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entitled 'Student Loan Programs: As Federal Costs of Loan Consolidation 
Rise, Other Options Should Be Examined' which was released on December 
01, 2003.

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Report to Congressional Requesters:

United States General Accounting Office:

GAO:

October 2003:

Student Loan Programs:

As Federal Costs of Loan Consolidation Rise, Other Options Should Be 
Examined:

GAO-04-101:

GAO Highlights:

Highlights of GAO-04-101, a report to congressional requesters

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.

What GAO Recommends:

GAO recommends that the Secretary of Education assess the advantages 
of consolidation loans for borrowers and the government in light of 
program costs and identify options for reducing federal costs. Options 
could include targeting the program to borrowers at risk of default 
and extending existing consolidation alternatives to more borrowers. 
Education should also consider how best to distribute program costs 
among borrowers, lenders and the taxpayers. Education agreed with our 
recommendation.

www.gao.gov/cgi-bin/getrpt?GAO-04-101.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Cornelia Ashby at 
(202) 512-8403 or ashbyc@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

Consolidation Borrowers Had More Debt, Higher Incomes, and Differed in 
Other Ways When Compared with Nonconsolidation Borrowers:

Interest Rates and Increased Loan Volumes Have Increased Federal Costs:

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:

Conclusion:

Recommendation for Executive Action:

Agency Comments:

Appendix I: Comments from the Department of Education:

Appendix II: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Staff Acknowledgments:

Tables:

Table 1: Annual Income and Annual Student Loan Repayment of 
Consolidation Borrowers Compared with Nonconsolidation Borrowers 
Entering Repayment in 1999:

Table 2: Number of Lenders of Consolidation Borrowers Compared to 
Nonconsolidation Borrowers Originating Loans, January 1987 to November 
2002:

Table 3: Interest Rate Spread for FDLP Consolidation Loans Originated 
in Fiscal Years 2002 and 2003:

Table 4: Description of Borrower Repayment Plans:

Table 5: Comparison of Repayment Periods for FFELP Consolidation and 
Nonconsolidation Loans, by Repayment Plan:

Table 6: Repayment Periods for FDLP Consolidation and Nonconsolidation 
Loans, by Repayment Plan:

Table 7: Comparison of Borrowers' Options under Consolidation and 
Nonconsolidation Loans:

Figures:

Figure 1: Average Student Loan Debt of Consolidation Loan Borrowers 
Prior to Consolidation Compared with Nonconsolidation Borrowers 
Originating Loans January 1987 to November 2002:

Figure 2: Repayment Periods of Consolidation Loans Compared with 
Nonconsolidation Loans Originating from January 1987 to November 2002:

Figure 3: Type of School Attended by Consolidation Loan Borrowers 
Compared with Nonconsolidation Borrowers Originating Loans, January 
1987 to November 2002:

Figure 4: Percentage of Consolidation Loan Borrowers Who Borrowed for 
Graduate/Professional School Compared with Nonconsolidation Borrowers 
Originating Loans, January 1987 to November 2002:

Figure 5: Average Number of Loans of Consolidation Loan Borrowers 
Compared with Nonconsolidation Borrowers Originating Loans, January 
1987 to November 2002:

Figure 6: Percentage of Consolidation Borrowers Who Defaulted on 
Consolidation Loans Compared with Nonconsolidation Borrowers Who 
Defaulted on Loans, January 1987 to November 2002:

Figure 7: Consolidation loan volume increased as borrower interest 
rates fell:

Figure 8: Illustration of Estimated SAP Paid to Holders of FFELP 
Consolidation Loans Originated in Fiscal Year 2003:

Figure 9: Illustration of Net Subsidy Costs to the Federal Government 
for Consolidation Loans Made in Fiscal Year 2002 Using Three Different 
Sets of Interest Rate Assumptions:

Abbreviations:

FCRA: Federal Credit Reform Act:

FDLP: William D. Ford Direct Loan Program:

FFELP: Federal Family Education Loan Program:

HEA: Higher Education Act:

HEAL: Health Educational Assistance Loans:

IRS: Internal Revenue Service:

NSLDS: National Student Loan Data System:

SAP: special allowance payment:

United States General Accounting Office:

Washington, DC 20548:

October 31, 2003:

The Honorable John A. Boehner: 
Chairman: 
Committee on Education and the Workforce: 
House of Representatives:

The Honorable Howard P. "Buck" McKeon: 
Chairman: 
Subcommittee on 21st Century Competitiveness: 
Committee on Education and the Workforce:  
House of Representatives:

For over 2 decades, the federal government has made consolidation loans 
available to help borrowers cope with large amounts of federal student 
loan debt. Consolidation loans are designed to help borrowers stay 
current on loan payments, thereby reducing the government's costs of 
paying for defaults. Instead of making concurrent repayments on several 
loans over a period usually limited to 10 years, consolidation loan 
borrowers can combine their loans and extend their repayment periods 
beyond 10 years, thereby reducing monthly repayments. Consolidation 
loans also allow borrowers to lock in a fixed interest rate, unlike 
most other federal student loans, which carry an interest rate that 
varies from year to year. Between fiscal year 2000 and 2002, the number 
of borrowers consolidating their federal student loans nearly doubled 
to almost 1 million, and the total amount--or volume--of loans being 
consolidated rose even more sharply, from $12 billion to over $31 
billion. Consolidation loans are available under both of the Department 
of Education's (Education) two major student loan program--the Federal 
Family Education Loan Program (FFELP) and the William D. Ford Direct 
Loan Program (FDLP[Footnote 1])--and, in fiscal year 2002, accounted 
for about 44 percent of these programs' total loan volume.

The increase in consolidation borrowers and loans has raised 
congressional interest in the cost of the program for the federal 
government. Two main types of federal costs are involved. One is 
"subsidy"--the net present value of cash flows to and from the 
government that result from providing these loans to 
borrowers.[Footnote 2] For FFELP consolidation loans, cash flows 
include, for example, fees paid by lenders to the government and a 
special allowance payment by the government to lenders to provide them 
a guaranteed rate of return on the student loans they make. For FDLP 
consolidation loans, cash flows include borrowers' repayment of loan 
principal and payments of interest to Education, and loan disbursements 
by the government to borrowers. The subsidy costs of FDLP consolidation 
loans are also affected by the interest Education must pay to the 
Department of Treasury (Treasury) to finance its lending activities. 
The second type of cost is administration, which includes such items as 
expenses related to originating and servicing direct loans.[Footnote 3]

For years, consolidation loans were basically the only alternative 
available to borrowers seeking to reduce the size of their loan 
repayments. In recent years, however, some repayment options, such as 
graduated, extended, and income-based repayment plans, have been added 
to FFELP and FDLP. This change has raised congressional interest in the 
degree to which these options extend payment relief to borrowers 
without requiring them to consolidate their loans, and in the potential 
advantages and disadvantages of the various approaches, both for 
borrowers and the federal government. In light of the upcoming 
reauthorization of the Higher Education Act (HEA) (which authorizes the 
consolidation programs), you asked us to examine several issues 
concerning consolidation loans. As agreed with your office, we focused 
our work on answering the following key questions:

* How do consolidation loan borrowers differ from nonconsolidation loan 
borrowers?

* How are federal subsidy and administration costs for consolidation 
loan programs affected by recent interest rate and loan volume changes?

* To what extent do repayment options other than consolidation loans 
allow borrowers to simplify loan repayment and reduce repayment 
amounts?

Our work to answer these questions involved a variety of information 
sources, including officials from Education's Office of Federal Student 
Aid and Budget Service, as well as representatives of FFELP lenders. To 
develop information about student borrowers, we analyzed a sample of 
student loan data from Education's National Student Loan Data System 
(NSLDS)--a comprehensive national database of student loans, borrowers, 
and other information. The sample was a randomly drawn, representative 
sample that contained records on approximately 4.4 million loans held 
by 1.4 million students or their parents. The sample constituted 4 
percent of the overall NSLDS population of approximately 32 million 
students.[Footnote 4] To assess the reliability of the NSLDS data, we 
reviewed existing information about the sample and interviewed 
Education officials in Washington, D.C., responsible for performing 
data accuracy, validity, and integrity tests of NSLDS data. In 
addition, we performed electronic testing of key variables in our 
sample for obvious problems in accuracy and completeness. We determined 
that the NSLDS data were sufficiently reliable for this report. Our 
analysis on borrower characteristics focused on borrowers in the sample 
who originated loans from 1987 (the year consolidation loans were made 
available under the program as it is currently structured[Footnote 5]) 
to November 2002. To develop information about the family income of 
borrowers and their repayment amounts, we analyzed data provided by the 
Internal Revenue Service (IRS) on family income and Education on loan 
repayments for a sample of borrowers who entered repayment in 1999. Our 
analysis of federal costs of consolidation loans is also based in part 
on interviews with Education officials in Washington, D.C., and a 
review of relevant analyses prepared by Education. We reviewed the HEA 
and related Education regulations and other published information to 
identify the repayment options available to student loan borrowers. We 
conducted our work from July 2002 through August 2003 in accordance 
with generally accepted government auditing standards.

