Student Consolidation Loans
Further Analysis Could Lead to Enhanced Default Assumptions for Budgetary Cost Estimates Gao ID: GAO-04-843 August 20, 2004The number of borrowers consolidating their federal student loans has increased substantially in recent years, with the total amount of loans being consolidated rising from $13 billion in fiscal year 1999 to over $41 billion in fiscal year 2003. This increase in consolidation loan volume and recent interest rate trends have increased the overall estimated long-term cost to the federal government of providing consolidation loans under the Department of Education's (Education) two major student loan programs--the Federal Family Education Loan Program (FFELP) and the William D. Ford Federal Direct Loan Program (FDLP). GAO is providing information on (1) the differences that exist between FFELP and FDLP consolidation loans and borrowers, (2) the extent to which borrowers with student loans under one program obtain consolidation loans under the other, and (3) how FFELP and FDLP borrower and loan characteristics and the movement of loans between the two programs are incorporated into Education's budgetary cost estimates for consolidation loans.
On average, during the 1995-to-2003 period, FFELP consolidation loan borrowers had higher levels of consolidation loan debt than FDLP consolidation loan borrowers. FFELP borrowers were also more likely than FDLP consolidation borrowers to have attended a 4-year school versus a 2-year or proprietary school. As a group, FFELP borrowers were less likely to default on a student loan prior to consolidation than FDLP borrowers. However, both FFELP and FDLP borrowers who had defaulted prior to consolidation were more likely to default on their consolidation loan than those who did not default prior to consolidation. Over the 1998-to-2002 period, an increasing share of both FFELP and FDLP underlying loan volume was consolidated into FFELP, while a decreasing share of underlying loan volume was consolidated into FDLP. Defaulted loans, however, whether from FFELP or FDLP, were much more likely to be consolidated into FDLP. In general, Education incorporates borrower and loan characteristics and movement of loans between programs into its budgetary cost estimates by (1) grouping loans with similar characteristics in risk categories, (2) forecasting loan volume for each risk category, and (3) applying various assumptions to each risk category based on historical and other economic data. Education incorporates the default history of borrowers into its cost estimates by grouping consolidation loans with underlying defaulted loans in a risk category and applying higher default rate assumptions to loans in this category. However, Education has not analyzed whether borrowers with an underlying defaulted loan will default on their consolidation loans at different rates based on the type of school attended. Education does incorporate assumptions based on variations in default rates by school type, but only for nonconsolidation loans. Our analysis demonstrates that the extent to which borrowers with an underlying defaulted loan default on their consolidation loan varies according to the type of school they attended.
RecommendationsOur 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.
Director: Team: Phone:GAO-04-843, Student Consolidation Loans: Further Analysis Could Lead to Enhanced Default Assumptions for Budgetary Cost Estimates
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Report to the Chairman, Committee on the Budget, House of
Representatives:
United States Government Accountability Office:
GAO:
August 2004:
Student Consolidation Loans:
Further Analysis Could Lead to Enhanced Default Assumptions for
Budgetary Cost Estimates:
GAO-04-843:
GAO Highlights:
Highlights of GAO-04-843, a report to House Committee on the Budget.
Why GAO Did This Study:
The number of borrowers consolidating their federal student loans has
increased substantially in recent years, with the total amount of loans
being consolidated rising from $13 billion in fiscal year 1999 to over
$41 billion in fiscal year 2003. This increase in consolidation loan
volume and recent interest rate trends have increased the overall
estimated long-term cost to the federal government of providing
consolidation loans under the Department of Education‘s (Education) two
major student loan programs”the Federal Family Education Loan Program
(FFELP) and the William D. Ford Federal Direct Loan Program (FDLP).
GAO is providing information on (1) the differences that exist between
FFELP and FDLP consolidation loans and borrowers, (2) the extent to
which borrowers with student loans under one program obtain
consolidation loans under the other, and (3) how FFELP and FDLP
borrower and loan characteristics and the movement of loans between the
two programs are incorporated into Education‘s budgetary cost estimates
for consolidation loans.
