Conclusions

Developing reasonable estimates of subsidy costs for loan programs is a  complex task. Numerous assumptions must be taken into account and  projections must be made for the estimated life of the loans, which could  be up to 30 years. Because FDLP’s subsidy costs are determined largely by  interest rates—specifically the difference, or spread, between the borrower  and discount rates—and since interest rate fluctuations cannot be  predicted with any certainty, it is uncertain that the current trend in  negative subsidy costs for FDLP will continue. That being said, there are also other factors that affect the subsidy cost of  FDLP, such as origination fees paid by borrowers, defaults, subsequent  collections on defaulted loans, and the timing of loan repayments. While  Education is able to estimate origination fees close to the actual amounts in  the financial systems, the other key cash flows varied significantly. Additionally, Education’s current model for estimating FDLP subsidy costs  does not directly take into account certain key factors, such as  prepayments and consolidations. Objectives, Scope, and Methodology

This report responds to your request and that of the former Chairman of  the House Committee on the Budget that we prepare a report on the  financing of Education's William D. Ford Federal Direct Loan Program  (FDLP).
Why GAO Did This Study

The Department of Education runs two major federal student loan programs, the William D. Ford Federal Direct Loan Program (FDLP) and the Federal Family Education Loan Program (FFELP). Under FDLP, students or their parents borrow money directly from the federal government through the schools the students attend. Under FFELP, money is borrowed from private lenders, and the federal government guarantees repayment if the borrowers default. GAO investigated concerns about Education's reliance on estimates to project FDLP costs and a lack of historical information on which to base those estimates.

What GAO Found

GAO found that developing a reasonable estimate of subsidy cost for loan programs is complex. Many assumptions must be taken into account and projections must be made for the life of the loans. Because FDLP's subsidy costs are determined largely by interest rates and interest rate fluctuations cannot be predicted with any certainty, it is unclear whether the current trend in negative subsidy costs for FDLP will continue. In addition, other factors, such as origination fees paid by borrowers, defaults, subsequent collections on defaulted loans and timing of loan repayments, affect the subsidy cost of FDLP. Although Education is able to estimate origination fees close to the actual amounts in the financial system, other key cash flows varied significantly. Also, Education's current model for estimating FDLP subsidy costs does not directly take into account key factors, such as prepayments and consolidations.