Results in Brief:

On average, consolidation loan borrowers, during the 1987 to 2002 time 
period, had higher levels of student loan debt, higher incomes, and 
larger loan repayments than did nonconsolidation loan borrowers. The 
average level of student loan debt among consolidation loan borrowers, 
prior to consolidating their loans, was about $22,000 versus about 
$10,000 for borrowers who did not consolidate their loans. 
Consolidation loan borrowers were less likely than nonconsolidation 
loan borrowers to have attended a proprietary (for profit) school and 
were more likely to have borrowed while attending graduate/professional 
school. Most consolidation loans had repayment periods that were longer 
than 10 years. In addition, consolidation loan borrowers, on average, 
had twice as many student loans as did nonconsolidation borrowers, and 
two-thirds of consolidation loan borrowers had loans from more than one 
lender, compared with about one-third of nonconsolidation loan 
borrowers. Overall, once they had consolidated their loans, borrowers 
with consolidation loans defaulted less often than borrowers who did 
not consolidate their loans.

Recent trends in interest rates and consolidation loan volumes have 
affected the FFELP and FDLP consolidation loan programs in different 
ways, but in the aggregate, estimated subsidy and administration costs 
have increased. For FFELP consolidation loans, subsidy costs 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 
paid by consolidation loan borrowers. When the interest rate paid by 
borrowers does not provide the full guaranteed rate to lenders, the 
federal government must pay lenders the difference. Higher loan volumes 
in the FFELP program also added to the estimated subsidy costs. FDLP 
consolidation loans are made by the government and thus carry no 
interest rate guarantee to lenders, but changing interest rates and 
loan volumes affected costs in this program as well. In both fiscal 
years 2002 and 2003, there was no net subsidy cost to the government 
because the interest rate paid by borrowers who consolidated their 
loans was greater than the interest rate Education must pay to Treasury 
to finance its lending. However, the drop in interest rates that 
occurred in fiscal year 2003, among other things, reduced the 
government's estimated net gain to $286 million for loans made in 
fiscal year 2003, down from $460 million for loans made the year 
before. A decrease in loan volume from recent record highs also 
contributed to the reduced gain. Administration costs are not 
specifically tracked for either consolidation loan program, but 
available evidence indicates that these costs have risen, primarily 
reflecting increased loan volumes.

Repayment options, other than consolidation loans, that allow borrowers 
to simplify loan repayment and reduce repayment amounts--such as the 
ability to make a single repayment to cover multiple loans and obtain 
extended repayment terms--are now available to some borrowers under 
both FFELP and FDLP, but these alternatives are not available to all 
borrowers. If borrowers have multiple loans from a single lender, they 
can make one monthly payment to cover all their loans. Many borrowers 
can also adjust the amount of their monthly payments so that they make 
smaller monthly payments at the start of repayment and larger monthly 
payments during later repayment periods for each of their individual 
loans. Moreover, borrowers with relatively large loan balances can 
extend their repayment periods beyond a 10-year term, which results in 
smaller monthly payments. While these alternatives to consolidation 
have been added, borrowers must meet certain criteria to be able to use 
them. For example, the ability to make a single payment is limited to 
borrowers whose loans are currently with a single lender, and the 
ability to extend repayment periods is, in some cases, limited to 
borrowers whose total loan balances are above certain limits. For 
borrowers who cannot use these options, consolidation loans remain the 
only vehicle under FFELP and FDLP by which they may combine multiple 
repayments into one and reduce the amount of their monthly repayments. 
Consolidation loans also allow borrowers to lock in a fixed interest 
rate for the life of the loan--an option not available to 
nonconsolidation loan borrowers in either program. The ability to lock 
in a low interest rate for the life of the loan is one factor that 
could motivate some borrowers to choose consolidation over other 
options. Borrowers' repayment choices, including whether to obtain a 
consolidation loan or use other repayment 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.

In this report, we recommend that the Secretary of Education assess the 
advantages of consolidation loans for borrowers and the government in 
light of program costs and identify options for reducing federal costs.

We provided Education with a copy of our draft report for review and 
comment. In written comments on our draft report, Education agreed with 
our reported findings and recommendations. Education's written comments 
appear in appendix I. Education also provided technical comments, which 
we incorporated where appropriate.

Background:

Congress created consolidation loans under Title IV of the HEA to help 
borrowers combine and reduce monthly repayments so as to help decrease 
federal loan default costs. Consolidation loans are available under 
Education's two major student loan programs--the FFELP and FDLP. Under 
FFELP, private lenders make loans to students with Education 
guaranteeing the lenders loan repayment and a rate of return on the 
loans they make. Under FDLP, the federal government makes loans to 
students using federal funds.

FFELP and FDLP Offer Several Types of Loans:

In addition to consolidation loans, a number of other types of loans 
are available under FFELP and FDLP, including subsidized Stafford, 
unsubsidized Stafford, and PLUS loans. Both subsidized and unsubsidized 
Stafford loans are variable rate loans that are available to 
undergraduate and graduate students. The interest rates borrowers pay 
on these loans adjust annually, based on a statutorily established 
market-indexed rate setting formula, and may not exceed 8.25 percent. 
To qualify for a subsidized Stafford loan, a student must establish 
financial need. Students can qualify for unsubsidized Stafford loans 
regardless of financial need. The federal government pays the interest 
on behalf of subsidized loan borrowers while the student is in school. 
Unsubsidized loan borrowers are responsible for all interest costs. 
PLUS loans are variable rate loans that are available to parents of 
dependent undergraduate students. The interest rates on these loans 
adjust annually, based on a statutorily established market-indexed rate 
setting formula, and may not exceed 9 percent. Parents can qualify for 
PLUS loans regardless of financial need.

Consolidation loans differ from Stafford and PLUS loans in that they 
enable borrowers who have multiple loans--possibly from different 
lenders, different guarantors,[Footnote 6] and even from different loan 
programs--to combine their loans into a single loan and make one 
monthly payment. Consolidation loans are new originations that, in 
general, do not contribute to increases in outstanding loan balances 
because they refinance already existing loans.[Footnote 7] By obtaining 
a consolidation loan, borrowers can lower their monthly payments by 
extending the repayment period longer than the maximum 10 years 
generally available on Stafford and PLUS loans. Consolidation loans 
also provide borrowers with the opportunity to lock in a fixed interest 
rate on their student loans, based on the weighted average of the 
interest rates in effect on the loans being consolidated rounded up to 
the nearest one-eighth of 1 percent, capped at 8.25 percent. Borrowers 
can qualify for consolidation loans regardless of financial need.

Loans eligible for inclusion in a consolidation loan must be comprised 
of at least one eligible FFELP or FDLP loan (subsidized and 
unsubsidized Stafford loans, PLUS loans, and, in some instances, 
consolidation loans). Other types of federal student loans made outside 
of FFELP and FDLP, which may carry a variable or fixed borrower 
interest rate, are also eligible for inclusion in a consolidation loan, 
including Perkins loans, Health Professions Student loans, Nursing 
Student Loans, and Health Education Assistance loans[Footnote 8] 
(HEAL).

Consolidation loans under FFELP and FDLP accounted for about 44 percent 
of the $71.8 billion in total new student loan dollars that originated 
during fiscal year 2002. FFELP consolidation loans comprised about 72 
percent of the fiscal year 2002 consolidation loan volume, while FDLP 
consolidation loans accounted for the remaining 28 percent.

Federal Credit Reform Act of 1990 Helps Define Federal Costs Associated 
with Consolidation Loans:

The Federal Credit Reform Act (FCRA) of 1990 was enacted to require 
agencies to more accurately measure the government's cost of federal 
loan programs and to permit better cost comparisons among and between 
credit programs, such as FDLP and FFELP. Prior to implementing FCRA, 
the budgetary cost of a new direct loan or loan guarantee was reported 
on a cash basis. Thus, loan guarantees appeared to be free in the 
budget year, while direct loans appeared to be as expensive as grants. 
As a result, costs were distorted and credit programs could not be 
compared meaningfully with other programs and with each other. FCRA and 
the related accounting standards and budgetary guidance, together known 
as credit reform, were established to more accurately measure the 
government's costs of federal credit programs.

Subsidy Costs:

As part of implementing credit reform, agencies are required to 
estimate the long-term cost to the government of a direct loan or a 
loan guarantee, generally referred to as the subsidy cost, based on the 
present value of estimated net cash flows, excluding administration 
costs.

For FFELP loans, the subsidy cost of a loan guarantee is the net 
present value, when a guaranteed loan is disbursed, of estimated cash 
flows such as:

* Payments by the government to lenders to cover loan defaults and 
interest subsidies. (Interest subsidies include payments to lenders 
that provide them a guaranteed rate of return on the loans they make as 
well as payments of interest on behalf of subsidized Stafford loan 
borrowers who are in periods of deferment).[Footnote 9]

* Payments by lenders to the government, including origination and 
other fees, penalties assessed borrowers, and recoveries on defaulted 
loans. (For consolidation loans, FFELP loan holders must pay, on a 
monthly basis, a fee calculated on an annual basis equal to 1.05 
percent of the unpaid principal and accrued interest of the loans in 
their portfolio.):

For FDLP loans, the subsidy cost of a direct loan is the net present 
value, at the time when the direct loan is disbursed, of estimated cash 
flows such as:

* loan disbursements by the government to borrowers and:

* principal repayments and payments of interest by borrowers to the 
government.

