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
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.