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A HISTORY OF DIRECT LOANS The William D. Ford Federal Direct Loan Program was initially authorized as a demonstration pilot by the Higher Education Amendments of 1992. The Student Loan Reform Act of 1993, a part of the Omnibus Budget Reconciliation Act of 1993, authorized that the program be implemented on a phased-in basis. Such a phase-in would be based on total guaranteed student loan volume: 5 percent in the first year, 1994-95; 40 percent in the second year, 1995-96; 50 percent in the third and fourth years, 1996-97 and 1997-98; and 60 percent in the fifth year, 1998-99. After the 1995-96 year, the loan volume percentages may be increased if institutional demand for participation is greater. The Direct Loan Program is intended to redress many of the problems that have grown over the last 25 years with the existing Federal Family Educational Loan Program (FFELP), primarily its complexity for schools and borrowers and its cost to the taxpayer. In fact, as part of the Budget Reconciliation Act of 1993, Direct Loans are scored as estimated by CBO to save over $4.3 billion by FY 1998. This savings is derived from the elimination of special allowances, administrative expense allowances, default claims, and interest benefits to lenders, guarantee agencies, secondary markets and servicers and the lower cost of funds made available by the government. Direct Loans are simpler. There are only three players: the student, the school and the Department of Education. Students complete only one application, the Free Application for Federal Student Aid (FAFSA). There is no need for a separate loan application to a bank. The school determines how much a student will need to borrow and electronically transmits all the required loan information to the Department of Education. When the loan is approved, the student simply signs a promissory note and the school credits the student's tuition account. The primary benefits to students are: They receive their loan funds much more quickly; and they know exactly whom to contact for deferments and repayment or any questions they might have about their loan, because their loans will never be sold. The benefits for schools are: greater control over the loan process by receiving the loan funds electronically; receiving tuition payments faster; and improving cashflow, a benefit for large schools as well as smaller ones. In the first year of the program 104 institutions participated. In the 1996-97 academic year (Year 3), the program has grown to include more than 1,700 institutions. Revised 7/1/96 |