Stafford Student Loans

The cost of the Stafford Student Loan Program has come under increased scrutiny by public policymakers. Congress has tried to shift more costs to student borrowers by raising student loan interest rates, limiting program eligibility, and establishing unsubsidized loan programs. Congress is now exploring other ways to cut costs without affecting the program's mission of ensuring student access to loan capital. GAO looked at the effect that lower rates of return--as a consequence of cutting the subsidy rate--would have on the volume of Stafford loans supplied by commercial lenders. The rate of return most commercial lenders receive on Stafford loans is probably higher than the return necessary to retain them in the program, GAO concludes. As such, moderate reductions to the special allowance could generate substantial savings without jeopardizing the program's reliance on private loan capital. Guaranty agencies will continue to bridge the difference between student loan demand and loan capital supplied by commercial lenders through their direct loan programs. The guaranty agency lending necessary to offset the drop in commercial loans caused by a moderate reduction in the special allowance factor is well within their demonstrated lending capacity. A cut in the special allowance could increase the student loan market share controlled by large-scale commercial lenders. High-volume lenders have rarely left the program or curtailed their participation level. Therefore, a drop in future commercial loan supply caused by lowering the special allowance is likely to result from a few small-volume lenders leaving the program rather than from a proportionate decrease by all lenders. To capitalize on economies of scale, high-volume commercial lenders may absorb some of the student loan market abandoned by these small lenders.

GAO found that: (1) moderate reductions to the special allowance could generate substantial program savings without jeopardizing the program's reliance on private loan capital; (2) a special allowance factor of 3 percent could generate cumulative savings of about $421 million between fiscal years 1992 and 1996; (3) guaranty agencies would continue to offset the difference between student loan demand and loan capital supplied by commercial lenders; (4) the guaranty agency lending necessary to offset the drop in commercial loans caused by a moderate reduction in the special allowance factor is well within their demonstrated lending capacity; (5) since high-volume lenders rarely leave the program or curtail participation levels, a drop in future commercial loan supply caused by lower special allowances is likely to result from a few small-volume lenders leaving the program; and (6) to capitalize on economies of scale, high-volume lenders may absorb some of the student loan market abandoned by small lenders.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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