to the Title IV WAN and the Federal Government shutdown delayed notification of PLUS status for as long as 2 or 3 weeks, instead of the expected 5 days.
Servicer Acknowledgment Reports
In comparison to the first year of Direct Lending, schools were having very few origination records rejected. That success can be directly attributed to the EDExpress edits, which prevent a loan record with incorrect or missing data from being submitted to the Servicer. Schools also found themselves experiencing fewer and fewer rejections as they became familiar with the process.
Schools reported needing one additional edit in the software. When originating loans, schools often used the anticipated graduation date the student listed on the Free Application for Federal Student Aid (FAFSA)--which was frequently incorrect. When the school tried to originate a loan with a loan period extending beyond the originally anticipated graduation date, the loan record was rejected. Some mainframe-using schools had already incorporated the edit. Other schools decided to avoid the problem by not automatically transferring the FAFSA date on origination records.
The Servicer's acknowledgment report uses codes to indicate the reason for rejecting an origination record. While some FAOs found the acknowledgment record to be clear and easily understood, others reported difficulty in understanding the error messages.
One school experienced a problem that may face multi-campus schools or school consortiums. Although its Central Loan Processing Office administered loans for seven divisions of the university, it transmitted loan records to the Servicer under a single school code, with no mechanism in EDExpress to keep track of which records came from each division. When acknowledgments of errors were received from the Servicer, the Loan Processing Office staff had problems in redirecting the error message to the appropriate division for correction. In general, schools have reported difficulty matching individual records with acknowledgment reports.
School 16 used the acknowledgment reports as a quality control tool to help identify problems and prevent their reoccurrence. The FAO noted that this helped refine the school's system. The school added additional checks and edits rather than simply correcting the errors and resubmitting the records. For example, after a number of records had been rejected because of the graduation-date problem, the school ceased using the graduation date listed on the FAFSA.
Quality of Technical Support
The majority of FAOs praised the Servicer's technical support staff for a friendly and supportive attitude in helping schools resolve origination problems. As noted earlier, the schools said that when the problems were relatively simple they received answers quickly. But the more difficult or complex the problem was, the less likely the support staff were able to resolve it immediately. The FAOs noted that the technical support staff almost always called back with an answer; the exception was with problems related to computer systems.
Satisfaction
Overall, FAOs interviewed from case study institutions reported being very satisfied with the origination process for Direct Loans. They commented that once they became familiar with the system, it proceeded smoothly and efficiently. Most FAOs assessed the level of effort as being equal to that of processing FFELP loan applications but consisting of different activities. With loan origination they had to key in data and correct rejected records; with FFELP they had to distribute and collect applications, complete the data on the school, and correct lenders' errors. Schools with multiple lenders reported that Direct Lending required less effort than FFELP because all loans come from a single source, eliminating the difficulties caused by variations in lender application forms. In some instances, originating Direct Loans was a new responsibility that required a moderate increase in that person's workload. For instance, School 5 and School 19 said that the person responsible for administrating Direct Loans in their Financial Aid Office had not had experience in administering FFELP Loans.
Promissory Notes
Typical Procedures
Promissory notes were usually mailed to the student's home, either with the award letter or after a student indicated they wanted to take out a loan. Students were then responsible for signing the note and mailing it or returning it in-person to the Financial Aid Office. If the note was produced near the beginning of classes or during the school term, the school kept the note at the Financial Aid Office and had the student sign it there. Staff members at the Financial Aid Office entered the receipt of the individual promissory note in the computer system as a status change.
Some schools printed both a Subsidized Stafford Loan and an Unsubsidized Stafford Loan on a single promissory note. Others preferred to have the student receive and sign separate notes to reinforce the fact that the student was taking out two distinct loans with different terms. In many cases, receipt of a signed promissory note served as the trigger for disbursing loan funds. School 16 made use of the pre-printed bar code on the promissory note and used a scanning machine to keep track of the notes in their mainframe system.
Some schools waited until they received the Servicer's acknowledgment of both the origination record and the promissory note before beginning the disbursement process. This prevented the school from disbursing a loan without an accepted origination record or signed promissory note and resulted in fewer unreconciled records during the reconciliation process.
Schools encountered very few problems with the promissory note process. School 11 reported being unable to track 4,000 promissory notes because the Servicer's acknowledgment report was not sorted by the batches submitted. School 11 did not, however, consider that inability to be a problem.