The subsidy costs of FDLP loans are also affected by the interest 
Education must pay to Treasury to finance its lending activities.

Administration Costs:

Administration costs include all costs directly related to FDLP program 
operations, including loan servicing, loan system development and 
maintenance, including computer costs, and the costs of collecting on 
delinquent loans. For FFELP loans, lenders incur a substantial portion 
of administration costs. The federal government initially pays many of 
these costs by paying an allowance to the lenders. These allowances are 
part of the subsidy cost under credit reform. For FDLP loans, the 
federal government pays for administration costs directly.

Consolidation Borrowers Had More Debt, Higher Incomes, and Differed in 
Other Ways When Compared with Nonconsolidation Borrowers:

Consolidation loan borrowers differed from nonconsolidation loan 
borrowers in a variety of ways. On average, consolidation loan 
borrowers had higher student loan debt, higher incomes, larger annual 
loan repayments, and longer repayment periods. They were also less 
likely to have attended a proprietary (or, for-profit) school and were 
more likely to have borrowed while attending graduate/professional 
school. In addition, they averaged more student loans from more 
lenders. Overall, consolidation loan borrowers defaulted less often 
than borrowers who had not consolidated their loans.

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. Prior to 
consolidation, the average student loan debt for our sample of 
consolidation loan borrowers from January 1987 through November 2002 
was $21,735, more than twice the average of $9,587 for nonconsolidation 
borrowers (see fig. 1). While average student loan debt was higher for 
consolidation loan borrowers, the average student loan debt for both 
types of borrowers increased over time. Between 1992 and 2002, the 
average student loan debt increased from $17,420 to $35,339 for 
consolidation loan borrowers, and from $7,267 to $15,720 for 
nonconsolidation borrowers.

Figure 1: Average Student Loan Debt of Consolidation Loan Borrowers 
Prior to Consolidation Compared with Nonconsolidation Borrowers 
Originating Loans January 1987 to November 2002:

[See PDF for image]

Note: Amounts analyzed and reported are in nominal dollars.

[End of figure]

Borrowers with consolidation loans had higher average incomes and 
higher average annual repayments on their student loans than 
nonconsolidation loan borrowers. In addition, loan repayments comprised 
a slightly higher percentage of the incomes of consolidation borrowers, 
with an annual student loan repayment-to-income ratio of 9.4 percent 
for consolidation loan borrowers and 8.4 percent for nonconsolidation 
borrowers (see table 1). Not only did consolidation loan borrowers have 
higher average incomes than nonconsolidation loan borrowers, 39 percent 
of them had family incomes greater than $50,000, compared with 23 
percent of nonconsolidation borrowers with family incomes greater than 
$50,000.

Table 1: Annual Income and Annual Student Loan Repayment of 
Consolidation Borrowers Compared with Nonconsolidation Borrowers 
Entering Repayment in 1999:

Average income; Consolidation borrowers: $47,150; Nonconsolidation 
borrowers: $32,591.

Average annual repayment; Consolidation borrowers: $3,355; 
Nonconsolidation borrowers: $2,126.

Average student loan repayment-to-income ratio; Consolidation 
borrowers: 9.4%; Nonconsolidation borrowers: 8.4%.

Source: GAO analysis of IRS and Education data.

Note: The annual student loan repayment-to-income ratio was calculated 
as the average debt burden across five income categories weighted by 
the number of borrowers in each category.

[End of table]

For the FDLP loans in our sample,[Footnote 10] consolidation loans 
tended to have longer repayment periods than nonconsolidation loans. 
Over 62 percent of consolidation loans had repayment terms of 12 years 
or more, compared with 26 percent for nonconsolidation loans. The 
smaller loan balances often carried by nonconsolidation loan borrowers 
could help explain why a smaller portion of nonconsolidation loans had 
repayment periods of more than 10 years. For example, under FDLP, many 
of the repayment plans that allow the extension of repayment periods 
require a minimum loan balance of $10,000. The repayment periods for 
loan balances over $10,000 usually vary depending on the amount of the 
loan, with 30 years being the maximum repayment period for loan 
balances of $60,000 or more. Since our analysis indicates that 
nonconsolidation loan borrowers had an average loan debt of $9,587, 
these borrowers would not qualify for extended repayment periods. 
However, even when consolidation loan borrowers had the option to 
extend their repayment term, nearly 4-in-10 (37 percent) of the 
consolidation loans in our sample had a standard 10-year repayment 
period (see fig. 2).

Figure 2: Repayment Periods of Consolidation Loans Compared with 
Nonconsolidation Loans Originating from January 1987 to November 2002:

[See PDF for image]

[End of figure]

Consolidation Borrowers Were Less Likely to Attend Proprietary Schools 
and More Likely to Have Borrowed While Attending Graduate/Professional 
School:

Consolidation loan borrowers were less likely than nonconsolidation 
loan borrowers to have attended a proprietary (or, for-profit) school. 
Additionally, borrowers with consolidation loans were somewhat more 
likely to have attended public or private/nonprofit schools than were 
nonconsolidation borrowers. Overall, 80 percent of consolidation 
borrowers attended public or private/nonprofit schools and 74 percent 
of nonconsolidation borrowers attended a public or private/nonprofit 
school (see fig. 3).

Figure 3: Type of School Attended by Consolidation Loan Borrowers 
Compared with Nonconsolidation Borrowers Originating Loans, January 
1987 to November 2002:

[See PDF for image]

[End of figure]

Although both consolidation and nonconsolidation loan borrowers tended 
to borrow prior to graduate/professional school, our analysis indicates 
that consolidation loan borrowers were more likely than 
nonconsolidation borrowers to have taken out a student loan while 
attending graduate/professional school. About 28 percent of 
consolidation loan borrowers borrowed while they were in graduate/
professional school compared with 12 percent of nonconsolidation loan 
borrowers (see fig. 4).

Figure 4: Percentage of Consolidation Loan Borrowers Who Borrowed for 
Graduate/Professional School Compared with Nonconsolidation Borrowers 
Originating Loans, January 1987 to November 2002:

[See PDF for image]

[End of figure]

Consolidation Borrowers Had More Loans and Borrowed from More Lenders:

Prior to consolidating their loans, consolidation loan borrowers 
averaged more loans from more lenders than nonconsolidation loan 
borrowers. Consolidation loan borrowers had taken out an average of 
about six loans each, nearly twice the average number for 
nonconsolidation borrowers (see fig. 5). Furthermore, consolidation 
loan borrowers were more likely to have borrowed from more than one 
lender. Prior to consolidation, 28 percent of consolidation loan 
borrowers had loans from three or more lenders compared with 9 percent 
for nonconsolidation borrowers (see table 2).

Figure 5: Average Number of Loans of Consolidation Loan Borrowers 
Compared with Nonconsolidation Borrowers Originating Loans, January 
1987 to November 2002:

[See PDF for image]

[End of figure]

Table 2: Number of Lenders of Consolidation Borrowers Compared to 
Nonconsolidation Borrowers Originating Loans, January 1987 to November 
2002:

Number of lenders: 1; Consolidation borrowers: 37%; Nonconsolidation 
borrowers: 69%.

Number of lenders: 2; Consolidation borrowers: 35%; Nonconsolidation 
borrowers: 22%.

Number of lenders: 3 or more; Consolidation borrowers: 28%; 
Nonconsolidation borrowers: 9%.

Number of lenders: Total; Consolidation borrowers: 100%; 
Nonconsolidation borrowers: 100%.

Source: GAO analysis of NSLDS data.

[End of table]

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. The overall default rate for consolidation loan borrowers 
who had defaulted on their consolidation loans was about 8 percent 
compared with the overall default rate of 23 percent for 
nonconsolidation borrowers (see fig. 6).

Figure 6: Percentage of Consolidation Borrowers Who Defaulted on 
Consolidation Loans Compared with Nonconsolidation Borrowers Who 
Defaulted on Loans, January 1987 to November 2002:

[See PDF for image]

[End of figure]

Some consolidation loan borrowers had defaulted on a student loan prior 
to obtaining their consolidation loan and then subsequently defaulted 
on their consolidation loan as well. About one-fifth (19 percent) of 
consolidation loan borrowers had, in fact, defaulted on a loan before 
they obtained a consolidation loan; of these borrowers, about 23 
percent subsequently defaulted on their consolidation loans. Of the 
approximately four-fifths (81 percent) of consolidation loan borrowers 
that had never defaulted on a student loan prior to obtaining a 
consolidation loan, about 5 percent defaulted on their consolidation 
loan.

