Consolidation loans are available  under Education’s two major student loan programs—the FFELP and  FDLP. Under FDLP, the federal government makes loans to  students using federal funds. For FDLP loans, the federal  government pays for administration costs directly. Consolidation Borrowers Had Higher Student Loan Debt and Incomes, Larger Loan Repayments, and Longer Repayment Periods

Borrowers with consolidation loans had a higher average amount of  student loan debt than nonconsolidation loan borrowers. Consolidation Borrowers Defaulted Less Often

Fewer consolidation loan borrowers in our sample had defaulted on their  consolidation loans than nonconsolidation borrowers had defaulted on  their loans. Interest Rates and Increased Loan Volumes Have Increased Federal Costs

Although recent trends in interest rates and consolidation loan volumes  have affected the FFELP and FDLP consolidation programs in somewhat  different ways, the net effect has been an increase in estimated subsidy  and administration costs for loans made in fiscal year 2003 as compared  with loans made in fiscal year 2002. Administration costs are not specifically tracked for either loan program,  but available evidence indicates that these costs have also risen. Under these  conditions, some borrowers may find it in their economic self-interest to  consolidate their loans so that they can lock in a low fixed interest rate for  the life of the loan, as opposed to paying variable rates on their existing  loans, regardless of whether they need a consolidation loan to avoid  difficulty in making loan repayments. Increased Special Allowance Payments to Lenders and Increased Loan Volume Caused FFELP Subsidy Costs to Rise

Estimated subsidy costs for FFELP consolidation loans are expected to  increase from $1.3 billion for loans made in fiscal year 2002 to almost   $3 billion for loans made in fiscal year 2003. In both years,  borrower interest rates for FDLP consolidation loans were somewhat  higher than the discount rate, resulting in a net gain to the government. Repayment Options Other Than Consolidation Loans That Allow Borrowers to Simplify Loan Repayments and Reduce Repayment Amounts Exist, but Borrowers’ Use of These Options Is Limited by Several Factors

Repayment options, other than consolidation loans, that allow borrowers  to simplify loan repayment and reduce repayment amounts are now  available to some borrowers under both FFELP and FDLP, but these  alternatives are not available to all borrowers. Table 7 compares the extent to which  borrowers can combine multiple loan payments into one, lower monthly  repayment amounts, and extend repayment periods under consolidation  and nonconsolidation options. Borrowers’ Choices between Fixed or Variable Rate Alternatives Affect Federal Costs

The choices that borrowers ultimately make will have consequences for  federal costs. For both programs, federal costs are also affected by the  repayment period chosen by borrowers. For example, borrowers who obtained a consolidation loan  in the past and are paying higher rates of interest would be provided the  opportunity to obtain a new consolidation loan at current (lower)  borrower interest rates. While consolidation loans may thus  remain an important tool to help borrowers manage their educational debt  and thus reduce the cost of student loan defaults, the surge in the number  of borrowers consolidating their loans suggests that many borrowers who  face little risk of default are choosing consolidation as a way of obtaining  low fixed interest rates—an economically rational choice on the part of  borrowers. An assessment of the advantages  of consolidation loans for borrowers and the government, taking into  account program costs and the availability of, and potential changes to,  existing alternatives to consolidation, and how consolidation loan costs  could be distributed among borrowers, lenders, and the taxpayers, would  be useful in making decisions about how best to manage the consolidation  loan program and whether any changes are warranted.
Why GAO Did This Study

The federal government makes consolidation loans available to help borrowers manage their student loan debt. By combining loans into one and extending the repayment period, a consolidation loan reduces monthly repayments, which may lower default risk and, thereby, reduce federal costs of loan defaults. Consolidation loans also allow borrowers to lock in a fixed interest rate--an option not available for other student loans--and are available to borrowers regardless of financial need. GAO was asked to examine (1) how consolidation borrowers differ from nonconsolidation borrowers; (2) how federal costs have been affected by recent interest rate and loan volume changes; and (3) the extent to which repayment options--other than consolidation--are available to help simplify and reduce loan repayments.

What GAO Found

On average, consolidation loan borrowers, over the 1987 to 2002 period, had higher levels of student loan debt, higher incomes, and larger loan repayments than did nonconsolidation borrowers. For example, the average student loan debt among consolidation borrowers prior to consolidating their loans was about $22,000 versus about $10,000 for nonconsolidation borrowers. As a group, they defaulted less often on their consolidation loans than borrowers who did not consolidate their loans. Recent trends in interest rates and consolidation loan volumes have affected consolidations in 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)--in different ways, but in the aggregate, estimated subsidy and administration costs have increased. Subsidy costs for FFELP consolidation loans grew from $1.3 billion for loans made in fiscal year 2002 to nearly $3 billion for loans made in fiscal year 2003. Lower interest rates available to borrowers in fiscal year 2003 increased these costs 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 loan borrowers pay. Higher loan volumes also added to the estimated subsidy costs. Interest rates and loan volume also affected costs for FDLP consolidation loans, but in a different way. Because the interest rate the government charges borrowers has been somewhat greater than the interest rate that Education pays to finance its lending, consolidation loans have generated a net gain for the government in recent years. Lower rates paid by borrowers and reduced loan volume from recent record highs, however, reduced the net gain to $286 million for loans made in fiscal year 2003, down from $460 million the year before. While administration costs are not specifically tracked for either loan program, available evidence indicates that these costs have also risen. Alternatives to consolidation, such as the ability to make a single repayment to cover multiple loans and obtain extended repayment terms, now give some borrowers opportunities to simplify and reduce loan repayments, but not all borrowers can use them. As a result, consolidation loans may be the only option for some borrowers to simplify and reduce repayments. Borrowers' repayment choices--whether to obtain a consolidation loan or use other alternatives--have consequences for federal costs. While consolidation loans may remain an important tool to help borrowers, overall federal costs in providing for consolidation loans may exceed federal savings from reduced defaults. An assessment of the advantages of consolidation loans for borrowers and the government, taking into account program costs and how costs could be distributed among borrowers, lenders, and the taxpayers, would be useful for decisionmakers.