oversight

Federal Student Aid's Efforts to Ensure the Effective Processing of Student Loans Under the Direct Loan Program

Published by the Department of Education, Office of Inspector General on 2010-09-16.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Final
                                      UNITED STATES DEPARTMENT OF EDUCATION
                                                            OFFICE OF INSPECTOR GENERAL

                                                                     September 16, 2010

FINAL MANAGEMENT INFORMATION REPORT


To:                     William J. Taggart
                        Chief Operating Officer
                        Federal Student Aid

From:                   Keith West /s/
                        Assistant Inspector General for Audit

Subject:                Federal Student Aid’s Efforts to Ensure the Effective Processing
                        of Student Loans Under the Direct Loan Program
                        Control Number ED-OIG/X19K0008

The purpose of this Final Management Information Report is to provide the U.S. Department
of Education (Department), Federal Student Aid (FSA), with information that may be beneficial
to ensuring a smooth transition of Federal Family Education Loan Program (FFEL) schools to
the William D. Ford Federal Direct Loan Program (Direct Loan). The objective of our review
was to assess the status of FSA’s efforts to ensure the Common Origination and Disbursement
(COD) system can effectively process 100 percent of student loan volume1 under the Direct Loan
program as a result of the SAFRA Act (SAFRA), which was part of the Health Care and
Education Reconciliation Act enacted March 30, 2010, P.L. 111-152. Because of the new
requirements resulting from SAFRA, we performed this review to assess FSA’s efforts in
1) executing appropriate modifications to the COD contract given the anticipated increase in
Direct Loan volume; 2) providing technical assistance to impacted schools, and 3) preparing
contingency plans if the COD system cannot effectively handle the increased loan volume,
especially during the peak loan origination period. With respect to the scope of our review, we
found FSA took actions intended to ensure the effective processing of student loans as a result of
the 100 percent transition to the Direct Loan program.

In accordance with the Freedom of Information Act (5 U.S.C. § 552), reports issued by the
Office of Inspector General are available to members of the press and general public to the extent
information contained therein is not subject to exemptions in the Act.


                                                         BACKGROUND



FSA was created as a result of the Higher Education Amendments of 1998. FSA’s mission
includes ensuring that all eligible individuals benefit from federally funded or federally
guaranteed financial assistance for education beyond high school. To this end, FSA administers


1
     Stafford, PLUS and Consolidation loans 


    The Department of Education’s mission is to promote student achievement and preparation for global competitiveness by fostering educational
                                                      excellence and ensuring equal access.
Final Management Information Report
ED-OIG/X19K0008 	                                                                        Page 2 of 9

the Federal student financial assistance programs authorized under Title IV of the Higher
Education Act of 1965, as amended.

In Fiscal Year (FY) 2009, FSA delivered or supported the delivery of approximately $113 billion
in new aid to almost 13 million postsecondary students and their families through the Title IV
programs, which include the Direct Loan and FFEL programs.

       	 The Direct Loan program lends funds directly to students through participating 

          postsecondary institutions, with funds borrowed from the United States Treasury. 

          In FY 2009, the Department originated 7.3 million Direct Loans. 


       	 FFEL funds are provided by private and non-profit lenders, insured by loan guaranty
          agencies, and are reinsured by the Federal Government. In FY 2009, FFEL lenders
          originated 14.6 million FFEL loans.

FSA relies on contractors to provide the information technology systems that support the
operation of the Direct Loan program, as well as operational and maintenance assistance and
technical assistance to postsecondary institutions. One of the key systems is the COD system.
This system processes, stores, and reconciles data from several FSA programs, including the
Direct Loan program. The COD system was designed to provide a consistent process for
requesting, reporting, and reconciling Direct Loans. The COD contractor provides system
operation and maintenance, as well as a call center and technical support.

On March 30, 2010, the President signed the Health Care and Education Reconciliation Act
which included the SAFRA Act. SAFRA required that all new Federal Stafford, PLUS and
Consolidation loans be made through the Direct Loan program beginning July 1, 2010. It also
appropriated $50 million to the Department for FY 2010 to provide technical assistance to
institutions of higher education that were already participating or seeking to participate in the
Direct Loan program.

This review built upon work conducted during our recent audit of the Department’s Oversight of
the Direct Loan Program.2 In the related report, we noted that FSA took actions to estimate the
impact of significant changes on Direct Loan origination and servicing demands as a result of
student loan market conditions and authorities granted to the Department under the Ensuring
Continued Access to Student Loan Act (ECASLA), P.L. 110-227. FSA’s response to potential
volume increases included modifying existing contracts and awarding new contracts. Our report
also noted that FSA appeared to have access to sufficient resources to assist schools with the
transition to the Direct Loan program. Because of FSA’s reliance on vendor provided assistance
to successfully meet the demands of increased program volume, we suggested FSA ensure
effective contract monitoring practices were in place as well as provisions for appropriate system
testing to ensure affected systems will perform adequately under increasing processing
requirements.