What GAO Found:
On average, during the 1995-to-2003 period, FFELP consolidation loan
borrowers had higher levels of consolidation loan debt than FDLP
consolidation loan borrowers. FFELP borrowers were also more likely
than FDLP consolidation borrowers to have attended a 4-year school
versus a 2-year or proprietary school. As a group, FFELP borrowers were
less likely to default on a student loan prior to consolidation than
FDLP borrowers. However, both FFELP and FDLP borrowers who had
defaulted prior to consolidation were more likely to default on their
consolidation loan than those who did not default prior to
consolidation.
Over the 1998-to-2002 period, an increasing share of both FFELP and
FDLP underlying loan volume was consolidated into FFELP, while a
decreasing share of underlying loan volume was consolidated into FDLP.
Defaulted loans, however, whether from FFELP or FDLP, were much more
likely to be consolidated into FDLP.
In general, Education incorporates borrower and loan characteristics
and movement of loans between programs into its budgetary cost
estimates by (1) grouping loans with similar characteristics in risk
categories, (2) forecasting loan volume for each risk category, and (3)
applying various assumptions to each risk category based on historical
and other economic data. Education incorporates the default history of
borrowers into its cost estimates by grouping consolidation loans with
underlying defaulted loans in a risk category and applying higher
default rate assumptions to loans in this category. However, Education
has not analyzed whether borrowers with an underlying defaulted loan
will default on their consolidation loans at different rates based on
the type of school attended. Education does incorporate assumptions
based on variations in default rates by school type, but only for
nonconsolidation loans. As shown below, our analysis demonstrates that
the extent to which borrowers with an underlying defaulted loan default
on their consolidation loan varies according to the type of school they
attended.
Default Rate of Consolidation Loan Borrowers Who Defaulted on a Loan
Underlying Their Consolidation Loan, by Program and School Type, Fiscal
Years 1995 to 2001:
[See PDF for image]
[End of figure]
What GAO Recommends:
GAO recommends that Education consider the type of schools
consolidation borrowers attended in developing the risk categories for
the department‘s budgetary cost estimates. Education generally agreed
with our recommendation.
www.gao.gov/cgi-bin/getrpt?GAO-04-843.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Cornelia Ashby, (202)
512-8403, ashbyc@gao.gov.
[End of section]
Contents:
Letter:
Summary of Key Findings:
Further Analysis Could Lead to Enhanced Default Assumptions for
Consolidation Loan Cost Estimates:
Recommendation for Executive Action:
Agency Comments:
Scope and Methodology:
Briefing Slides:
Appendix I: Comments from the Department of Education:
Figures:
Figure 1: Default Rate of Consolidation Borrowers Who Defaulted on a
Loan Underlying Their Consolidation Loan, by Program and School Type,
Fiscal Years 1995 to 2001:
Figure 2: Percentage of FFELP Consolidation Loan Borrowers with an
Underlying Default by School Type:
Figure 3: Percentage of FDLP Consolidation Loan Borrowers with an
Underlying Default, by School Type:
Abbreviations:
FDLP: William D. Ford Direct Loan Program:
FFELP: Federal Family Education Loan Program:
NSLDS: National Student Loan Data System:
United States Government Accountability Office:
Washington, DC 20548:
August 20, 2004:
The Honorable Jim Nussle:
Chairman, Committee on the Budget:
House of Representatives:
Dear Mr. Chairman:
Consolidation loans--available under both of the Department of
Education's (Education) two major student loan programs, the Federal
Family Education Loan Program (FFELP) and the William D. Ford Direct
Loan Program (FDLP)[Footnote 1]--allow borrowers who have multiple
student loans, possibly from different lenders and from different loan
programs, to combine their loans into a single new loan and extend
their repayment period. Consolidation loans can reduce borrowers'
monthly repayments, which may lower default risk and thereby reduce
federal costs of loan defaults. Current provisions of the program also
allow borrowers to lock in a fixed interest rate on their consolidation