Satisfaction
All of the case study schools reported satisfaction with processing promissory notes. The FAOs considered that to be a part of the origination process and reported expending little or no extra effort beyond that needed to administer FFELP applications.
Drawdown, Disbursement,(9) and Refunds to Borrowers
Typical Procedures
When drawing down funds, all but two schools used the actual amount disbursed instead of an estimate to avoid having excess cash. For the first drawdown of the fall and spring semesters only, School 2 ran a program simulating the disbursement and then added an amount likely to cover the signed promissory notes expected to be returned in the next 2 days for the drawdown.
Five of the schools (1, 2, 15, 16, and 20) credited students' accounts and then drew down the amount of total credits. The remaining schools drew down the funds before disbursement. Schools 4 and 17, as second-level schools, had the Servicer draw down the funds. They disbursed loan funds after receiving funds from ED. Schools disbursing funds before drawdown were generally making a "paper float" because a) they were crediting the funds against the balance of tuition and fees owed to the school, and/or b) students' refund checks were mailed and not cashed until ED's funds had been received (within 48 hours of a request).
The drawdown request and disbursement of funds was usually done by the schools' Accounting or Business Office. School 19's central FAO drew down the funds and disbursed funds to each campus.
School 20 wrote a check to the student, then notified the third-party servicer (TPS). The TPS then requested the drawdown, which the school received two to three days later. Students endorsed the check back to the school. The FAO at School 20 points out that having the borrower endorse a check reinforces the idea that the student is receiving a loan. The school was floating the loan funds for approximately four days. However, since loans were limited to tuition and fees, there were no refunds and the "float" was actually a four-day delay between crediting the student's account and actually receiving funds from ED.
School 5 began uploading EDExpress data to the mainframe to develop a list of the names of students ready to have their loans disbursed. The 1994-95 EDExpress software did not provide the list; it only provided a total of dollars to be disbursed. The FAO at School 13 reported that the 1995-96 version of EDExpress allowed her to generate such a list, edit as needed, and delay disbursement of loans to students with poor attendance records who might fail to meet requirements for satisfactory academic progress.
In schools with mainframe systems, the drawdown calculation, disbursement to students' accounts, and calculation and cutting of the refund check were subsumed in a single automated process. In comparison, School 4--with an independent mainframe and PC system--entered disbursement data into the database of the mainframe. The FAO requested a student refund check from the Business Office and gave the student a release-of-funds form. The student took the form to the Business Office, which returned the form to the FAO after giving the student the refund check. Because the process entailed double-entering disbursement data into both computer systems, the FAO reported that it was more time consuming than under FFELP.
Satisfaction
The most greatly appreciated factor of the Direct Lending disbursement process was the speed with which loan funds were received and disbursed to students; there were very few delays. That speed-up produced other benefits as well, including:
FAOs 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 greatly reduced under Direct Lending. They also noted shorter lines of students waiting for loan checks.
Changing and Canceling Direct Loans
Typical Procedures
To change or cancel a loan, the origination record needs to be adjusted and resubmitted to the Direct Loan Servicer. All but one of the Level 1 schools returned the cash to their Direct Loan account and reduced the subsequent drawdown by that amount. Only School 5 returned the cash to the Servicer. School 5 had difficulties with calculating the drawdown amount in 1994-95, so now that the drawdown process is operating smoothly, it does not wish to change.
Problems arose at some schools if a second disbursement had to be changed or canceled or if a disbursement date had to be changed. Many FAOs were not sure how to process such changes and stated that the training did not address those issues and that the reference materials were unclear. School 18 reported that learning how to perform the function required a considerable amount of time; School 17's FAO said that changing loans was its "biggest headache."
Processing a loan change has the effect of creating a new loan record with a new identification number. This can potentially cause reconciliation problems because of multiple records for the same loan and instances of the number of loan records for a student exceeding the software's maximum. That problem was solved in the 1996-97 EDExpress software, in which changed loans carry the same identification number as the original loan record, and the maximum number of records per student was expanded.
