Repayment periods under these plans may be up to 25 years. Costs to  manage and collect payments on defaulted loans are also included in  administrative costs. For Direct Loans, subsidy costs represent the estimated long- term cost to the government of extending credit over the life of the loan,  excluding administration costs. Loan Cohort: A group of loans made in a  particular fiscal year. Total Direct Loan Administrative Costs Grew from $314 Million to $864 Million in Recent Years, but Costs per Borrower Have Generally Remained Steady or Fallen

		Total Direct Loan Administrative Costs Grew by $550 Million from Fiscal Years 2007 to 2012, Largely Driven by an Increase in the Number of Direct Loans

The Department of Education reported that full administrative costs (i.e. These Direct  Loan administrative costs represent 65 percent of the $1.3 billion in new  budget authority made available to the Student Aid Administration  account in fiscal year 2012, while administrative costs for other loan,  grant, and loan guarantee programs and activities made up the   Loan servicing, which includes activities related to  remainder.processing loan payments and maintaining borrower information, is the  largest category of reported administrative costs, comprising 63 percent  of total administrative costs in fiscal year 2012. Several factors contributed to the increase in the number of Direct Loans. Costs per Borrower and Other Unit Costs Have Generally Remained Stable or Fallen

While total reported administrative costs increased from fiscal year 2007  to fiscal year 2012, cost per borrower and other unit cost measures  remained stable or fell. According to Education officials, increased loan  volume resulted in a decrease in many unit costs. Recent changes in loan servicing contracts, combined with other factors,  have increased uncertainty about what servicing costs per borrower will  be in coming years. The  new contracts use a different pricing structure to encourage servicers to  keep more borrowers in a repayment status. Estimated Subsidy Costs Differ across Loan Cohorts and Fluctuate over Time

		Subsidy Costs Vary by Loan Cohort, and Current Estimates Show the Government is Expected to Generate Subsidy Income from Recent Cohorts

Reestimate: Annual recalculation of estimated  lifetime loan subsidy costs for each cohort,  incorporating updated information on actual loan  performance and revised assumptions about  future cash flows. However, current estimates for this group of loan  cohorts are based predominantly on forecasted cash flow data derived  from assumptions about future loan performance.on actual cash flows for these loans becomes available, subsidy cost  estimates will change. This will not  be known with certainty until all cash flows have been recorded after   As more information  loans have been repaid or discharged—which may be as many as 40  years from when the loans were originally disbursed. Past GAO work has  found that the difference, or “spread,” between the borrower interest rate  and government’s cost of borrowing was a key factor in determining  whether there is a positive or negative subsidy for Direct Loans. During this time, the  government’s cost of borrowing fell more sharply than borrower interest  rates. Subsidy Cost Estimates Fluctuate over Time Due to Regularly-Updated Data

Education’s estimates of lifetime loan subsidy costs have varied over time  based on updated information recognized during the reestimate process. Through the reestimate process, subsidy cost estimates are updated for  each loan cohort to account for information on actual loan performance  and the government’s cost of borrowing.2012 have experienced both downward and upward adjustments to the  estimated subsidy costs over time due to these reestimates. For example, the 2008 loan cohort was estimated  to generate as much as $9.09 in subsidy income per $100 of loan  disbursements based on the reestimate information published in the fiscal  year 2011 President’s budget. This represents a swing of  $9.33 per $100 of loan disbursements. Volatility in subsidy cost estimates for a given cohort is generally  expected to decrease over time. Because Direct Loan Costs Are Sensitive to Certain Variables, Borrower Interest Rates Cannot Be Set in Advance to Consistently Balance Government Revenue with Costs

		Direct Loan Costs Are More Sensitive to Changes in Government Borrowing Costs than to Other Selected Variables

Direct Loan costs fluctuate according to changes in certain variables, with  varying levels of sensitivity. In particular, Direct Loan costs are sensitive  to changes in the government’s cost of borrowing, which changes for  each cohort of loans depending on economic conditions and the  characteristics of the cohort.information on loan performance that results in fluctuations in the cost  estimates themselves, means that total Direct Loan costs cannot be  known with certainty until actual data are available at the end of the loans’  life cycle—a process which takes decades. Borrower Interest Rates Cannot Be Set in Advance to Consistently Balance Government Revenue with Direct Loan Costs