loans, unlike other FFELP and FDLP student loans, which carry an
interest rate that varies from year to year. As we reported in October
2003 and in March 2004,[Footnote 2] the number of borrowers
consolidating their federal student loans has increased substantially,
with the total amount--or volume--of loans being consolidated rising
from $13 billion in fiscal year 1999 to over $41 billion in fiscal year
2003. This increase in consolidation loan volume and the lower interest
rates available to borrowers in recent years have increased the overall
estimated long-term cost to the federal government of providing
consolidation loans.[Footnote 3]
This report addresses your request that we expand upon the information
provided in our earlier reports on consolidation loans by determining
(1) what differences exist between FFELP and FDLP consolidation loans
and borrowers, (2) the extent to which borrowers with student loans
under one program obtain consolidation loans under the other, and (3)
how FFELP and FDLP borrower and loan characteristics and the movement
of loans between the two programs are incorporated into Education's
budgetary cost estimates. Our work is based on an analysis of a
representative sample of borrowers from Education's National Student
Loan Data System (NSLDS), a national database of student loan
recipients. Our analysis primarily focused on FFELP and FDLP borrowers
in the sample who originated consolidation loans from 1995, the first
full year in which loans were available under FDLP, through June 2003.
On May 20, 2004, we briefed your staff on the results of our work. This
report transmits the slides we used to brief your staff and conveys
additional school type information requested by your staff at the
briefing. Our key findings provided at the briefing are summarized
below, followed by the additional information we are reporting in
response to your staff's request. At the end of this letter, we provide
additional details on the scope and methodology of our work.
Summary of Key Findings:
In determining differences that exist between FFELP and FDLP
consolidation loans and borrowers, we found that on average, FFELP
consolidation loan borrowers, during the 1995-to-2003 time period, had
higher levels of consolidation loan debt than did FDLP consolidation
loan borrowers. The average consolidation loan amount among FFELP
borrowers was about $26,400 versus about $20,000 for FDLP borrowers.
FFELP consolidation borrowers were less likely than FDLP consolidation
borrowers to have attended a proprietary (for profit) school prior to
consolidation and were more likely to have borrowed while attending
graduate school. Overall, FDLP borrowers had higher default rates in 4
out of the 7 years between fiscal years 1995 through 2001.
Additionally, for borrowers who had defaulted prior to consolidation,
borrowers from both FFELP and FDLP were more likely to have defaulted
on their consolidation loan than those who did not default prior to
consolidation.
From fiscal year 1998 to fiscal year 2002, the share of underlying
FFELP and FDLP loan volume consolidated into FFELP increased, while the
share of underlying loan volume consolidated into FDLP decreased.
[Footnote 4] In fiscal year 2002 alone, 84 percent of FFELP loan volume
that was consolidated was done so under FFELP, while 16 percent was
consolidated under FDLP. With regard to FDLP loan volume consolidated,
58 percent was consolidated under FFELP, while 42 percent was
consolidated under FDLP. Defaulted loans, however, whether from FFELP
or FDLP, were much more likely to be consolidated into FDLP. For
example, in fiscal year 2002, 87 percent of defaulted underlying FFELP
loan volume and 92 percent of defaulted underlying FDLP loan volume
were consolidated under FDLP. According to Education officials, it is
not surprising that a larger share of defaulted underlying FFELP and
FDLP loan volume is consolidated into FDLP because requirements for
consolidating defaulted loans under this program are often less
stringent than those imposed by FFELP lenders. For example, FFELP
lenders may chose not to offer repayment plans based on income levels,
while FDLP is required to offer such a plan to eligible borrowers. In
addition, an FFELP lender may require that the borrower be employed,
while FDLP does not have such a requirement.
