The Direct Loan Program Is Not a Safe Haven for High Default-Rate
Direct Loans not only introduces improved default prevention mechanisms,
but schools selected to participate in direct lending actually have lower
FFELP cohort default rates than FFELP-only schools.
The Department of Education's (ED) implementation of the Direct Loan
program and its efforts to address schools' student loan default rates should
be reviewed intheir entirety:
COHORT DEFAULT RATES ARE LOWER FOR SCHOOLS PARTICIPATING IN DIRECT LOANS...
According to the General Accounting Office, the average FY 1992
(the latest data available) FFELP cohort default rate for schools participating
in Direct Loans is 11.3%, compared with 15% FOR FFELP-only
schools. A school must be eligible to participate in FFELP in order to
be eligible to participate in direct lending and must maintain FFELP eligibility
after it enters the Direct Loan Program.
DIRECT LOANS REPRESENTS THE ENTIRE COMMUNITY OF ELIGIBLE SCHOOLS...
By law the Direct Loan program is required to achieve a reasonable
representation of all schools participating in federal student aid programs.
Proprietary schools represent the largest number of schools in both iret lending
and FFELP, but they represent the smallest percentage of loan volume.
ED INITIATIES RESULT IN A DRAMATIC REDUCTION IN DEFAULTS...
As a result of aggressive default prevention and default collection efforts
begun in 1989, net annual default costs were less than $500 million for the
past year. This compares to a high of $2.9 billion in FY 1991.
DIRECT LOAN CENTRALIZED DATA COLLECTION SAFEGUARDS AGAINST DEFAULTS...
The immediate and direct access to all student loan account activity provided
by the Direct Loan centralized database represents a revolutionary
breakthrough in default prevention. The availability of on-line, real-time data
on all Direct Loan borrowers will facilitate the Department's monitoring of
borrowers' loan repayment activity and calculation of schools' default rates in
a more timely, accurate manner. For the first time, a real default prevention
program can be initiated for both borrowers and schools. This level of
control is not available under FFELP, where default rate calculations lag two
years behind the current academic year.
STRENGTHENED DEFAULT PREVENTION MECHANISMS ARE TO BE INSTITUTED
IN BOTH DIRECT LOANS AND FFELP...
By December 1995, ED will publish final regulations to enhance the
FFELP's default-reduction initiative and provide additional default
prevention measures in direct lending. Among other important
modifications, the regulations will define a default measurement for direct
lending similar to the FFELP cohort default rate and will establish triggers,
similar to those in FFELP, that will kick out high default rate schools.