Education halts $1 billion direct-loan program

Facing less demand than expected for its direct college-lending program the Education Department has pulled the plug on an estimated $1 billion five-year project to service student loans.

Education awarded the Federal Direct Student Loan Program (FDSLP) in September 1996 to Electronic Data Systems Corp. USA Group Inc. and Raytheon E-Systems to provide all hardware software and personnel to track and process a portion of the more than $30 billion worth of college loans issued every year.

But when the contract's one-year term expired last month Education officials decided not to exercise the contract's optional years because the number of direct student loans had not increased as fast as originally estimated.

Through FDSLP the agency makes loans to students through schools participating in the program thereby cutting out middle-man financial institutions. At about $9 billion and 2.5 million loans annually the program accounts for about a third of the loans the department oversees each year. The Federal Family Education Loan Program (FFELP) an agency-backed program in which banks and credit unions lend money to students accounts for most of the remaining two-thirds.

The direct program was launched in 1994 in an effort to centralize and simplify the student loan process thereby bringing savings for taxpayers as more students opted to participate in the less-complicated direct program rather than the more involved FFELP. When they awarded the FDSLP servicing contract last year Education officials had expected the direct-loan program to grow from one-third of all student loans to 60 percent of loans by 1998. But Education officials now say FDSLP loan volume will remain at about a third of all loans.

"As it turns out now the direct loan program is pretty much stabilizing at about a third of the market.... And therefore we were getting much more servicing capacity than we were going to need " said Jerry Russomano director of program systems service in the department's Office of Student Financial Assistance Programs.

Education's decision to can the loan-servicing contract comes as Congress increases its call for an overhaul of the student financial-aid system. Critics on Capitol Hill have long questioned Education's direct-loan program.

"From the very beginning a number of our members here...questioned whether the Department of Education ought to act as a bank for college students " said Jay Diskey director of communications for the House Committee on Education and the Work Force.

But politics apparently was not the reason for discontinuing the FDSLP servicing contract. EDS spokesman Randy Dove said "The department for budgetary reasons decided they weren't going to go forward with that contract. The real reason is budget."

Dove said his company was 95 percent finished with systems development and testing for the loan-servicing project. "We were certainly disappointed " he said. "Obviously it's business we were counting on."

The EDS E-Systems and USA Group teams each will get $13 million for work already performed on FDSLP.

The direct-loan program's flat growth may be tied to a series of congressional attacks on the agency's lending programs. In 1995 there was an attempt in Congress to kill the direct-lending program or place caps on the program's growth Education spokeswoman Stephanie Babyak said.

As a result some colleges may have been reluctant to sign up for the direct program reducing the number of students who knew about the program. "I'm skittish of the government doing any kind of massive processing because I don't think that's its strength " said Benny H. Walker vice president of enrollment at Furman University in Greenville S.C. "I didn't want to be a guinea pig especially when I was doing well [without the federal direct program]."

In addition the South Carolina Student Loan Corp. provides Furman students with direct lending like they would get through the federal program.Agency officials say that in the wake of the recent FDSLP contract cancellation Education will use an existing FDSLP loan-servicing contract with Computer Data Systems Inc. Rockville Md. That contract awarded at the end of 1993 covers nearly seven years and has an estimated value of $376 million.

By keeping all of the FDSLP servicing work with the CDSI contract Education will receive discounts from CDSI that will total $30 million in fiscal 1998 and $200 million over the next five years Babyak said.CDSI officials could not be reached for comment.