Education incorporates FFELP and FDLP borrower and loan
characteristics, and the movement of loans between the two programs,
into its budgetary cost estimates by (1) grouping loans that share
similar characteristics in risk categories, (2) forecasting loan volume
for these categories, taking into account the movement of loans between
the two programs, and (3) applying various assumptions to the
categories, such as rates of interest, estimates of loan prepayment,
and rates of default. Among the risk categories Education uses to
estimate costs, for example, is one that includes consolidation loans
with underlying defaulted loans. Education forecasts the expected loan
volume for this risk category and then applies various assumptions to
derive an estimated budget cost for the loans. For example, Education
assumes that a certain proportion of loans placed in this risk category
will eventually go into default, thus increasing the federal
government's cost of the loans. Education sometimes makes different
assumptions for different groups. For example, Education assumes that
consolidation borrowers who have defaulted on an underlying loan will
default on their consolidation loans at a higher rate than will
consolidation loan borrowers who have not previously defaulted. In
estimating the costs of nonconsolidation loans--those that borrowers
may ultimately consolidate--Education groups loans based on the type of
schools borrowers attended (2-year, 4-year, proprietary, and so forth)
because experience has shown that these borrowers default on their
loans at different rates. However, Education does not group
consolidation loan borrowers in this way because consolidation loans
could reflect multiple underlying loans with different risk categories,
and it believes that other differences, such as default rates of
underlying loans, are more likely to significantly affect the estimated
costs of consolidation loans. For consolidation loans, however,
Education has not analyzed whether borrowers who consolidate a
defaulted loan default again, or redefault, at different rates based on
the type of school they attended. Because of data limitations,
Education was, until recently, unable to link consolidation loans to
borrowers' underlying loans. Education can now do this, making it
possible to determine whether redefault rates vary by type of school.
As a result of the additional analysis we conducted after the briefing,
we are making a recommendation to the Secretary of Education that he
direct Education's Director, Budget Service, to consider the type of
schools consolidation borrowers attended in developing the risk
categories for the department's budgetary cost estimates.
Further Analysis Could Lead to Enhanced Default Assumptions for
Consolidation Loan Cost Estimates:
Education's recently acquired ability to link consolidation loans to
borrowers' underlying loans allows it to conduct additional analyses,
which could be used to refine its budgetary cost estimates. In
particular, Education could expand its risk categories that currently
segregate consolidation loans by whether they have an underlying
default to also segregate by the type of schools borrowers attended.
Our analysis demonstrates that the extent to which borrowers redefault
on consolidation loans varies according to the type of school they
attended. By analyzing the extent to which borrowers will default on
their consolidation loans based on the type of school attended,
Education could determine the resulting impact on budgetary cost
estimates. This could be important since the proportion of
consolidation loan borrowers by type of schools attended has varied
over time. As these proportions vary, the total rate of default on
consolidation loans will likely vary as well, given that the type of
school borrowers attended affects default rates. In its report on
internal control, Education's auditor recently recommended that the
department better monitor consolidation loan activity and conduct
studies of the assumptions used in estimating the budgetary costs of
consolidation loans.
Extent to Which Consolidation Loan Borrowers Redefault Varies by Type
of School Attended:
According to our analysis, the extent to which borrowers consolidated
loans that included at least one loan on which they had defaulted, and
then subsequently defaulted on their consolidation loan, varies by the
type of school borrowers attended. For both FFELP and FDLP
consolidation loans originated from fiscal years 1995 to 2001, the
overall default rate for consolidation loan borrowers with an
underlying default was higher for borrowers who had attended a 2-year
or proprietary school than for those who had attended a 4-year school.
As figure 1 shows, for FFELP, the rate of default was 45.5 percent for
borrowers who had attended proprietary schools, compared with 29.6
percent for borrowers who had attended a 4-year school. We observed
similar relative default rates with respect to FDLP consolidation
loans. The lower rate of redefault among consolidation loan borrowers
who attended a 4-year school is consistent with the lower risk of
nonconsolidation loan borrowers who attended a 4-year school, compared
with borrowers who attended other types of schools.
Figure 1: Default Rate of Consolidation Borrowers Who Defaulted on a
Loan Underlying Their Consolidation Loan, by Program and School Type,
Fiscal Years 1995 to 2001:
[See PDF for image]
Notes:
(1) Analysis based on borrowers in the NSLDS sample who originated a
consolidation loan from fiscal years 1995 through 2001, plus any
underlying loans these borrowers originated from January 1, 1980,
through September 2001.