Two schools reported that loan cancellations had been submitted to the Servicer but had not been processed. Thereupon borrowers began receiving repayment notices for the canceled loans. Both schools said their EDExpress records showed the loans canceled and the funds returned, but the Servicer told the borrowers that "the school is holding the money." Other schools did not discover that loan changes or cancellations had not been processed by the Servicer until the records failed to reconcile. That may have been caused by the Servicer's requiring a disbursement record before allowing a change to be processed.
Two mainframe schools experienced problems in programming loan changes or cancellations. School 15's mainframe "zeroed out" canceled second disbursements, but that was not acceptable to the Servicer. So the aid office had to double-enter the changes into the mainframe database and into the EDExpress system. School 2's program was incapable of canceling second disbursements and needed substantial reprogramming to comply with the Servicer's recording requirements. The FAO at that school said that the process of changing loans was much more complicated than he had anticipated and the Servicer was not flexible in helping the school arrive at a solution to the programming problem. In comparison, School 1--using commercial software--submitted a batch of 800 loan changes with no errors or problems.
Satisfaction
Because of the difficulties involved, a number of the FAOs were less than satisfied with the procedure of changing loans. However, once they had learned the procedures, most FAOs reported, that changing or canceling loans was easier under Direct Lending than under FFELP because the school 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 of the FAOs said that under Direct Lending, changing a loan is completely automated, requires the same action for all loans, and allows them to easily check the loan status. Under FFELP, schools sent a handwritten change form to the lender or guarantee agency. They were often unsure of the resolution and had no means of tracking the changes. Once FAOs understood the Direct Loan change process, they found it easier to track the changes.
The Importance of Sequence of Loan Processing Actions
Although EDExpress allows a certain amount of flexibility in processing, the software implicitly establishes a specific ordering of some events and actions. ED, through its training activities and the Regional Office Account Managers, has stressed the importance of sequencing the steps required to process loans. The Regional Office Account Managers stressed that reconciliation, when processed as part of this optimal sequence of actions, will more likely run smoothly. The exhibit below summarizes "optimal" sequencing of the steps in processing loans. It was compiled by Macro, based on data supplied by a broad range of school FAOs during the case study interviews. Although no serious problems occur if some steps are performed out of sequence, reconciliation may be easier if the correct sequence is followed consistently.
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The following examples were reported by FAOs as potential consequences of processing Direct Loan steps out of order:
If a loan is disbursed before receipt of the origination or promissory note acknowledgment reports, the school may be disbursing a loan that has not been booked. Early errors cause the subsequent records to be rejected, causing multiple unreconciled records for each loan and potentially leading to problems in audit and accounting.
Errors listed in the acknowledgment reports must be corrected before reconciliation, or records will fail to reconcile.
The Servicer must have a disbursement record before a loan change can be processed. If a change is submitted before a disbursement record is on file, the change will not be processed and loan records will fail to reconcile.
The acknowledgment of the promissory note must be received before reconciliation or the loan record may fail to reconcile. Promissory notes mailed to the Servicer near the end of a month may not yet be processed. If reconciliation is attempted early in the next month, those loan records will fail to reconcile. One FAO recommends waiting until the second week of the month to attempt reconciliation or to wait until acknowledgment of all promissory notes is received.
Schools must be aware of the role that timing of procedures plays in reconciliation. School 18 disbursed loan funds on its mainframe on a Friday and ran the EDExpress disbursement program on Saturday. Although the mainframe listed the disbursement as Friday, the EDExpress software listed the disbursement as the following Monday. The disbursement dates did not match and the records failed to reconcile. To avoid that problem, the school now disburses on the mainframe on Thursdays and downloads the data to EDExpress on Fridays.
Borrower Counseling
ED's Printed Materials
Almost all of the case study schools were using ED-produced counseling materials. With two exceptions, brochures were supplied to the schools in adequate numbers and on a timely basis. The FAOs reported a high level of satisfaction with the quality of the entrance and exit interview brochures. Although ED has produced handouts addressing the various repayment options, not all of the FAOs knew that.
Some FAOs expected to receive individualized exit-counseling materials for each borrower. The Direct Loan Servicer sends that information directly to the students instead of to the schools, but FAOs may request that they be sent to the school.
Videos
Reviews of the ED-produced videos were mixed. Some FAOs used and liked the entrance and exit videos, but many FAOs recommended less emphasis on drama and more concrete, specific information about repayment options and consolidation. School 15's FAO said she would use the videos if they provided enough information that she did not have to supplement them with an in-person presentation. Like other FAOs, she said that the videos did not hold the students' attention and did not present enough factual information in a realistic way. Some schools preferred the videos produced by lenders and guarantee agencies, while others said they were good, but out-of-date.