2
     ED-OIG/X19I0006; issued November 24, 2009.
Final Management Information Report
ED-OIG/X19K0008                                                                                       Page 3 of 9



                                           OBSERVATIONS



With respect to the scope of our review, we found FSA took actions intended to ensure the
effective processing of student loans as a result of the 100 percent transition to the Direct Loan
program. Specifically, we found FSA executed contract modifications that expanded the COD
contract’s loan origination tier pricing structure3 to accommodate the projected origination
volume for FY 2010 and beyond, and subsequently ordered sufficient processing capacity in
relation to the anticipated FY 2010 COD origination volume. The contract also contains
requirements for the contractor to process unexpected increases in origination volume. In
addition, we concluded that FSA is providing appropriate technical assistance to impacted
schools and has reasonable plans in place to accommodate schools that experience challenges in
successfully transitioning to the Direct Loan program. Lastly, we noted that FSA has a COD
contingency plan in place that documents related disaster recovery procedures intended to assist
in resuming critical data processing support with the least amount of delay in the event of
disruption of data processing operations. However, FSA is completely reliant on the COD
system to originate loans. Origination operations cannot be transferred elsewhere in the event
the COD system experiences difficulties in processing increased loan volume, which would
likely result in delays.

Section 1 – Execution of Appropriate Contract Modifications

We determined that FSA executed contract modifications that expanded the COD contract’s loan
origination tier pricing structure to accommodate the projected origination volume for FY 2010
and beyond, and subsequently ordered sufficient processing capacity in relation to the anticipated
FY 2010 COD origination volume. The contract also contains requirements for the contractor to
process unexpected increases in origination volume.

Our review found that both FSA and the COD contractor prepared estimates of COD originations
for FY 2010 to reflect the changes in the Direct Loan program as a result of SAFRA. The COD
contractor projection of 30.3 million originations was slightly below the 33.5 million originations
projected by FSA.

FSA officials stated that they accepted the COD contractor’s projections because they were more
current and based on actual COD origination volume to date. As part of a technical assessment
of the Direct Loan origination process, the Office of Inspector General’s (OIG) Computer
Assisted Assessment Techniques Division analyzed the contractor’s FY 2010 COD origination
projections for accuracy and reasonableness. It determined the COD contractor’s projection was
supported and appeared to have a reasonable basis for the methodology used.




3
 Under the COD contract the Department commits to a level of service each FY based on the number of projected
originations. The related pricing structure for FY 2010 includes a base of 14,045,400 originations and additional
pricing tiers based on incremental increases of 1,872,720 originations.
Final Management Information Report
ED-OIG/X19K0008                                                                           Page 4 of 9

During work conducted as part of our audit of the Department’s Oversight of the Direct Loan
Program,4 FSA officials had indicated that the COD system could process 100 percent of FFEL
loan volume. However, the COD’s tier pricing structure was limited to 24 million originations,
which FSA felt was sufficient to handle any immediate increase in Direct Loan originations at
that time. We found that FSA subsequently modified the COD system contract in February 2010
to expand the pricing structure to Tier 11 (up to 34.6 million originations) through FY 2015,
which would be an adequate structure to accommodate either the COD contractor’s projections
or FSA’s original projection.

FSA notified the contractor of its selection of Tier 9 (30.9 million originations) through an email
dated April 21, 2010 and formalized this direction through a contract modification executed in
June 2010. FSA staff stated that it reviews the number of COD originations on a daily basis to
ensure it has ordered the appropriate tier level. A new tier level can be ordered at any time if
necessary. FSA staff stated that although it has funding to accommodate pricing at the Tier 10
level (32.8 million originations), it did not order this tier because it did not want to pay a higher
price than necessary for origination services. We noted the applicable contract modification
includes a provision that FSA would not be billed at a higher rate for origination levels that
exceed the ordered tier level until the originations are greater than 20 percent of the next tier’s
incremental increase in origination volume.

With regard to general operational capability, we found the COD contract, as modified through
March 1, 2010, includes clauses identifying the contractor’s responsibility to: a) support and
maintain the COD infrastructure necessary to support the origination and disbursement of Direct
Loans; and b) monitor the utilization of system technical capacity to identify and address any
shortfalls that may affect system performance.

Specifically, the COD contract, Section C.4.1, “COD Infrastructure Support,” states

           The Contractor shall support and maintain the infrastructure necessary to support the
           origination and disbursement of Direct Loans… . Infrastructure consists of the COD
           Data Center, COD Operations Center, and Customer Service Center.