(2) Four-year, 2-year, and proprietary represent borrowers whose
underlying loans were obtained exclusively while attending these types
of schools. Two-and 4-year category represents borrowers whose
underlying loans were obtained while attending both 2-and 4-year
schools. All other represents borrowers whose underlying loans were
obtained while attending some combination of 4-year, 2-year,
proprietary, and foreign schools other than the categories listed
above.
[End of figure]
While figure 1 presents borrower rates of redefault, by school type, we
also analyzed borrowers' default rates by year of consolidation, by
school type. On this basis, we also observed differences by school
type. Moreover, we observed different borrower default rates by school
type for consolidation loans without an underlying loan default, and we
observed different dollar volume default rates by school type for both
consolidation loans with and without an underlying loan default.
Because Education assumes a similar rate of default among consolidation
loan borrowers without regard to the type of school borrowers attended,
Education's cost estimates may be excluding important risk factors
associated with specific school types. However, the impact of this
exclusion will not be known until Education performs an analysis of the
sensitivity of the cost estimates to different school types.
Share of Consolidation Loan Borrowers by Type of Schools Attended
Varied over Time:
Overall, the number of borrowers consolidating their student loans has
increased significantly in recent years, while the proportion of
borrowers by type of school attended has varied over time. As these
proportions vary, the overall rate of default on consolidation loans
will likely vary as well, given that the type of school borrowers
attended affects default rates. As shown in figure 2 for FFELP and
figure 3 for FDLP, generally there was an increasing share of
consolidation loan borrowers with an underlying defaulted loan who had
attended a 4-year school. At the same time there was a decreasing share
of consolidation loan borrowers with an underlying defaulted loan who
had attended a proprietary school. For example, for FFELP, the
percentage of consolidation loan borrowers with an underlying default
who had attended a 4-year school increased from over 30 percent in
fiscal year 1995 to almost 50 percent in fiscal year 2001. In contrast,
the percentage of consolidation loan borrowers with an underlying
default who had attended a proprietary school dropped from almost 50
percent in fiscal year 1995 to about 26 percent in fiscal year 2001.
Similar patterns are also observed with regard to FDLP consolidation
loans beginning in fiscal year 1996.
Figure 2: Percentage of FFELP Consolidation Loan Borrowers with an
Underlying Default by School Type:
[See PDF for image]
Note: Analysis based on borrowers in the NSLDS sample who originated a
FFELP consolidation loan from fiscal years 1995 through 2001, plus any
underlying loans these borrowers originated from January 1, 1980,
through September 2001.
[End of figure]
Figure 3: Percentage of FDLP Consolidation Loan Borrowers with an
Underlying Default, by School Type:
[See PDF for image]
Note: Analysis based on borrowers in the NSLDS sample who originated a
FDLP consolidation loan from fiscal years 1995 through 2001, plus any
underlying loans these borrowers originated from January 1, 1980,
through September 2001.
[End of figure]
While figures 2 and 3 present the variations in the percentage of
consolidation loan borrowers with an underlying default by school type,
we also analyzed volume changes by school type. On this basis, we also
observed similar variations in proportions by school type. Because
default rate assumptions are based in part on loans consolidated years
ago that had a different distribution of underlying loans by school
type than current consolidation loans, they may be less reliable than
they could be. This could result in less precise cost estimates for
consolidation loans.