Level of Effort
Most FAOs said that counseling borrowers required the same level of effort in both Direct Lending and FFELP. Others reported some areas of decreased or increased effort. One FAO noted that under Direct Lending, counselors had substantially more time for counseling. Another FAO noted that exit counseling was simplified because the school no longer had to determine which servicer was involved each time. For schools that received assistance from lenders, the workload increased. One school noted that the loss of lender participation also meant the loss of added "banker credibility" with students. One FAO said that the need to train financial aid counselors about repayment options had temporarily increased the workload.
Reconciliation
In reporting on reconciliation issues, Macro was not privy to detailed reports stating the percentage of total loans reconciled at an individual school. Site visits occurred in the midst of the 1995-96 academic year cycle and Macro did not follow-up with institutions to gather final reconciliation statistics. We focused on evaluating the ease, usefulness and satisfaction with the reconciliation process as opposed to performing a statistical analysis of the reconciliation process. In asking if schools were up-to-date in the reconciliation process, in most cases, the responses were of an anecdotal nature rather than an absolute accounting of all loan records.
There were dramatic differences between Year One and Year Two schools' experiences with reconciliation. The majority of reconciliation problems among Year One schools were due to issues associated with a start-up program, such as software problems at the school or at the Servicer, limited understanding of the reconciliation process, or lack of training in reconciliation.
Those problems created database inconsistencies that required intensive intervention on the part of the Servicer or the Task Force. The Year One schools struggled with correcting 1994-95 records, but report that the software refinements, more available training, and better understanding of the reconciliation process greatly improved 1995-96 reconciliation.
Year Two schools, in comparison, reported having few if any unreconciled records. They encountered similar problems including software/hardware compatibility issues and a need to get up-to-speed on knowledge of the reconciliation process; yet with the Year Two improvements (mentioned above), problem resolution seemed much easier. At the time of the visits, Year Two schools either were completely up-to-date or were in the process of correcting the few rejected records.
Typical Procedures
For most of the schools in the sample, the FAO was responsible for reconciliation. The Business Office entered data on drawdown and receipt of funds into the mainframe system or submitted those data to the FAO to be entered into EDExpress. The FAO then checked the records for completeness and accuracy. The reconciliation file was then transmitted to the Servicer. Schools are required to reconcile Direct Loan transactions three ways:
The Cash Transaction Report--lists individual cash records including drawdowns, disbursements, and refunds;
The Cash Summary Report--lists summary cash records in a number of categories, including drawdown cash, cash disbursed, and excess cash; and
The Loan Detail Report--compares school and Servicer data for origination, promissory note, and disbursement for each student.
Schools must identify the unreconciled records, correct them, and resubmit them. Some FAOs noted that they could not always understand the codes used for records failing to reconcile and therefore did not know how to correct them.
Reasons for Failure to Reconcile
Schools reported that the majority of unreconciled records are loan detail records. As noted in the section of this report addressing the sequencing of tasks, there are several conditions that might cause out-of-sequence events records to fail reconciliation:
Promissory notes had not been processed or accepted by the Servicer;
Rejected origination or disbursement records had not been corrected before reconciliation; and
Loan changes were made before the Servicer had a disbursement record.
The Servicer's acknowledgment reports are cumulative records. If a loan record failed to reconcile in one month and was not corrected, it reappeared on the subsequent month's acknowledgment. That lag prevented schools from knowing which month's records were fully reconciled. It also led to problems for schools that created their records in 1994-95 but waited until 1995-96 to reconcile them. For instance, School 2 had to reprogram its system to add batch identification to 1994-95 records, and School 4 could not bring 1994-95 records into 1995-96 software.
Quality Assurance(10)
Since the beginning of Direct Lending, ED has provided schools with a Quality Assurance (QA) Guide. This guide contains an overview on quality assurance principles and includes a self-assessment for FAOs to administer. Most schools visited indicated that they were not using this guide or implementing any quality assurance procedures. Some FAOs commented that ED's QA processes seemed to be designed for larger, complex organizations and were of little value for smaller offices.
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