Since the total costs associated with Direct Loans, including  administrative and subsidy costs, are in flux until actual data are recorded  through the end of the loans’ life cycle, the point at which the government  covers loan costs without generating additional revenue—known as the  breakeven point—may also change throughout the life cycle of the loans  until actual information is available. As a result, borrower interest rates  that are needed to cover Direct Loan costs at one time may not cover  costs at another time. To determine whether or not the conditions that would break even for one  cohort would also break even for another cohort under different  circumstances, we experimented with certain aspects of the borrower  interest rate for two separate cohort years. Specifically, we altered the  index (the base market rate that student loan interest rates are pegged  to), the mark-up rate (the percentage-point increase over the base rate  that students are charged), and the differences in the mark-up rates  among loan types. We looked at how these changes to the borrower rates  would affect total Direct Loan costs, taking into account both  administrative and subsidy costs. Importantly, while changing the index and mark-up rates helped achieve a  temporary breakeven point for the 2014 cohort, the same borrower rate  scenarios did not yield the same results when applied to the 2019 cohort. A difference in outcome for these  two cohorts emerges because Direct Loan costs are sensitive to variables  that are projected to look very different for 2019 than they did for 2014. Indeed, when we changed the index  and mark-up rates for the 2019 cohort in the same manner that  approximated a breakeven point for the 2014 cohort, the resulting  estimates show the government incurring costs that would not be covered  by revenues from Direct Loans. However, available information illustrates the  difficulties of accurately predicting what these program costs will be, and  how much borrowers should ultimately be charged to achieve a particular  outcome. Specifically, fluctuations in the actual and expected costs of the  student loan program over time make it impractical to establish a  particular borrower interest rate that would consistently break even. Similarly, making frequent changes to the borrower  interest rate could help program costs more closely match revenue in the  short term, but it may confuse potential borrowers and complicate efforts  to make the program transparent to students. In  its comments, reproduced in appendix III, Education agreed with our  findings. Appendix I: Objectives, Scope, and Methodology

This report addresses (1) how the costs of administering the Direct Loan  program have varied in recent years, (2) how estimated subsidy costs  associated with the Direct Loan program have varied in recent years, and  (3) how changes in different variables influence the overall cost of the  Direct Loan program and the borrower interest rate needed to cover those  costs. This is referred to as a breakeven  analysis.
Why GAO Did This Study

Federal student loans issued under the Direct Loan program play a key role in ensuring access to higher education for millions of students. The costs of the program to the government include administrative costs like loan servicing. They also include subsidy costs, which are the estimated long-term costs to the government of providing loans, such as the government’s cost of borrowing and defaults on loans. Some have questioned whether borrower interest rates can be more precisely set to cover these costs without generating excess federal income. The Bipartisan Student Loan Certainty Act of 2013 required GAO to provide information on issues related to the cost of federal student loans.
This report addresses (1) how the costs of administering the Direct Loan program have varied in recent years, (2) how estimated subsidy costs have varied in recent years, and (3) how changes in different variables influence the overall cost of the program and the borrower interest rate needed to cover those costs.
GAO reviewed Direct Loan administrative cost data and analyzed subsidy cost data from Education for fiscal years 2007 through 2012, which are presented in nominal dollars throughout the report. In addition, GAO worked with Education to illustrate how changes in variables such as government borrowing costs could affect Direct Loan subsidy costs. GAO also examined whether borrower rates could be set so the government could cover Direct Loan costs without generating excess revenue (known as a breakeven analysis). GAO reviewed relevant federal laws, guidance, and reports; and interviewed Education and other agency officials.
GAO does not make recommendations in this report. The Department of Education agreed with our findings.