Education's Fiscal Year 2003 Financial Statements Auditor Reported That
Improvements Were Needed in Education's Cost Estimation Process:
While Education received an unqualified audit opinion on its fiscal
year 2003 financial statements, the auditor's report on internal
control[Footnote 5] identified certain matters that it considers to be
reportable conditions,[Footnote 6] including matters related to
Education's cost estimates. Among other things, the report noted that
Education had made progress in refining various assumptions used in
estimating costs related to consolidation loans based on its recently
acquired ability to link consolidation loans to the paid-off underlying
loans. In light of the significant increase in consolidation loans in
recent years, however, the auditor recommended, among other things,
that Education continue to identify and gather data to better monitor
and report on consolidations, and accelerate studies to validate the
basis of assumptions used to determine the effect of loan
consolidations, to ensure timely updates of its cost estimates for the
best available information. To assist in addressing the auditor's
recommendations, as well as address recommendations contained in our
January 2001 report,[Footnote 7] Education officials have established a
"credit reform working group" to formalize and document assumptions
used in developing its budgetary cost estimates and to make its
estimates more transparent.[Footnote 8]
Recommendation for Executive Action:
To better reflect the impact of consolidation loans on Education's
budgetary cost estimates, we recommend that the Secretary of Education
direct Education's Director, Budget Service, to consider the type of
schools consolidation borrowers attended in developing the risk
categories for the department's budgetary cost estimates. Education
could use the credit reform working group as a vehicle to help the
Director, Budget Service, monitor this effort and assess the impact of
including the type of schools borrowers attended in the assumptions
Education uses to develop its budgetary cost estimates.
Agency Comments:
We provided a draft of this report to Education for review and comment.
In commenting on the draft, Education, in general, agreed with our
findings and recommendation. Education noted that it will conduct an
analysis to determine whether expanding risk categories is the best
approach and that if it does not expand risk categories it will track
and report on consolidating borrowers by school type. Education's
written comments appear in appendix I.
Scope and Methodology:
To answer the three research questions, we analyzed a randomly drawn,
representative sample of borrowers from NSLDS, which is a comprehensive
national database of Title IV loan and grant recipients. Our analysis
of the characteristics of borrowers and loans focused on FFELP and FDLP
borrowers in the sample who originated consolidation loans from 1995,
the first full year that FDLP loans were made, through June 2003.
Including only those years when both programs were in operation allowed
for more meaningful comparisons between programs. For the borrowers in
our analysis, we included underlying loans originated from January 1,
1980, through June 2003. To determine the extent to which borrowers
with student loans under one program obtain consolidation loans under
the other, we linked sample borrowers' consolidation loans to their
underlying loans and analyzed these data to determine the extent of
loan movement between programs. This linking analysis included
borrowers who originated consolidation loans from fiscal years 1995
through 2002, the most recent linking methodology data file available
at the time of our review. In order to develop the additional
information requested by your staff on consolidation loan default rates
by year and of borrowers by type of school attended, we focused on
FFELP and FDLP borrowers in the NSLDS sample who originated
consolidation loans from fiscal years 1995 through 2001. For these
borrowers we reviewed default information through June 2003 in order to
determine if these borrowers had subsequently defaulted on their
consolidation loans. This approach allowed sufficient time for more
recent loans that subsequently defaulted to appear as defaulted loans
in NSLDS. We interviewed officials at Education to determine how
Education incorporates FDLP and FFELP consolidation loan and borrower
characteristics and the movement of loans from one program to the other
in its cost estimates. We assessed the reliability of the NSLDS data by
reviewing financial statement audit reports and Education's annual
reports on NSLDS data reliability. We also interviewed external
auditors and Education officials on the reliability of NSLDS data. In
addition, we performed electronic testing of key variables in our
sample for obvious problems in accuracy and completeness. We determined
that NSLDS data were sufficiently reliable for this review. We
conducted our work from December 2003 through July 2004 in accordance
with generally accepted government auditing standards.
We are sending copies of this report to the Secretary of Education, the
Director of Education's Budget Service, and other interested parties.
This report is also available at no charge on GAO's Web site at
http://www.gao.gov. If you have any questions about this report,
please contact me at (202) 512-8403 or Jeff Appel, Assistant Director,
at (202) 512-9915. You may also reach us by e-mail at ashbyc@gao.gov
or appelc@gao.gov. Key contributors to this assignment were Susan Chin,
Julianne Hartman Cutts, Cindy Decker, and John Mingus.