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. In FFELP, estimated 
subsidy costs rose from $1.3 billion for loans made in fiscal year 2002 
to nearly $3 billion for loans made in fiscal year 2003. These 
estimated subsidy costs are affected by the amount the federal 
government must pay to lenders to guarantee them a statutorily 
established rate of return, which fluctuates over time as interest 
rates rise and fall. Increased FFELP consolidation loan volume in 2003 
also raised costs. For FDLP consolidation loans, the margin of 
difference narrowed between the interest rate that Education earned 
from borrowers and the rate that Education paid to the Treasury to 
finance direct loans. As a result of this smaller difference, as well 
as an expected decrease in demand for FDLP consolidation loans compared 
to prior years, the estimated net interest gain to the government 
dropped from $460 million in fiscal year 2002 to $286 million in fiscal 
year 2003. The movement of subsidy costs for loans made in future years 
will depend heavily on what happens to interest rates and loan volumes. 
Administration costs are not specifically tracked for either loan 
program, but available evidence indicates that these costs have also 
risen.

Borrowers' Rates Have Dropped and Loan Volumes Have Risen:

Recent years have seen dramatic growth in loan volume for both 
consolidation loan programs, along with an overall drop in interest 
rates for borrowers that correspond to the overall decline in interest 
rates. From fiscal year 1998 through fiscal year 2002, the volume of 
consolidation loans made (or "originated") rose from $5.8 billion to 
over $31 billion. Of the over $31 billion in consolidation loan volume 
for fiscal year 2002, $22.7 billion was in the FFELP and $8.8 billion 
was in the FDLP. While FDLP consolidation loan volume for fiscal year 
2003 is expected to decrease, FFELP loan volume is expected to 
increase, resulting in a total consolidation loan volume of over $36 
billion for the year. The dramatic growth in consolidation loan volume 
in recent years is due in part to declining interest rates that have 
made it attractive for many borrowers to consolidate their variable 
rate student loans at a low, fixed rate. From July 2000 to June 2003, 
the minimum fixed interest rate for consolidation loans dropped 4 
percentage points, with consolidation loan borrowers currently 
obtaining rates as low as 3.50 percent in the year beginning July 1, 
2003. Figure 7 shows the relationship between these two factors. 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.

Figure 7: Consolidation loan volume increased as borrower interest 
rates fell:

[See PDF for image]

[End of figure]

Underscoring the potential attractiveness of these loans to potential 
borrowers, many lenders, including newer loan companies that are 
specializing in consolidation loans, are aggressively marketing 
consolidation loans to compete for consolidation loan business as well 
as to retain the loans of their current customers. Their marketing 
techniques have included mass mailings, telemarketing, and Internet 
pop-ups to encourage borrowers to consolidate their loans. This 
increased marketing effort has likely contributed to the record level 
of consolidation loan volume.

Effect on Subsidy Costs Varies between Programs:

Overall estimated subsidy costs for consolidation loans made in fiscal 
year 2003 were greater than for consolidation loans made in fiscal year 
2002. In light of the differences between how the FFELP and FDLP 
operate, however, the costs of these two programs were affected in very 
different ways. For FFELP, the result was a substantial increase in 
estimated subsidy costs. For FDLP, the result was a narrowing of the 
net difference between the estimated interest payments paid by 
consolidated loan borrowers to Education and the costs paid by 
Education to Treasury to finance direct loans.

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. While part of the 
increase is the result of greater loan volume, the increase is 
primarily due to the higher interest subsidies the government is 
expected to pay to lenders to ensure they receive a guaranteed rate of 
return on student loans.

The interest subsidy, which is called a special allowance payment 
(SAP), is based on a formula specified in law and paid by Education to 
lenders on a quarterly basis when the "guaranteed lender yield" exceeds 
the borrower rate. This guaranteed lender yield is currently based on 
the average 3-month commercial paper[Footnote 11] interest rate plus an 
additional 2.64 percent. The amount of the quarterly SAP paid to loan 
holders equals the difference between the guaranteed lender yield and 
the borrower rate divided by four and multiplied by the average unpaid 
principal balance of all loans the lender holds. If the borrower's 
interest rate exceeds the guaranteed lender yield, Education does not 
pay a SAP, and the lender receives the borrower rate.

Education's estimate of nearly $3 billion in subsidy costs for FFELP 
consolidation loans made in fiscal year 2003 is based on the assumption 
that the guaranteed lender yield will rise over the next several years, 
reflecting Education's assumption that market interest rates are likely 
to rise from the historically low levels experienced in fiscal year 
2003. In figure 8, the bottom line shows the fixed borrower rate for a 
FFELP consolidation loan made in the first 9 months of fiscal year 
2003, while the top line shows Education's estimated values for the 
guaranteed lender yield over time. In fiscal year 2003, market interest 
rates were such that the guaranteed lender yield established under the 
SAP formula was actually below the borrower rate. Lenders would 
therefore receive only the rate paid by borrowers; no SAP would be 
paid. However, in future years, when the guaranteed lender yield is 
expected to increase and be above the borrower rate, Education would 
have to make up the difference in the form of a SAP. As the figure 
shows, Education's assumptions would call for lenders to receive a SAP 
over most of the life of the consolidation loans made in fiscal year 
2003.

Figure 8: Illustration of Estimated SAP Paid to Holders of FFELP 
Consolidation Loans Originated in Fiscal Year 2003:

[See PDF for image]

[End of figure]

[A] The estimated lender yield, which is based on the average 3-month 
commercial paper rates, as provided by the Office and Management and 
Budget (OMB), does not vary much after fiscal year 2007 since the 
projected commercial paper rates do not vary much after fiscal year 
2007. The actual lender yield could vary from these projections 
depending on future interest rates.

[B] This borrower rate is for a consolidation loan originated from 
October to June of fiscal year 2003 and whose underlying loans are 
Stafford loans disbursed after July1,1998, and in repayment at time of 
consolidation.

In point of fact, Education is required to revise these estimates 
periodically to adjust for changing assumptions about interest rates 
and loan performance. Subsidy costs estimates for FFELP consolidation 
loans can vary substantially, depending on how much the guaranteed 
lender yield rises above the fixed rate paid by borrowers. Education is 
required to account for such changes in subsidy cost estimates by 
annually updating, or "reestimating," loan program costs, in accordance 
with OMB budget guidance.[Footnote 12] Any increase or decrease in the 
subsidy cost estimates resulting from reestimates is reflected in 
future program budget estimates as appropriate and Education's end of 
the fiscal year financial statements whenever the reestimated amount is 
significant. Thus, Education's estimates for both fiscal year 2002 
loans and fiscal year 2003 loans are subject to change in the future.

An increase in loan volume also played a role in the subsidy cost 
increase from fiscal years 2002 to 2003, but to a lesser degree than 
the higher interest subsidies the government is expected to pay to 
lenders. On their own, loan volumes can increase subsidy amounts. To 
illustrate, estimated subsidy costs can be converted into subsidy 
rates, reflecting the estimated unit cost per loan dollar to the 
federal government. For example, a $1,000 loan with a federal subsidy 
cost of $100 would have a subsidy rate of 10 percent. The subsidy rate 
for FFELP consolidation loans made in fiscal year 2002 was 
approximately 5.9 percent. Given a fiscal year 2002 FFELP consolidation 
loan volume of about $22.7 billion, and a subsidy rate of 5.9 percent, 
federal subsidy costs can be determined by multiplying the loan volume 
by the subsidy rate ($22.7 billion X 0.059 = $1.3 billion). Viewed in 
this way, it is clear that even if the subsidy rate remained the same 
from fiscal year 2002 to 2003, the larger expected FFELP consolidation 
loan volume of $30.5 billion in fiscal year 2003 would have increased 
total subsidy costs to $1.8 billion (i.e., $30.5 billion X 0.059 = $1.8 
billion), an increase of $0.5 billion from fiscal year 2002. However, 
the higher interest subsidies the government is expected to pay to 
lenders, as previously discussed, also increased the subsidy rate for 
FFELP consolidation loans made in fiscal year 2003. This rate--9.8 
percent--coupled with the estimated loan volume of $30.5 billion, 
resulted in the total FFELP consolidation loan subsidy costs of about 
$3 billion ($30.5 billion X 0.098).

Changing Interest Rates Also Affected FDLP Consolidation Loans:

Subsidy costs can occur within FDLP as well, but in a different way. 
The FDLP consolidation program is a direct loan program and therefore 
involves no guaranteed yields to private lenders. Still, the program 
has potential subsidy costs determined in part by the relationship 
between interest rates Education earns from borrowers--the borrower 
rate and the rate Education pays Treasury to finance its lending. The 
government's cost of capital is determined by the interest rate 
Education pays Treasury to finance direct student loans, which is 
equivalent to the discount rate.[Footnote 13] The difference between 
borrowers' rates and the discount rate--called the interest rate 
spread--is a key driver of subsidy estimates for FDLP loans. When the 
borrower rate is greater than the discount rate, Education will receive 
more interest from borrowers than it will pay in interest to Treasury 
to finance its loans, resulting in a positive interest rate spread--or 
a gain (excluding administrative costs) to the government. Conversely, 
when the borrower rate is less than the discount rate, Education will 
pay more in interest to Treasury than it will receive from borrowers, 
which will result in a negative interest rate spread--or a cost to the 
government.

