William D. Ford Federal Direct Loan Program U.S. Department of Education

The William D. Ford Federal Direct Loan (Direct Loan) Program lends funds directly to students and parents through participating schools. Created in 1993, this program is funded primarily by U.S. Department of the Treasury borrowings, as well as an appropriation for subsidy costs. As of September 30, 2016, FSA’s portfolio of Direct Loans included $958.9 billion in credit program receivables, net. In FY 2016, the Department made $94.7 billion in net loans to 9.8 million recipients.

Agency Accountable Official: Tim Soltis, Delegated to Perform the Duties of the Chief Financial Officer

Program Accountable Official: Jay Hurt, Chief Financial Officer, Federal Student Aid

Total Payments
$97.2B
Improper Payments
$3.9B
Improper Payment Rate
3.98%

Supplemental Measures

Current Measure: 59.26%

Target: 59.26%

Description: The total number of Direct Loan recipients who transferred tax data from the IRS to their Free Application for Federal Student Aid (FAFSA) as a percent of the total number of Direct Loan recipients who were determined to be eligible to use the IRS Data Retrieval Tool (IRS DRT) to transfer tax data. Use of the IRS DRT to directly transfer tax information from the IRS to the online FAFSA verifies applicants’ income and as applicable their parents’ income to determine how much aid they are eligible to receive. Errors in income reported on the FAFSA application is one of the root causes of improper payments in the Direct Loan program. Transferring tax data to the FAFSA with the IRS DRT helps ensure that the income reported is accurate, reducing the likelihood of an improper payment being made.

Update Frequency: Annually

Data Current as of: August 2016


Program Comments

The Direct Loan Program includes the drawdown of funds by schools, the origination of a loan and disbursement of funds from the school to the student (or their account); consolidations; servicing of the loan and collections from loan holders; and return of Title IV collections (undisbursed funds or overpayments) from schools.

To calculate an annual improper payment estimate for the Direct Loan Program, the Department of Education obtained approval from OMB in FY 2016 to use an alternative methodology. This alternative methodology leverages data collected through Federal Student Aid Program Reviews, which include procedures such as verifying student-reported income levels, student academic performance, and eligibility on the disbursed funds for a sample of students in each review. In addition, the Direct Loan estimate is based on samples of refunds and consolidations. In FY 2016, gross improper payments in the Direct Loan Program were estimated to be $3.87 billion, or 3.98% of total program outlays of $97.2 billion.

Root causes of improper payments in the Direct Loan Program include: incorrect self-reporting of an applicant’s income which leads to incorrect awards based on Expected Family Contribution (EFC); incorrect processing of student data by institutions during normal operations; student account data changes not applied or processed correctly; ineligibility for a Direct Loan (e.g., validity of high school attended, history of degrees obtained); satisfactory academic progress not achieved; and incorrectly calculated return records by institutions returning Title IV student aid funds. To prevent and reduce improper payments in the Direct Loan Program, the Department is pursuing several corrective actions.

One of the most recent significant actions that the Department is pursuing is to encourage applicants to retrieve certain income information directly from the IRS with the use of the IRS DRT. With just a few simple steps, applicants can view information from their IRS tax return and transfer that information directly into the FAFSA. Applicants who are eligible to use the IRS DRT are encouraged through various messaging to use the tool. Of those who fill out the FAFSA each year, some applicants indicate that they intend to file a tax return, but have not done so yet. These applicants must later retrieve their IRS data once they file or face verification by the school. For the 2017-18 award year, applicants will be able to complete their FAFSA using “prior-prior year” tax data. This is in contrast with the current “prior year” process where many applicants submit their FAFSAs before tax returns have been completed resulting in the need to estimate income and tax information that subsequently needs to be corrected once the tax return is filed; or worse, waiting to complete their FAFSA until after the tax return has been filed. Also, applicants will be able to initiate their application earlier in the 2017-18 award year. The start of the FAFSA cycle for 2017-18 will move up from Jan 1 to Oct 1.

Another key action in addressing the inaccuracies on the FAFSA, are the changes in verification regulations. Verification is the process required by the Department that schools conduct to confirm specific information reported on the FAFSA by the applicant. Annually, the Department analyzes grant recipients and the verification selection system, and informs the financial aid community of what FAFSA items are subject to verification for the upcoming award year. This annual analysis is performed to enhance verification methodology and to meet the goal of selecting the applicants who are most likely to have incorrect information on their FAFSA.

In addition, Federal Student Aid’s Program Compliance office works to promote accountability in the administration of Title IV student financial aid through institutional oversight and enforcement. As part of its ongoing oversight and enforcement activities, Program Compliance conducts periodic recertification of all schools’ eligibility and issues loss of eligibility determinations to schools; assesses millions of dollars in final program review determinations and final audit determinations; and debars individuals from receiving assistance or benefits from any federal agency as a result of financial aid fraud or other criminal convictions. Additional information on the Department’s efforts to reduce and prevent improper payments in the Direct Loan Program can be found in its annual AFR (http://www2.ed.gov/about/reports/annual/2016report/index.html).