Additionally, the COD contract Section C.4.5.1, “Performance Monitoring and Capacity
Planning,” states

           … The Contractor shall regularly monitor the utilization of system technical capacity in
           order to identify and address any projected shortfalls that may affect system performance.
           Capacity monitoring includes system utilization of CPU [Central Processing Unit],
           memory and physical storage.

FSA officials agreed that these clauses require the contractor to process unexpected increases in
origination volumes.




4
    See Footnote 2. 
Final Management Information Report
ED-OIG/X19K0008                                                                          Page 5 of 9

Section 2 – Technical Assistance Provided to Impacted Postsecondary Institutions

We concluded FSA is providing appropriate on-going technical assistance to schools and has
reasonable plans in place to accommodate schools that experience difficulties in transitioning to
the Direct Loan program. FSA has provided technical assistance through training opportunities
and other activities conducted by its Transition Team and technical assistance contractor. FSA is
also actively monitoring schools transitioning to the Direct Loan program to assess their related
progress and initiate follow-up activities where deemed necessary.

Training Opportunities

FSA incorporated several training opportunities and learning resources on its Training for
Financial Aid Professionals website. We noted several webinars and training workshops
designed to assist schools in their transition to the Direct Loan program. Learning resources
included topics such as Direct Loan reconciliation, tools, and reports; awarding and reporting
Direct Loans made at foreign schools; and using the COD website and other FSA software to
process Direct Loans. The webinars and workshops were provided between May and July 2010
or offered as self-paced training. FSA also held 15 conferences across the country between
February and April 2010, which featured information about the Direct Loan program, the
systems used to administer the program, and issues for schools to consider when implementing
the Direct Loan program.

Transition Team and Technical Assistance Contractor

In the summer of 2009, FSA created a Transition Team to assist schools in implementing the
Direct Loan program. The team identified schools that were expected to have an increased risk
of transition difficulty based on several factors, including those that lacked previous experience
with COD, required heightened cash monitoring, required conversions of legacy systems, and
were identified as small private institutions. FSA’s internal tracking report identified a total of
340 schools that met those criteria. FSA indicated that each of these schools was assigned a
point of contact on the Transition Team to directly resolve implementation issues.

Additionally, FSA acquired the services of a technical assistance contractor through the
execution of a task order in April 2010. The technical assistance contractor is required to
provide services such as consulting activities and support and must develop a tracking system for
the status of each school site support deployment. This task order also requires the contractor to
provide a "Virtual Financial Aid Office” to assist schools that fall behind in the transition process
or have insufficient staff to effectively transition.

FSA’s Transition Team may approve telephone or on-site support from its technical assistance
contractor to help a school in its transition process. On-site support may last from two to three
days to greater than a week. Related activities could include items such as validating the
school’s selected software solution and developing reconciliation procedures. FSA’s Transition
Team estimated that no more than 120 schools would likely need on-site assistance, based upon
information the team has compiled from working with all of the schools. As of July 8, 2010, the
technical assistance contractor reported it had received a total of 14 requests for telephone
support and 7 requests for on-site support. The contractor’s monthly status report through
June 2010 identified just one school as potentially unable to originate Direct Loans until after
mid-August 2010. In response, the contractor identified a risk mitigation plan that included the
Final Management Information Report
ED-OIG/X19K0008                                                                          Page 6 of 9

development of an implementation project plan and deployment of additional support resources
to further assist the school in its transition.

Transition Monitoring

FSA’s Business Operations staff is actively tracking the number of schools that have transitioned
to the Direct Loan program along with those that have not. FSA’s Direct Loan Transition Report
as of July 29, 2010 showed that FSA projected 2,575 domestic schools would need to transition
to the Direct Loan program through December 2010 and that 1,884 of these schools (73 percent)
had fully transitioned to the Direct Loan program since April 2010. FSA officials stated that on
average approximately 30 domestic schools transition to the Direct Loan program per day and
that these schools are reporting the transition process to be easier than expected.

The report also indicated that 136 of the 473 foreign schools (29 percent) needing to transition
had fully transitioned to the Direct Loan program since July 2010. FSA officials stated that
there were several reasons why they were not concerned about this. FSA explained that it was
not possible for foreign schools to be fully transitioned before July 1, 2010 because of statutory
requirements that did not allow them to participate in the program prior to that date. In addition,
FSA officials indicated that only about 25 percent of foreign schools actually generate a
significant amount of loan volume and that some of the schools operate on a different award year
and may not have a need to process any Direct Loans during the current award year.

FSA officials indicated that they have taken steps to assist schools that showed limited activity in
the transition process. This included providing programmatic information necessary to originate
Direct Loans to domestic schools that did not submit their intent to participate in the Direct Loan
program by April 2010, and contacting domestic schools that had not shown Direct Loan related
activity by July 2010. FSA further indicated it plans to contact senior officials at domestic
schools it considers to be non-responsive. FSA stated that during June 2010 it began actively
communicating with foreign schools that had not submitted amended Program Participation
Agreements and that it was conducting additional follow-up as part of its ongoing monitoring
efforts.

