Then, in November 1999, Education began offering a 0.25- percentage point reduction in the interest rate to borrowers who agreed to  repay their loans this way. Education Has Not Informed Borrowers about the Possible Cost Implications of EDA Participation or Prepayment Options

Education has not informed borrowers of the possible cost implications of  EDA participation nor has it systematically informed borrowers of their  prepayment options. To continue their  prepayments, such borrowers would have to send a check for any  prepayment or make arrangements to continue making prepayments  through EDA. Education saved an estimated $1.5 million in fiscal year 2001 as a result of  generating and mailing fewer bills to EDA borrowers. Conclusions

Regardless of the conclusions Education reached in its cost justification,  borrowers who enroll in EDA will benefit from paying a reduced interest  rate on their loans and the federal government will achieve administrative  cost savings. Education does not make clear that, in spite of the 0.25  percentage-point interest rate reduction, borrowers might incur more  interest cost over the life of their loans under EDA than they would if they  continued to sometimes make payments in excess of the scheduled  amount due.
What GAO Found

Since 1999, the Department of Education (Education) has offered a 0.25 percent interest rate reduction to borrowers who agree to an electronic debit (EDA) program. Borrowers pay a lower interest rate, while the federal government receives fewer late payments. Any revenue loss to the federal government from a reduced interest rate would be more than offset by a gain in revenue because some EDA borrowers who had previously paid by check would stop making periodic payments in excess of their scheduled amount due. By ceasing to make these prepayments, these borrowers would not pay off their loans as soon as they would have without signing up for EDA and, therefore, incur additional interest costs over the life of their loans. Although actual EDA enrollments have exceeded original estimates, Education lacks data on prepayment patterns after borrowers enroll in the program. Education has not informed borrowers of the cost implications of EDA participation, nor has it systematically informed borrowers of their prepayment options. GAO estimates that Education saved $1.5 million in administrative costs in fiscal year 2001 because it did not have to mail bills to EDA borrowers.