Education Dept.'s Transition to Direct Lending Gets Mixed Reviews at House Hearing

October 25, 2011

Has the transition in federal student loans to 100-percent direct lending been seamless or riddled with problems? It depends on whom you ask.

At a hearing on Tuesday of the U.S. House of Representatives higher-education subcommittee, Rep. Virginia Foxx, a North Carolina Republican who is the panel's chairwoman, said the federal government had failed to protect borrowers' personal and financial information and had provided inadequate customer service since last July, when it became the sole provider of federal student loans.

She cited a security breach that occurred earlier this month, when borrowers who logged on to the Education Department's loan-servicing site were able to see other borrowers' bank-routing numbers and loan-repayment histories. The lapse, which occurred while the department was in the midst of a transition to a new Web site, lasted about seven minutes and affected as many as 5,000 borrowers.

"Although the Department of Education had lofty promises of strong customer service when this transition began, many schools have voiced concerns about increasing instances of problems and mistakes," Representative Foxx said in an opening statement.

The panel's Democrats offered a starkly different view. They said the transition had been "seamless," with no disruptions in loan availability to students. Rep. Tim H. Bishop of New York, a former student-aid administrator, characterized the challenges some colleges faced in converting to the program as "growing pains," and argued that the "Armageddon-type projections of burden" on student-aid staffs had failed to materialize.

Rep. Ruben E. Hinojosa of Texas, the top Democrat on the subcommittee, noted that the department's inspector general had conducted several reviews of the transition, and found no "material issues."

'Bumps' and 'Obstacles'

Given the split in the subcommittee, it fell to the student-aid administrators called to testify at the hearing to provide a reality check. Though all three of them agreed that no students had been denied access to loans during the switch to direct lending, two described "bumps" and "obstacles" they had encountered in administering the program.

Mark Bandré, vice president for enrollment management and student affairs at Baker University, in Kansas, said his office spends more time helping students track down and understand the details of their loans than it used to.

"We are now doing most of the work that customer-service representatives used to do at the banks and guarantee agencies," he said.

Rondall H. Day, director of financial aid at Kennesaw State University, in Georgia, said colleges were "extremely concerned" that the addition of 15 new nonprofit servicers in the coming months would further confuse students.

Mr. Day also said that a delay in the awarding of contracts to guarantors to assist in preventing loan defaults had left "some schools scrambling to fill in the gaps."

"Schools and students need these services sooner rather than later," Mr. Day said.

The department is reviewing 22 proposals from guarantors, according to James W. Runcie, chief operating officer for the Office of Federal Student Aid.

In his testimony, Mr. Runcie described several steps the department had taken to ease the transition to 100-percent direct lending, including hiring a "chief customer experience officer" responsible for customer advocacy, financial literacy, and consumer protection, and for providing incentives for servicers to reduce student-loan defaults.

Asked about the security lapse, he said the department had taken the Web site down for 48 hours to fix the problem and had offered credit monitoring to affected students.

The Education Department made $102.2-billion in direct loans during the 2010-11 academic year, up from the $42.6-billion that it made before the end of bank-based lending.