For FDLP consolidation loans made in fiscal years 2002 and 2003, no 
such negative interest rate spreads were incurred in either year, based 
on the methodology Education uses to determine these costs. 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. However, while Education continued to benefit from lending 
at interest rates higher than its cost of borrowing for FDLP 
consolidation loans made in fiscal year 2003, the size of this benefit 
is expected to decline from $460 million in fiscal year 2002 to $286 
million in fiscal year 2003.[Footnote 14]

The smaller net gain that is expected to occur in fiscal year 2003 
reflects a narrowed difference between the discount rate and the 
borrower rate. In fiscal year 2003, this difference narrowed in part 
because borrower rates dropped more than the discount rate. The 
borrower rates for FDLP consolidation loans dropped 2 percentage 
points, from 6 percent in fiscal year 2002 to 4 percent in fiscal year 
2003. The discount rate, on the other hand, dropped by only 0.95 
percentage points. The resulting interest rate spread decreased from 
1.1 percent to 0.05 percent (see table 3). In other words, each $100 of 
consolidated FDLP loans made in fiscal year 2002, will result in $1.10 
more in interest received by Education than it will pay out in interest 
to the Treasury. A similar loan originated in fiscal year 2003, 
however, will generate only $0.05 more in interest for the government.

Table 3: Interest Rate Spread for FDLP Consolidation Loans Originated 
in Fiscal Years 2002 and 2003:

Fiscal year: 2002; Borrower rate: 6.0%; Discount rate: 4.90%; Interest 
rate spread: 1.1%; Estimated interest payments for each $100 of loans: 
1.1% x $100 = $1.10.

Fiscal year: 2003; Borrower rate: 4.0%; Discount rate: 3.95%; Interest 
rate spread: 0.05%; Estimated interest payments for each $100 of loans: 
0.05% x $100 = $0.05.

Source: GAO analysis of Education's Budget Service data.

Note: The discount rate of 3.95 percent is an estimated discount rate 
on August 18, 2003. The actual discount rate for fiscal year 2003 may 
be higher or lower, which would reduce or increase the interest rate 
spread for fiscal year 2003.

[End of table]

While Education revises estimates periodically to adjust for changing 
assumptions about future interest rates for FFELP consolidation loans, 
the borrower rate and the discount rate used to derive the subsidy cost 
for FDLP consolidation loans made in fiscal year 2003 are generally 
fixed for the life of the loans. As a result, the subsidy cost of FDLP 
consolidation loans made in any given fiscal year do not vary in the 
way that subsidy costs for FFELP consolidation loans do.[Footnote 15]

Loan volume also played a role in the smaller net gain that occurred in 
fiscal year 2003. While FDLP consolidation loan volume increased from 
about $5.4 billion in fiscal year 2000 to about $8.8 billion in fiscal 
year 2002, Education estimated a decrease in demand for FDLP 
consolidation loans for 2003, expecting volume to be about $6 
billion.[Footnote 16] The unit cost per loan dollar, or subsidy rate, 
for FDLP consolidation loans made in fiscal year 2002 was a negative 
5.2 percent, which resulted in a negative subsidy[Footnote 17]--that 
is, a "gain"--to the government of $0.052 for each dollar lent 
(excluding administrative costs). As previously discussed, the 
difference between the discount rate and the borrower rate narrowed 
from fiscal year 2002 to fiscal year 2003, which contributed to the 
increased subsidy rate from a negative 5.2 percent to a negative 4.8 
percent, resulting in a smaller gain, per loan dollar, to the 
government. Had the subsidy rate remained the same from fiscal year 
2002 to fiscal year 2003, the decrease in FDLP consolidation loan 
volume would have resulted in a reduced gain to the government of about 
$147 million. The subsidy rate increase from fiscal year 2002 to fiscal 
year 2003, however, coupled with reduced loan volume, resulted in a 
reduced gain of $174 million.

Subsidy Costs Are Sensitive to Interest Rate Changes:

As the discussion of both FFELP and FDLP loans shows, interest rates 
have a strong effect on whether subsidy costs occur and how large they 
are. As a measure of how great an effect different interest rate 
assumptions can have, we asked Education to conduct two additional sets 
of calculations for fiscal year 2002 FFELP and FDLP consolidation 
loans. Using the same loan volume and other assumptions of the fiscal 
year 2002 estimates, Education applied the interest rate assumptions 
that were used to develop the estimates for the fiscal year 2001 and 
2003 consolidation loans. These assumptions differed from those in 
place in fiscal year 2002, as well as from each other. In general, the 
interest rate assumptions for fiscal year 2001 were higher than the 
assumptions used in fiscal year 2002, and future interest rates were 
expected to decrease. The interest rate assumptions for fiscal year 
2003, on the other hand, were generally lower than the assumptions used 
in fiscal year 2002, and future interest rates were expected to 
increase.

Calculating subsidy estimates under these three different sets of 
interest rate assumptions produced substantially different results. As 
figure 9 shows, the results of this analysis indicated that for FFELP 
consolidation loans, the fiscal year 2001 interest rate assumptions 
would result in estimated subsidy costs totaling $129 million, or about 
$1 billion less than the estimated subsidy costs under the actual 
fiscal year 2002 estimates. In contrast, the fiscal year 2003 interest 
rate assumptions resulted in estimated subsidy costs totaling $2.4 
billion, an increase of more than $1.2 billion in subsidy costs, even 
though the estimate was calculated across the same volume of loans. For 
FDLP consolidation loans, the analysis indicated that a greater 
interest rate spread between the discount rate and the borrower rate 
for the fiscal year 2001 interest rate assumptions, resulted in a net 
gain to the government totaling about $645 million or about $264 
million more than the gain under the actual fiscal year 2002 estimates. 
In contrast, the fiscal year 2003 interest rate assumptions resulted in 
an estimated subsidy cost to the government totaling about $370 
million, a change of about $751 million. This increase is primarily due 
to the negative interest rate spread in which the borrower rate used in 
fiscal year 2003 was less than the discount rate used in the fiscal 
year 2003 interest rate assumptions.

Figure 9: Illustration of Net Subsidy Costs to the Federal Government 
for Consolidation Loans Made in Fiscal Year 2002 Using Three Different 
Sets of Interest Rate Assumptions:

[See PDF for image]

Note: Results were obtained by applying Education's interest rate 
assumptions for fiscal years 2001, 2002, and 2003 to the 2002 
consolidation loans. Negative subsidy costs for FDLP using fiscal years 
2001 and 2002 rates represent a net gain for the federal government.

[End of figure]

Administration Costs Also Increase, but Mainly Because of Loan Volume:

Loan volume affects administrative costs, in that cost is in part a 
function of the number of loans originated and serviced during the 
year. As a result, when loan volume increases, administration costs 
also increase. Education's current cost accounting system does not 
specifically track administration costs incurred by each of the student 
loan programs. Consequently, we were unable to determine the total 
administration costs incurred by consolidation loan programs or any 
off-setting administrative cost reductions associated with the 
prepayment of loans underlying consolidation loans. However, based on 
available Education data, we were able to determine some of the direct 
costs associated with the origination, servicing and collection of FDLP 
consolidation loans. For fiscal year 2002, these costs totaled roughly 
$52.3 million. This total includes approximately $31 million for loan 
origination, $19 million for loan servicing, and $3 million for loan 
collection. The $52.3 million does not include overhead costs, which 
include such expenses as personnel, rent, travel, training, and other 
activities related to maintaining program operations. For fiscal year 
2003, the estimated costs for the origination, servicing, and 
collection of FDLP consolidation loans is projected to increase by 
about $7 million to $59.5 million.

While we similarly were unable to determine Education's administration 
costs directly related to FFELP consolidation loans, they are likely to 
be smaller than for FDLP consolidation loans. This is because under 
FFELP, a large portion of administration cost is borne directly by 
lenders, who make and service the loans. The special allowance payments 
to lenders, which rise and fall as interest rates change are designed 
to ensure that lenders are compensated for administration and other 
costs, and provided with a reasonable return on their investment so 
that they will continue to participate in the program.

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. Since consolidation 
loans were first offered to borrowers, Congress has changed student 
loan programs in ways that provide borrowers with these loan repayment 
options. These options include provisions for combining multiple loan 
payments into one and for restructuring the repayment terms or 
lengthening the repayment period in order to lower monthly repayment 
amounts. However, these options are limited, in some cases, to 
borrowers who have loans with one lender, or whose loan balances meet 
certain criteria. These options also differ from the consolidation loan 
program in that they carry a variable borrower interest rate, while 
consolidation loans allow borrowers to lock in a fixed interest rate. 
In today's environment, with current low interest rates that are 
expected to rise over time, the ability to lock in a low fixed rate may 
affect many borrowers' decisions about which approach to take. 
Borrowers' choices of whether to use consolidation loans or these other 
options have a budgetary effect for the federal government. Proposed 
legislation has been introduced in the 108th Congress that, among other 
things, would replace the fixed borrower interest rate for 
consolidation loans with a variable interest rate.