What GAO Found

Total Direct Loan administrative costs grew from $314 million to $864 million from fiscal years 2007 to 2012, but federal costs per borrower have generally remained steady or fallen. The increase in total administrative costs largely results from an increase of over 300 percent in the number of Direct Loans during that same time period. One key factor contributing to this loan volume increase was a law that ended student loan originations under a federally guaranteed loan program resulting in new originations being made under the Direct Loan program. Loan servicing--which includes activities like counseling borrowers on selecting repayment plans, processing payments, and collecting on loans in delinquent status--is the largest category of administrative costs, comprising 63 percent of total Direct Loan administrative costs in fiscal year 2012. While total administrative costs have increased, costs per borrower and other unit costs have remained steady or declined. For example, the servicing cost per borrower has remained roughly $25 over the six-year period we examined. However, a number of factors, including a new payment structure for loan servicing contracts to reward servicers for keeping more borrowers in repayment status, have created some uncertainty about the servicing cost per borrower in coming years.
Separate from administrative costs, estimated subsidy costs vary by loan cohort--a group of loans made in a single fiscal year--and change over time. Based on the Department of Education's (Education) recent estimates, the government would generate subsidy income for the 2007 to 2012 Direct Loan cohorts as a group. However, estimates will change, because current subsidy cost estimates for these cohorts are based predominantly on assumptions about future revenue and costs. Actual subsidy costs will not be known until all cash flows have been recorded, generally after loans have been repaid. This may be as many as 40 years from when the loans were originally disbursed, because many borrowers do not begin repayment until after leaving school, and some face economic hardships that extend their payment periods. Subsidy cost estimates fluctuate over time due to the incorporation of updated data on actual loan performance and the government's cost of borrowing, as well as revised assumptions about future revenue and costs, through the annual reestimate process. As a result, there can be wide variations in the estimated subsidy costs for a given cohort over time. For example, the 2008 loan cohort was estimated to generate $9.09 of subsidy income per $100 of loan disbursements in one year, but in the next year that same cohort had an estimated subsidy cost of 24 cents per $100 of loan disbursements, a swing of $9.33. Volatility in subsidy cost estimates for a given cohort is generally expected to decrease over time as more actual loan performance data become available.
Because Direct Loan costs fluctuate with changes in certain variables, borrower interest rates cannot be set in advance to balance government revenue with costs consistently over the life of the loans. In a simulation of how loan costs respond to changes in selected variables, the costs were highly sensitive to changes in the government's cost of borrowing. This, coupled with cost estimates regularly updated to reflect loan performance data, means the total costs associated with Direct Loans are in flux until updates are recorded through the end of the loans' life cycle, which takes several decades. Therefore, the borrower interest rates that would generate revenue to exactly cover total loan costs—known as breaking even—would change over time. To determine whether or not a set of conditions that would break even for one cohort would also break even for another cohort under different circumstances, GAO used data forecasted for future years to experiment with certain aspects of the borrower interest rate for two separate cohort years.
• GAO selected cohort years 2014 and 2019 because economic conditions may be different several years apart.
• For these cohorts, the following three aspects of the borrower interest rate were altered: the index (the base market rate to which student loan interest rates are pegged), the mark-up rate (the percentage-point increase over the base rate that students are charged), and the differences in the mark-up rates among loan types, including undergraduate, graduate student, and parent loans.
• GAO looked at how these changes to the borrower rates would affect total government costs, taking into account both administrative and subsidy costs.
• Changing the index and mark-up rates helped achieve a breakeven point based on current cost estimates for the 2014 cohort; however, cost estimates for this cohort will change as updated data become available over the life of the loans.
• When GAO applied the same index and mark-up rates that temporarily resulted in a breakeven point for the 2014 cohort to the 2019 cohort, it resulted in a net cost to the government.
• The difference in outcome for these two cohorts is because Direct Loan costs are sensitive to variables, such as government borrowing costs, that are projected to look very different for 2019 than they did for 2014.
• As illustrated in the simulation, the borrower interest rates that are needed to cover costs at one point in time may not be effective at another point in time and cannot be precisely determined in advance to enable the government to break even consistently.
Available information on Direct Loan costs illustrates the difficulties of accurately predicting what these program costs will be, and how much borrowers should ultimately be charged to achieve a particular outcome. Specifically, fluctuations in the actual and expected costs of the student loan program over time make it challenging to target a particular borrower interest rate that would consistently break even. Making frequent changes to the borrower interest rate could help program costs more closely match revenues in the short term, but it could confuse potential borrowers and complicate efforts to make the program transparent to students.