These two programs are among the largest of the federal government’s  credit programs. The borrower pays all interest costs. Subsidy costs are calculated by estimating the federal  government’s future cash flows for loans made or guaranteed in a  particular fiscal year, called a loan cohort. In FFELP, private lenders, such as banks, fund the  loans, and the federal government guarantees lenders a statutorily  specified minimum yield that is tied to, and varies with, market financial  instruments. When the interest rate paid by borrowers is below that yield,  the federal government gives lenders subsidy payments, called SAP. Moreover, the federal government, through state-designated guaranty  agencies, guarantees repayment of loans if borrowers default. FFELP cash flows are  spread out over the life of the loan. fees)
Under FDLP, the U.S. Treasury funds the loans, which are originated  through participating schools and contractors. Reestimated Subsidy Costs Differed from Original Estimates for Both Loan Programs

Both FFELP and FDLP reestimated subsidy costs have differed from  original estimates for loans made in fiscal years 1994 through 2004,  highlighting the challenges in estimating the costs of federal student loans. FFELP reestimated subsidy costs were similar to or lower than original  estimates for loans made in fiscal years 1994 to 2002, but higher than  originally estimated for loans made in fiscal years 2003 and 2004. In  comparison, FDLP reestimated subsidy costs were generally similar to or  higher than original estimates for loans made in fiscal years 1994 through  2004. FFELP Reestimated Subsidy Costs Were Generally Similar to or Lower Than Original Estimates, with the Exception of Loans Disbursed in Fiscal Years 2003 and 2004

Reestimated subsidy costs for FFELP loans disbursed between fiscal years  1994 and 2002 were, in general, close to or lower than original estimates,  while reestimated subsidy costs for loans disbursed in 2003 and 2004 were  higher than originally expected, as shown in figure 3. Recent Low Interest Rates, Increased Loan Consolidation, and Additional Data Contributed to Differences between Reestimated and Original Subsidy Cost Estimates

Differences between original and reestimated subsidy cost estimates per  $100 disbursed can be explained, in part, by lower than expected market  interest rates, greater than anticipated loan consolidation, and more data  on student loans incorporated into cash flow model. Differences between  actual and expected interest rates and rates of consolidations affected  reestimated subsidy costs for each loan program in a different way. Interest Rates Lower Than Previously Forecasted Contributed to Differences between Reestimated and Original Subsidy Cost Estimates

Interest rates fell to lower than expected levels in 2001 and persisted at  those levels through 2004, which affected subsidy cost estimates in both  FFELP and FDLP because estimates, especially for the FDLP, are highly  sensitive to changes between projected and actual interest rates. For FFELP, lower than expected interest rates have resulted in lower than  expected SAP to lenders, which, in turn, resulted in lower reestimated  subsidy cost estimates. Certain Federal Costs and Revenues Associated with the Student Loan Programs Are Not Included in Subsidy Cost Estimates

Additional federal costs and revenues associated with the student loan  programs, such as federal administrative expenses, some costs of risk  associated with lending money over time, and federal tax revenues  generated by both student loan programs are not included in subsidy cost  estimates. Under current law, federal administrative expenses are excluded from  subsidy cost estimates. Private-Sector Activity in Both Student Loan Programs Generates Tax Revenues for the Federal Government That Are Not Included in Subsidy Cost Estimates

Both FFELP and FDLP generate federal tax revenues that are reflected in  the revenue portion of the budget but are not included in subsidy cost  calculations. Education reviewed the report and had no comments.
Why GAO Did This Study

In fiscal year 2004, the federal government made or guaranteed about $84 billion in loans for postsecondary education through two loan programs--the Federal Family Education Loan Progam (FFELP) and the Federal Direct Loan Program (FDLP). Under FFELP, private lenders fund the loans and the government guarantees them a minimum yield and repayment if borrowers default. When the interest rate paid by borrowers is lower than the guaranteed minimum yield, the government pays lenders special allowance payments (SAP). Under FDLP, the U.S. Treasury funds the loans that are originated through participating schools. Under the Federal Credit Reform Act (FCRA) of 1990 the government calculates, for purposes of the budget, the net cost of extending or guaranteeing credit over the life of a loan, called a subsidy cost. Agencies generally update, or reestimate, subsidy costs annually to include actual program results and adjust future program estimates. GAO examined (1) whether reestimated subsidy costs have differed from original estimates for FFELP and FDLP loans disbursed in fiscal years 1994 through 2004, (2) what factors explain changes between reestimated and original subsidy rates--that is subsidy cost estimates per $100 disbursed; and (3) which federal costs and revenues associated with the student loan programs are not included in subsidy cost estimates.

What GAO Found

Both FFELP and FDLP subsidy cost reestimates have differed from original estimates for loans made in fiscal years 1994 through 2004, reflecting the challenges inherent in estimating the actual costs of loans made under each of these federal loan programs. Reestimated subsidy costs for FFELP loans were close to or lower than original estimates for loans made in fiscal years 1994 to 2002, but higher than originally estimated for loans made in fiscal years 2003 and 2004. FDLP reestimated subsidy costs were generally similar to or higher than originally estimated for loans made in fiscal years 1994 through 2004. Differences between original and reestimated subsidy cost estimates per $100 disbursed were, in part, due to market interest rates that were lower than originally forecasted, greater than anticipated loan consolidation, and the availability of additional data on student loans. Each of these factors has affected reestimated subsidy costs for each loan program in a different way. For example, interest rates fell to lower than expected levels in 2001 and the condition persisted through 2004. For FFELP, lower than expected interest rates have made the difference between the borrower interest rate and lender yield smaller than expected resulting in lower SAP paid to lenders, which in turn resulted in lower reestimated subsidy cost estimates. For FDLP, lower than expected interest rates contributed to higher reestimated subsidy costs because the government received smaller interest payments from borrowers than originally anticipated and, in some cases, the rate paid by student borrowers fell below the government's fixed borrowing rate. Certain federal costs and revenues associated with the student loan programs, such as federal administrative expenses, some costs of risk associated with lending money over time, and federal tax revenues generated by both student loan programs, are not included in subsidy cost estimates. For example, under current law, federal administrative expenses are excluded from subsidy cost estimates. Moreover, both loan programs generate federal tax revenues from private sector companies and investors that are encompassed in the revenue portion of the budget but are not included in subsidy cost calculations. Estimating the amount of federal tax revenues generated by the loan programs would be difficult and was beyond the scope of our review. Education reviewed a draft copy of this report and did not have any comments.