Section 3 – Contingency Plans

We found that FSA has a contingency plan in place for the COD system that documents the
disaster recovery procedures intended to assist in resuming critical data processing support with
the least amount of delay in the event of disruption of data processing operations. However,
FSA’s COD contingency plan does not address a situation where the system would be unable to
process loans due to increased origination demand. FSA officials indicated that they are
completely reliant on the COD system to originate loans and categorized COD as a single point
of failure because it is the only system that can originate Direct Loans. Origination operations
cannot be transferred elsewhere in the event the COD system cannot handle an increase in loan
volume or peak processing periods. There will likely be a delay in origination processing if this
occurs.

A draft of this report was provided to FSA for comment. After reviewing the draft, FSA notified
OIG that it did not have any comments.
Final Management Information Report
ED-OIG/X19K0008                                                                         Page 7 of 9



                      OBJECTIVE, SCOPE, AND METHODOLOGY 



The objective of the review was to assess the status of FSA’s efforts to ensure the COD system
can effectively process 100 percent of student loan volume5 under the Direct Loan program as a
result of SAFRA requirements. To meet this objective, we specifically assessed FSA’s efforts in
1) executing appropriate modifications to the COD contract given the anticipated increase in
Direct Loan volume; 2) providing technical assistance to impacted schools, and 3) preparing
contingency plans if the COD system cannot effectively handle the increased loan volume,
especially during the peak loan origination period. Accordingly, we reviewed applicable Federal
laws and regulations and policies and procedures. We reviewed a prior OIG management
information report related to Direct Loan program systems and compliance monitoring, as well
as an OIG technical assessment review of the Direct Loan program origination process. We
reviewed the origination projections related to the 100 percent Direct Loan transition that were
prepared by both FSA and the COD contractor. We also conducted interviews with applicable
FSA management and staff and evaluated relevant documentation to assess FSA’s actions with
regard to COD system processing capabilities. Additional information on the scope and
methodology is presented below.

Contract Monitoring

We met with FSA contracting staff to identify contractual actions taken to increase the COD
system capacity in response to anticipated volume increases. We reviewed contract
documentation intended to ensure that the COD system can absorb the anticipated increased
volume and that a pricing structure adequate for the increased volume was established. We also
reviewed the schedule of deliverables in the COD system contract to identify and review any key
deliverables related to the capacity of the COD system.

Technical Assistance

We met with officials from FSA Business Operations to gain an understanding of the plans and
actions taken to provide postsecondary institutions with technical assistance as they transition to
the Direct Loan program. We reviewed contract documentation related to the task order awarded
for Direct Loan Readiness Transition Support. We obtained the transition support contractor’s
weekly Project Status Tracking Reports through July 8, 2010 as well as the monthly status report
through June 30, 2010 and reviewed the reports for any identified issues, risks, and actions taken
to mitigate these events. We reviewed announcements for current and future training activities
and learning resources made available to impacted schools. We also obtained FSA’s Direct
Loan Transition Reports to identify the number of domestic and foreign schools that have fully
transitioned to the Direct Loan program as of July 29, 2010.




5
    See Footnote 1.
Final Management Information Report
ED-OIG/X19K0008                                                                       Page 8 of 9

Contingency Plans

We met with FSA contracting officials to discuss FSA’s contingency plans in the event the COD
system would not be able to effectively process peak loan volume. We also reviewed the COD
Contingency Plan.

The scope of this review was limited to FSA’s efforts to ensure the effective processing of
student loans as a result of the 100 percent transition to the Direct Loan program required by
SAFRA. We specifically reviewed the actions taken by FSA as a result of SAFRA’s enactment
on March 30, 2010. The fieldwork for our review was conducted at Department offices in
Washington, D.C., during the period May 2010 through July 2010. An exit conference with
Department officials was held on July 8, 2010.

We conducted our work in accordance with the OIG quality standards for Management
Information Reports.

If you have any questions, please call Sean Dawson, Assistant Director, Operations Internal
Audit Team, at (202) 245-6268.

cc:     Dawn Dawson, Audit Liaison Officer, FSA


Attachment
Final Management Information Report
ED-OIG/X19K0008                                                         Page 9 of 9

                                                                       Attachment

                          Acronyms/Abbreviations Used in this Report


COD             Common Origination and Disbursement

Department      U.S. Department of Education

Direct Loan     William D. Ford Federal Direct Loan Program

ECASLA          Ensuring Continued Access to Student Loan Act

FFEL            Federal Family Education Loan Program

FSA             Federal Student Aid

FY              Fiscal Year

OIG             Office of Inspector General