Sincerely yours,
Signed by:
Cornelia M. Ashby:
Director, Education, Workforce,:
and Income Security Issues:
[End of section]
Briefing Slides:
[See PDF for images]
[End of slide presentation]
[End of section]
Appendix I: Comments from the Department of Education:
UNITED STATES DEPARTMENT OF EDUCATION:
OFFICE OF POSTSECONDARY EDUCATION:
Aug 4 2004:
THE ASSISTANT SECRETARY:
Ms. Cornelia M. Ashby:
Director, Education, Workforce,
and Income Security Issues:
United States Government Accountability Office:
Washington, DC 20548:
Dear Ms. Ashby:
Thank you for the opportunity to respond to the U.S. Government
Accountability Office's (GAO's) report entitled "STUDENT CONSOLIDATION
LOANS: Further Analysis Could Lead to Enhanced Default Assumptions for
Budgetary Cost Estimates" (GAO-04-843), which highlights the recent
growth in the volume of Federal Family Education Loan and Federal
Direct Student Loan consolidation loans. While we generally agree with
your findings, we believe there may be a better way to obtain the data
you discuss in your recommendation.
Your findings indicate a need to track the type of school associated
with underlying loans consolidated. To accomplish this, you recommend
that the Department expand risk categories used in cost estimation
models. There may be more efficient ways to monitor this information.
The Department will conduct an analysis to determine whether expanding
risk categories is the best approach.
The Department's current assumptions reflect default and re-default
experience of borrowers from various school types at an aggregate
level. If the Department does not expand risk categories, it will track
and report on consolidating borrowers by school type.
I appreciate your examination of this important issue. The Department
is committed to the continued development of our cost estimation model
for the Federal student loan programs.
Sincerely,
Signed by:
Sally L. Stroup:
[End of section]
FOOTNOTES
[1] Under FFELP, private lenders make consolidation loans to borrowers,
with Education guaranteeing lenders loan repayment and a minimum rate
of return. Under FDLP, Education uses federal funds to make direct
student loans.
[2] GAO, Student Loan Programs: As Federal Costs of Loan Consolidation
Rise, Other Options Should Be Examined, GAO-04-101 (Washington, D.C.:
October 31, 2003) and Student Loan Programs: Lower Interest Rates and
Higher Loan Volume Have Increased Federal Consolidation Loan Costs,
GAO-04-568T (Washington, D.C.: March 29, 2004).
[3] Lower interest rates available to borrowers have increased the cost
to the federal government because FFELP consolidation loans carry a
government-guaranteed rate of return to lenders that is projected to be
higher than the fixed interest rate consolidation borrowers pay. Higher
loan volumes in the FFELP program also add to the estimated costs of
consolidation loans. FDLP consolidation loans are made by the
government and thus carry no interest rate guarantee to lenders, but
changing interest rates and loan volumes affect the costs in this
program as well.
[4] The combination of declining interest rates and increased
consolidation loan marketing efforts by lenders has likely contributed
to the increase in the share of underlying loans consolidated into
FFELP.
[5] For the report of independent auditors, see Fiscal Year 2003
Performance and Accountability Report, U.S. Department of Education,
November 14, 2003.
[6] Reportable conditions are matters that come to the auditor's
attention that in the auditor's judgment should be communicated because
they represent significant deficiencies in the design or operation of
internal control, which could adversely affect the organization's
ability to record, process, summarize, and report financial data
consistent with the assertions of management in the financial
statements.
[7] GAO, Department of Education: Key Aspects of the Federal Direct
Loan Program's Cost Estimates, GAO-01-197 (Washington, D.C.: January
12, 2001).
[8] As we reported in March 2004, the credit reform working group will
also consider more formalized procedures related to performing and
documenting sensitivity analysis of its budgetary cost estimates,
according to Education officials. For additional information, see GAO,
Department of Education's Federal Direct Loan Program: Status of
Recommendations to Improve Cost Estimates and Presentation of Updated
Cash Flow Information, GAO-04-567R, (Washington, D.C.: March 29, 2004).
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