In the early 1990s, prospective college students were guaranteed loans through the the federal government's Federal Family Education Loan (FFEL) program. As demand for FFELs grew beyond initial expectation, so to did the involvement of financial institutions, each with their own unique procedures and loan requirements. At the program's peak, over seven thousand banks and forty guarantee agencies were offering FFELs to the college-bound. The system's diversity eventually led to delays in the loan approval and dispersal process, which in turn added administrative burden to both schools and students.
Under the Student Loan Reform Act of 1993, the United States Department of Education undertook a reform of the student loan process. The resultant William D. Ford Federal Direct Student Loan Program (FDSL) makes use of new technologies to streamline loan request procedures, collecting applications via one central website and making for a largely paperless system. Electronic transfers of funds, electronic imaging of promissory notes and electronic application records improved operational efficiency resulted in cost-savings.
The FDSL system, perhaps in the boldest departure from previous student loan administration, replaced bank and guarantee agencies with federal government coffers, an effort which essentially by-passed the middle-man and allowed government to offer direct loans to students. To further streamline the process, FDSL empowered schools to help students initiate the loan process. FDSL also offered students loans with more flexible repayment options, an added benefit made available by working with a single loan originator. Finally, and in an effort to reduce the loan default rate, FDSL offered income-contingent repayment schedules, verified and monitored by the Internal Revenue Service.
In four independent surveys, schools involved in FDSL reported overwhelming satisfaction with its improvements in efficiency and simplicity. FDSL has also surpassed FFEL in accountability as one hundred percent of funds dispersed as part of 852,000 separate loans made in the program's first year of operation were accounted for. As further testament to its efficiency, FDSL received over 470 letters of praise from college and university presidents. The most important result of this program, however, is its flexible repayment options that allow graduates the financial flexibility to pursue any profession they choose; students report no longer feeling obligated to high income-earning career options for the sole purpose of debt repayment.