Flexible Repayment Options Similar to Consolidation Are Available to 
Some Borrowers:

Other options, outside of consolidation, now exist for some borrowers 
to make single payments on multiple loans and reduce their payment 
amounts--options that were unavailable when Congress first introduced 
consolidation loans under the FFELP. For example, when Congress created 
the FDLP in 1993, Education provided FDLP borrowers with the ability to 
combine payments on multiple FDLP loans into a single payment. 
Similarly, in 1999, Education promulgated regulations requiring FFELP 
lenders to combine all of a borrower's FFELP loans into a single 
account to be repaid under a single repayment schedule. Furthermore, 
Congress has provided borrowers with a number of repayment plans that 
give certain FFELP and FDLP borrowers who do not consolidate their 
loans flexibility to reduce monthly payment amounts in a variety of 
ways. For example, "graduated" and "income-sensitive" repayment plans 
introduced in 1992, allow borrowers to make smaller payments early in a 
repayment period, followed by larger payments in future years. (These 
plans assume that a borrower's income will increase over the repayment 
period.) While borrowers who use the FFELP graduated and income-
sensitive repayment plans must generally repay their loans over a 10-
year period, another repayment plan--"extended"--allows certain FFELP 
borrowers to lengthen their repayment terms up to 25 years, thus 
reducing monthly repayment amounts. Under FDLP, borrowers have similar 
repayment options, plus additional flexibility to repay loans over 
longer periods, outside of consolidation. Table 4 summarizes the 
repayment plans available to borrowers under FFELP and FDLP.

Table 4: Description of Borrower Repayment Plans:

FFELP repayment plans: Standard; FFELP repayment plans: Borrowers make 
fixed monthly payments of at least $50 for up to 10 years.[A]; 
FDLP repayment plans: Standard; FDLP repayment plans: Borrowers make 
fixed monthly payments of at least $50 for up to 10 years.[A].

FFELP repayment plans: Graduated; FFELP repayment plans: Borrowers make 
smaller payments early in a repayment period, and larger payments 
later, within certain limits (no repayment can be more than three times 
greater than any other). Repayment must occur within 10 years; 
FDLP repayment plans: Graduated; FDLP repayment plans: 
Borrowers make fixed monthly repayments at two or more levels (usually 
a lower amount for the early years of repayment and a larger amount in 
the later years) over a period of time that varies with the size of the 
loan and is the same as for the FDLP extended repayment plan (see 
below). Borrowers' payments may not be less than the interest due or 
less than 50 percent, or more than 150 percent, of the monthly 
repayment required under the standard plan.

FFELP repayment plans: Extended; FFELP repayment plans: Borrowers make 
fixed or graduated monthly repayments of at least $50 for a period of 
time that varies depending on the amount of the loan. Repayment must 
occur within 25 years. Extended repayment is limited to new borrowers 
on or after October 7, 1998, who accumulate (after such date) 
outstanding loans totaling more than $30,000; FDLP repayment 
plans: Extended; FDLP repayment plans: Borrowers make fixed monthly 
repayments of at least $50 for a period of time that varies depending 
on the amount of the loan: 

Amount: 

Less than $10,000: 12 years; 
$10,000 to $19,999: 15 years; 
$20,000 to $39,999: 20 years; 
$40,000 to $59,999: 25 years; 
$60,000 or more: 30 years.

FFELP repayment plans: Income-sensitive; FFELP repayment plans: 
Borrowers' payment amounts may be adjusted annually to reflect changes 
in a borrower's income. Repayment plan is limited in the amount of 
adjustment that can be made by statutory requirements that the loan be 
repaid within the 10-year maximum and that monthly repayments are, at a 
minimum, sufficient to cover interest.[B]; FDLP repayment 
plans: Income-contingent; FDLP repayment plans: Borrowers' payment 
amounts are based on the total amount of the borrower's loan, income, 
and family size for a period up to 25 years. Under this repayment plan, 
borrowers repay based on annual income for up to 25 years with any 
remaining amount owed on the loan discharged at that time.

Sources: HEA, Congressional Research Service, and Education.

[A] Because of the variable interest rate for nonconsolidation loans, 
the loan holder may adjust either the size of the monthly repayment or 
the length of the repayment period annually. If the change in interest 
rates would result in a borrower being unable to complete repayment 
within the 10-year maximum, the loan holder may provide administrative 
forbearance for a maximum of 3 years (effectively extending the 
repayment period).

[B] FFELP regulations allow lenders some flexibility to extend 
repayment up to 15 years through "administrative forbearance" to 
accommodate the variable interest rates and sensitivity to very low 
incomes under this repayment plan.

[End of table]

Consolidation loan borrowers, like other FFELP and FDLP borrowers, may 
choose among the four repayment plans offered under the programs. 
Borrowers who consolidate under FFELP may--in addition to flexibility 
offered by the repayment plans--extend their repayment periods up to 30 
years by choosing a standard, graduated, or income-sensitive repayment 
plan. Extending repayment periods, in general, will lower borrowers' 
monthly repayment amount. Table 5 compares the repayment periods 
allowed by FFELP under consolidation with those allowed under 
nonconsolidation.

Table 5: Comparison of Repayment Periods for FFELP Consolidation and 
Nonconsolidation Loans, by Repayment Plan:

Standard; Maximum repayment period for nonconsolidation loans: Up to 10 
years; Maximum repayment period for consolidation loans: 10-30 years 
depending on outstanding balance of loans: 

Amount: Less than $7,500: Maximum period: 10 years;   
Amount: $7,500 to $9,999: Maximum period: 12 years; 
Amount: $10,000 to $$19,999: Maximum period: 15 years; 
Amount: $20,000 to $39,999: Maximum period: 20 years; 
Amount: $40,000 to $59,999: Maximum period: 25 years; 
Amount: $60,000 or more: Maximum period: 30 years;

Graduated; Maximum repayment period for nonconsolidation loans: Up to 
10 years; Maximum repayment period for consolidation loans: 10-30 years 
depending on outstanding balance of loans (see above).

Income-sensitive; Maximum repayment period for nonconsolidation loans: 
Up to 10 years; Maximum repayment period for consolidation loans: 10-30 
years depending on outstanding balance of loans (see above).

Extended[A]; Maximum repayment period for nonconsolidation loans: Up to 
25 years; Maximum repayment period for consolidation loans: Up to 25 
years.

Sources: HEA, Congressional Research Service, and Education.

[A] Limited to borrowers who accumulate after October 7, 1998, 
outstanding loans totaling more than $30,000.

[End of table]

Compared with FFELP borrowers, FDLP borrowers have more flexibility to 
extend the repayment periods for FDLP loans without obtaining a 
consolidation loan. Under the graduated and extended repayment plans, 
for example, FDLP borrowers may obtain a repayment period of up to 30 
years, regardless of whether they choose a consolidation loan or 
nonconsolidation option. Table 6 shows the repayment periods available 
for FDLP borrowers.

Table 6: Repayment Periods for FDLP Consolidation and Nonconsolidation 
Loans, by Repayment Plan:

Standard; Maximum repayment period: Up to 10 years.

Graduated; Maximum repayment period: 12-30 years depending on loan 
amount: 

Amount: Less than $10,000: Maximum period: 12 years; 
Amount: $10,000 to $19,999: Maximum period: 15 years; 
Amount: $20,000 to $39,999: Maximum period: 20 years; 
Amount: $40,000 to $59,999: Maximum period: 25 years; 
Amount: $60,000 or more: Maximum period: 30 years.

Extended; Maximum repayment period: 12-30 years depending on loan 
amount (see above).

Income-contingent; Maximum repayment period: Up to 25 years.

Sources: HEA, Congressional Research Service, and Education.

[End of table]

While the options, outside of consolidation, allow some borrowers to 
make single repayments on multiple loans and reduce their monthly 
repayment amounts--thus achieving ends similar to consolidation loans-
-not all borrowers can take advantage of these flexibilities. First, 
borrowers who obtained FFELP loans from multiple lenders are still 
faced with making multiple loan payments because lenders are only 
required to combine borrowers' repayments on the loans they make. 
Second, borrowers may be required to meet certain eligibility criteria-
-such as accumulating loans exceeding specified thresholds--to qualify 
for extended repayment periods. Finally, borrowers who obtained loans 
under multiple programs--FFELP, FDLP, or other programs--are also faced 
with multiple payments and may or may not be able to obtain lower 
monthly repayment amounts. 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.

Table 7: Comparison of Borrowers' Options under Consolidation and 
Nonconsolidation Loans:

Composition of borrower's loans: Consolidation loans: 

Composition of borrower's loans: FFELP; Able to reduce to single 
payment? Yes; Able to adjust monthly payments through graduated or 
income-based approaches? Yes; Able to extend the repayment period? 
Yes for all borrowers, with length of period dependent on loan 
balance.

Composition of borrower's loans: FDLP; Able to reduce to single 
payment? Yes; Able to adjust monthly payments through graduated or 
income-based approaches? Yes; Able to extend the repayment period? 
Yes for all borrowers, with length of period dependent on loan 
balance.

Composition of borrower's loans: Combination of FFELP and FDLP and/or 
other loans[A]; Able to reduce to single payment? Yes; Able to adjust 
monthly payments through graduated or income-based approaches? Yes; 
Able to extend the repayment period? Yes for all borrowers, with 
length of period dependent on loan balance.

Composition of borrower's loans: Nonconsolidation loans: 

Composition of borrower's loans: FFELP loans from a single lender; Able 
to reduce to single payment? Yes; Able to adjust monthly payments 
through graduated or income-based approaches? Yes; Able to extend the 
repayment period? Yes, but only for borrowers with loans totaling more 
than $30,000.

Composition of borrower's loans: FFELP loans from multiple lenders; 
Able to reduce to single payment? No; Able to adjust monthly payments 
through graduated or income-based approaches? Yes; Able to extend the 
repayment period? Yes, but only for borrowers with loans totaling more 
than $30,000.

Composition of borrower's loans: FDLP loans; Able to reduce to single 
payment? Yes; Able to adjust monthly payments through graduated or 
income-based approaches? Yes; Able to extend the repayment period? 
Yes for all borrowers, with length of period dependent on loan 
balance.

Composition of borrower's loans: Combination of FFELP and FDLP and/or 
other loans[A]; Able to reduce to single payment? No; Able to adjust 
monthly payments through graduated or income-based approaches? Varies 
by type of loan; Able to extend the repayment period? Varies by type 
of loan.

Source: GAO analysis.

[A] Other federal student loans eligible for inclusion in a 
consolidation loan include Perkins loans, Health Professions Student 
loans, HEA loans, and Public Health Service Act Nursing Student Loans.

[End of table]

Available Options Involve Variable Interest Rates, While Consolidation 
Offers Currently Attractive Fixed Rate:

Another key difference between consolidation loans and other repayment 
options for nonconsolidation loans is that these other options carry a 
variable interest rate, while consolidation loans carry a fixed 
interest rate for the life of the loan. Depending on prevailing 
interest rates and borrowers' expectations about future interest rates, 
this difference may affect the decisions that borrowers make regarding 
whether to obtain a consolidation loan or use other options to combine 
payments, lower payments, and extend repayment periods. When interest 
rates are low, as they are now, and are expected to increase in the 
future, a consolidation loan that carries a low fixed interest rate may 
be more attractive to borrowers because a variable rate may exceed the 
fixed rate during most or all of the remaining repayment period, which 
could be up to 30 years. However, if rates are expected to decrease in 
the future, repayment options that carry a variable rate may be more 
attractive, and borrowers may choose other options over consolidation, 
hoping to take advantage of lower rates in the future. Since it is 
difficult to predict interest rates over a lengthy period, borrowers 
need to be aware of all the risks involved before they make their final 
decision. Once student loans are consolidated, the interest rate is 
fixed for the life of the loan and, under current law, borrowers 
generally cannot reconsolidate their existing consolidation loans to 
take advantage of lower interest rates. Consequently, borrowers who 
chose to consolidate their student loans several years ago--and locked 
in what are now high rates relative to what borrowers can now obtain--
are unable to take advantage of the current rate. For example, 
borrowers who consolidated between February and June 1999, have a 
locked rate of 8.25 percent.[Footnote 18] Borrowers who elected to 
consolidate between July 2002 and June 2003 received a rate of 4 
percent, and for 2004, the rate is expected to be about 3.5 percent.

Borrowers' Choices between Fixed or Variable Rate Alternatives Affect 
Federal Costs:

The choices that borrowers ultimately make will have consequences for 
federal costs. As previously discussed, federal costs for FFELP 
consolidation loans have recently increased because of the greater 
difference between borrowers' fixed low interest rate and the variable 
rate guaranteed to lenders, which is expected to increase in the 
future. In this situation, were borrowers to choose an alternative 
option, costs to the federal government would likely be less because a 
variable borrower rate would increase along with the variable rate 
guaranteed to lenders and the difference between the two rates would be 
less. This decreased difference would result in decreased FFELP federal 
subsidy costs. If circumstances were different, however, federal 
subsidy costs could increase. For example, if borrowers obtained a 
consolidation loan with a fixed interest rate at a time when rates were 
expected to decrease in the future, federal subsidy costs would be 
lower, than is currently the case, because the borrower rate would 
likely exceed the rate guaranteed to lenders, and the federal 
government would not be required to pay a SAP. In such situations, if 
borrowers were to choose an alternative option with variable borrower 
rates, federal subsidy costs could increase because the borrower rate 
would decline along with the variable rate guaranteed to lenders. In 
this case, the decreased difference could result in increased FFELP 
federal subsidy costs, if SAP payments became necessary.

Borrowers' choices between fixed and variable rate loans and among 
repayment periods also affect costs to the federal government 
associated with FDLP loans. A significant driver of FDLP costs, as 
previously discussed, is the difference between the discount rate and 
the borrower rate. In general, higher borrower rates will result in 
Education receiving larger interest payments from borrowers, thus 
decreasing federal costs. Allowing borrowers to lock in a low fixed 
rate might result in decreased federal revenues if the variable 
interest rates on those loans borrowers converted to a consolidation 
loan would have otherwise increased in the future. For both programs, 
federal costs are also affected by the repayment period chosen by 
borrowers. For example, longer FFELP repayment periods can result in 
the federal government making special allowance payments to lenders 
over a longer period of time. For FDLP, longer repayment periods can 
increase the amount of interest borrowers pay to Education on their 
loans and increase the amount of interest paid by Education on the 
amounts borrowed from Treasury.

Proposed Legislation Concerning Consolidation Loans Could Affect 
Federal Costs:

Proposed legislation has been introduced in the 108th Congress that, 
among other things, would replace the fixed borrower interest rate for 
consolidation loans with a variable interest rate, which will affect 
federal costs associated with consolidation loans. In particular, the 
Student Loan Fairness Consolidation Act of 2003 (H.R. 2504) would 
eliminate provisions that prevent borrowers who previously obtained a 
consolidation loan from obtaining a new consolidation loan and replace 
the current fixed borrower rate with a variable borrower rate for 
borrowers who refinance their existing consolidation loans as well as 
for new consolidation loan borrowers. [Footnote 19] 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. In 
addition, in "re-consolidating" their loans, the proposed legislation 
would replace the current fixed borrower rate with a variable borrower 
rate. If enacted, the proposed legislation would affect federal costs 
due to the refinancing of previous consolidation loans and the change 
from fixed to variable borrower interest rates.

Conclusion:

Although additional options to consolidation are now available that 
give some FFELP and FDLP borrowers opportunities to simplify loan 
repayment and reduce repayments to more manageable levels, not all 
borrowers qualify. As a result, many borrowers may find that 
consolidation loans remain the only option for combining loans and 
lowering their monthly repayments. 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. If borrowers continue to consolidate 
their loans in the current low interest rate environment, and interest 
rates rise, the government assumes the cost of larger interest 
subsidies for FFELP consolidation loans. Providing for these larger 
interest subsidies on behalf of a broad spectrum of borrowers, however, 
may outweigh any government savings associated with the reduced costs 
of loan defaults for the smaller number of borrowers who might default 
in the absence of the repayment flexibility offered by consolidation 
loans. For FDLP consolidation loans, allowing borrowers to lock in a 
low fixed rate might result in decreased federal revenues if the 
variable interest rates on those loans borrowers converted to a 
consolidation loan would have otherwise increased in the future. The 
exact effects of FDLP consolidation loans, however, depend on a number 
of factors, including the length of loan repayment periods, borrower 
interest rates, and discount rates. Restructuring the consolidation 
loan program to specifically target borrowers who are experiencing 
difficulty in managing their student loan debt and at risk of default, 
and/or who are unable to simplify and reduce repayment amounts by using 
existing alternatives, might reduce overall federal costs by reducing 
the volume of consolidation loans made. In addition, making the other 
nonconsolidation options more readily available to borrowers might be a 
more cost-effective way for the federal government to provide borrowers 
with repayment flexibility while reducing federal costs. 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.

Recommendation for Executive Action:

We recommend that the Secretary of Education assess the advantages of 
consolidation loans for borrowers and the government in light of 
program costs and identify options for reducing federal costs. Options 
could include targeting the program to borrowers at risk of default, 
extending existing consolidation alternatives to more borrowers, and 
changing from a fixed to a variable rate the interest charged to 
borrowers on consolidation loans. In conducting such an assessment, 
Education should also consider how best to distribute program costs 
among borrowers, lenders, and the taxpayers and any tradeoffs involved 
in the distribution of these costs. If Education determines that 
statutory changes are needed to implement more cost-effective repayment 
options, it should seek such changes from Congress.

Agency Comments:

We provided a draft of this report to Education for review and comment. 
In commenting on the draft, Education agreed with our reported findings 
and recommendation, noting that our work will contribute to the policy 
discussions related to the reauthorization of the HEA. In addition, 
Education noted that it was pleased with our conclusion that 
consolidation loans have advantages for borrowers and may help them 
avoid default and that improving flexible repayment options for 
borrowers would provide several benefits. Education also provided 
technical comments, which we incorporated where appropriate. 
Education's written comments appear in appendix I.

As agreed with your offices, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
from its issue date. At that time we will send copies to the Secretary 
of Education and other interested parties. We will also make copies 
available to others upon request. In addition, the report will be 
available at no charge on GAO's Web site at http://www.gao.gov:

If you or your staff have any questions or wish to discuss this 
material further, please call me at (202) 512-8403, or Jeff Appel at 
(202) 512-9915. Other contacts and staff acknowledgments are listed in 
appendix II.

Cornelia M. Ashby: 
Director, Education, Workforce, and Income Security Issues:

Signed by Cornelia M. Ashby: 

[End of section]

Appendix I: Comments from the Department of Education:

UNITED STATES DEPARTMENT OF EDUCATION:

OFFICE OF POSTSECONDARY EDUCATION:

OCT 27 2003

THE ASSISTANT SECRETARY:

Ms. Cornelia M. Ashby 
Director, Education, Workforce, and Income Security Issues 
United States General Accounting Office 
Washington, DC 20548:

Dear Ms. Ashby:

Thank you for the opportunity to review and comment on your draft 
report, Student Loan Programs. As Federal Costs of Loan Consolidation 
Rise, Other Options Should Be Examined (GAO-04-101). We appreciate that 
you are providing Members of the Congress with a summary of several 
complex aspects of student loan consolidation. GAO's work will 
contribute to the policy discussions related to the reauthorization of 
the Higher Education Act of 1965, as amended (HEA).

We are pleased with your conclusions that loan consolidation has 
provided several advantages for borrowers and may have assisted in the 
significant improvements in default aversion and significant reductions 
in default that we have achieved over the past few years. We agree that 
improving the flexible repayment options available to Stafford and PLUS 
borrowers in the FFEL program would provide several benefits. As we 
review the HEA for the upcoming reauthorization, we will consider this 
issue. We also agree with the report's recommendation to assess the 
advantages of consolidation loans for borrowers and the government in 
light of program costs and identify options for reducing Federal costs.

We appreciate the analysis and GAO's lengthy work on this engagement. 
The Department looks forward to working with the education community 
and the Congress to develop a reauthorization bill that meets the needs 
of our nation's families.

Additional comments on specific sections of the report are contained in 
technical comments contained in an e-mail to you. Again, I wish to 
thank you and your staff for your work on this engagement and look 
forward to continuing to work with you on these and other important 
issues.

Sincerely,

Signed by: 

Sally L. Stroup:

[End of section]

Appendix II: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Jeff Appel (202) 512-9915:

Susan Chin (206) 287-4827:

Staff Acknowledgments:

In addition to those named above, Cindy Decker, Ben Jordan, Heather 
Macleod, Corinna Nicolaou, Stan Stenersen, Vanessa Taylor, and Marcia 
Carlsen made important contributions to this report.

FOOTNOTES

[1] Under FFELP, private lenders make consolidation loans to borrowers, 
with Education guaranteeing lenders loan repayment and a rate of return 
that is equal to the average 3-month commercial paper rate plus 2.64 
percent. As of June 30, 2003, that rate of return was 3.81 percent for 
consolidation loans made on or after January 1, 2000. Under FDLP, 
Education uses federal funds to make direct student loans.

[2] The Federal Credit Reform Act of 1990 requires Education to 
estimate these subsidy costs, using the net present value of cash flows 
to do so. Present value is the value today of the future stream of 
benefits and costs, discounted using an appropriate interest rate 
(generally the average annual interest rate for marketable zero-coupon 
U.S. Treasury securities with the same maturity from the date of 
disbursement as the cash flow being discounted). The background section 
of the report will describe credit reform in more detail.

[3] Under FFELP, a large portion of the administration cost is borne by 
the private lender. The federal government pays many of these costs in 
its subsidy payment to lenders--more specifically, in the 2.64 percent 
add on paid over and above the 3-month rate on commercial paper.

[4] Because we used a sample, there is a sampling error associated with 
estimates obtained from them. For a 95 percent confidence interval, all 
percentage estimates reported have sampling errors of plus or minus 1 
percentage point or less. All reported estimates other than percentages 
have sampling errors not exceeding plus or minus 5 percent of the value 
of those estimates.

[5] The current loan consolidation provisions were enacted by the 
Consolidated Omnibus Budget Reconciliation Act of 1985 (Pub. L . No. 
99-272) and later revised by the Higher Education Amendments of 1986 
(Pub. L. No. 99-498). The Student Loan Marketing Association (Sallie 
Mae) had previously been authorized to make consolidation loans. 

[6] State and nonprofit guaranty agencies receive federal funds to play 
the lead role in administering many aspects of the FFELP program, 
including reimbursing lenders when loans are placed in default and 
initiating collection work.

[7] In some cases, according to Education, borrowers' outstanding loan 
balances may increase if collections costs assessed borrowers are 
included in the amounts being consolidated.

[8] Perkins Loans are fixed rate loans for both undergraduate and 
graduate students with exceptional financial need. Perkins loans are 
made directly by schools using funds contributed by the federal 
government and schools; borrowers must repay these loans to their 
school. The Health Professions Student Loans and Nursing Student Loans 
are fixed rate loans for borrowers who pursue a course of study in 
specified health professions. The HEAL program provided loans to 
eligible graduate students in specified health professions. HEAL was 
discontinued on September 30, 1998. 

[9] Deferment equals a period of time during repayment in which the 
borrower, upon meeting certain conditions, is not required to make 
payments of loan principal. 

[10] NSLDS does not contain information about repayment terms for FFELP 
loans.

[11] Commercial paper is short-term, unsecured debt with maturities up 
to 270 days. It is issued in the form of promissory notes, primarily by 
corporations. Many companies use commercial paper to raise cash for 
current transactions, and many find it to be a lower-cost alternative 
to bank loans.

[12] To estimate the cost of loan programs, Education first estimates 
the future performance of direct and guaranteed loans when preparing 
their annual budgets. These first estimates establish the subsidy 
estimates for the current-year originated loans. The data used for the 
first estimates are reestimated later to reflect any changes in loan 
performance and expected changes in future economic performance. 
Reestimates are necessary because projections about interest and 
default rates and other variables that affect loan program costs change 
over time. Any increase or decrease in the estimated subsidy cost 
results in a corresponding increase or decrease in the estimated cost 
of the loan program for both budgetary and financial statement 
purposes. 

[13] While the discount rate is the interest rate used to calculate the 
present value of the estimated future cash flows to determine subsidy 
cost estimates, it is also generally the same rate at which interest is 
paid by Education on the amounts borrowed from Treasury to finance the 
direct loan program. 

[14] The subsidy estimates for consolidation loans made in fiscal year 
2003 were developed by Education in August 2003. To account for recent 
changes in interest rates, we asked Education to update its estimates 
as of August 18, 2003, using a discount rate that we calculated based 
on the average of daily Treasury rates for various short-and long-term 
maturities during fiscal year 2003. Because our calculation was as of 
August 18, 2003, we approximated the Treasury rates through the 
remainder of the fiscal year based on the August 18, 2003, rates. At 
the end of fiscal year 2003, when OMB determines the actual discount 
rates for fiscal year 2003, estimated subsidy costs of the fiscal year 
2003 FFELP and FDLP consolidation loans will likely change. 

[15] Subsidy cost estimates for consolidation loans made in fiscal year 
2003 will be updated when the actual discount rate for the loans made 
in fiscal year 2003 is known at the close of fiscal year 2003. 
Reestimates for interest rates for FDLP consolidation loans would 
generally not occur due to the fixed discount and borrower rates used 
for calculating subsidy cost estimates. However, technical reestimates 
which are made after the close of each fiscal year to adjust for 
changes in assumptions other than interest rates (e.g., defaults, 
recoveries, prepayments, and fees), may still occur and could result in 
changes to the subsidy cost estimates.

[16] Education's $6 billion estimate was calculated as part of the 
2003 Mid-Session Review and based on actual consolidation loan volume 
for the first two quarters of fiscal year 2003. Actual volume may 
differ. Further, in July 2003, borrower interest rates decreased from 
the prior year, which may increase demand for FDLP consolidation loans 
during the remainder of fiscal year 2003. 

[17] Negative subsidies mean subsidy costs that are less than zero. 
They occur if the present value of cash inflows to the government 
exceeds the present value of cash outflows.

[18] This assumes that the underlying loans being consolidated were 
Stafford loans disbursed between July 1995 and July 1998 and were in 
repayment at the time of consolidation.

[19] Other proposed legislation includes the Consolidation Student Loan 
Flexibility Act of 2003 (H. R. 942) and the College Loan Assistance Act 
of 2003 (H.R. 2505). H.R. 942 would, among other things, eliminate a 
requirement that borrowers certify to having sought and been unable to 
obtain a consolidation loan from any holders of the outstanding loans 
the borrower has selected for consolidation. Like H.R. 2504, H.R. 2505 
would, among other things, eliminate provisions that prevent borrowers 
who previously obtained a consolidation loan from obtaining a new 
consolidation loan.

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