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92-613 PDF 2004

FISCAL RESPONSIBILITY AND 

FEDERAL CONSOLIDATION 

LOANS: EXAMINING COST IMPLICATIONS FOR TAXPAYERS, 

STUDENTS, AND BORROWERS

HEARING

BEFORE THE

COMMITTEE ON EDUCATION 

AND THE WORKFORCE 

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

March 17, 2004

Serial No. 108-48

Printed for the use of the Committee on Education and the Workforce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house 

or 

Committee address: http://edworkforce.house.gov 

(II)

COMMITTEE ON EDUCATION AND THE WORKFORCE 

JOHN A. BOEHNER, Ohio, Chairman

Thomas E. Petri, Wisconsin, Vice Chairman 

Cass Ballenger, North Carolina 

Peter Hoekstra, Michigan 

Howard P. ‘‘Buck’’ McKeon, California 

Michael N. Castle, Delaware 

Sam Johnson, Texas 

James C. Greenwood, Pennsylvania 

Charlie Norwood, Georgia 

Fred Upton, Michigan 

Vernon J. Ehlers, Michigan 

Jim DeMint, South Carolina 

Johnny Isakson, Georgia 

Judy Biggert, Illinois 

Todd Russell Platts, Pennsylvania 

Patrick J. Tiberi, Ohio 

Ric Keller, Florida 

Tom Osborne, Nebraska 

Joe Wilson, South Carolina 

Tom Cole, Oklahoma 

Jon C. Porter, Nevada 

John Kline, Minnesota 

John R. Carter, Texas 

Marilyn N. Musgrave, Colorado 

Marsha Blackburn, Tennessee 

Phil Gingrey, Georgia 

Max Burns, Georgia 

George Miller, California 

Dale E. Kildee, Michigan 

Major R. Owens, New York 

Donald M. Payne, New Jersey 

Robert E. Andrews, New Jersey 

Lynn C. Woolsey, California 

Rube ́n Hinojosa, Texas 

Carolyn McCarthy, New York 

John F. Tierney, Massachusetts 

Ron Kind, Wisconsin 

Dennis J. Kucinich, Ohio 

David Wu, Oregon 

Rush D. Holt, New Jersey 

Susan A. Davis, California 

Betty McCollum, Minnesota 

Danny K. Davis, Illinois 

Ed Case, Hawaii 

Rau ́l M. Grijalva, Arizona 

Denise L. Majette, Georgia 

Chris Van Hollen, Maryland 

Tim Ryan, Ohio 

Timothy H. Bishop, New York

Paula Nowakowski, Staff Director 

John Lawrence, Minority Staff Director 

(III)

C O N T E N T S 

Page

Hearing held on March 17, 2004 ............................................................................ 1

Statement of Members: 

Boehner, Hon. John A., Chairman, Committee on Education and the 

Workforce ....................................................................................................... 2

Prepared statement of ............................................................................... 4

Hoekstra, Hon. Pete, a Representative in Congress from the State of 

Michigan, Prepared statement of ................................................................ 64

Kildee, Hon. Dale E., a Representative in Congress from the State of 

Michigan ........................................................................................................ 6

Miller, Hon. George A., Ranking Member, Committee on Education and 

the Workforce, Prepared statement of ........................................................ 5

Norwood, Hon. Charlie, a Representative in Congress from the State 

of Georgia, Prepared statement of ............................................................... 81

Wilson, Hon. Joe, a Representative in Congress from the State of South 

Carolina, Prepared statement of .................................................................. 78

Statement of Witnesses: 

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

U.S. General Accounting Office ................................................................... 8

Prepared statement of ............................................................................... 10

Hamlett, Titus, Student, University of Maryland ......................................... 18

Prepared statement of ............................................................................... 19

Neubig, Dr. Tom S., National Director, Quantitative Economics and Statistics, Ernst and Young LLP ...................................................................... 20

Prepared statement of ............................................................................... 22

Shapiro, Dr. Robert, Chairman, Sonecon, LLP and Senior Fellow, Brookings Institution and Progressive Policy Institute ....................................... 48

Prepared statement of ............................................................................... 51

(1)

FISCAL RESPONSIBILITY AND FEDERAL CONSOLIDATION LOANS: EXAMINING COST IMPLICATIONS FOR TAXPAYERS, STUDENTS, 

AND BORROWERS 

Wednesday, March 17, 2004

U.S. House of Representatives 

Committee on Education and the Workforce 

Washington, DC 

The Committee met, pursuant to notice, at 10:35 a.m., in room 

2175, Rayburn House Office Building, Hon. John Boehner (Chairman of the Committee) presiding. 

Present: Representatives Boehner, Miller, Petri, Hoekstra, 

McKeon, Castle, Johnson, Greenwood, Biggert, Tiberi, Keller, Wilson, Porter, Kline, Carter, Burns, Kildee, Andrews, Woolsey, 

Tierney, Wu, Holt, Davis, Grijalva, Van Hollen, and Bishop. 

Staff present: Kevin Frank, Professional Staff Member; Sally 

Lovejoy, Director of Education and Human Resources Policy; Catharine Meyer, Legislative Assistant; Krisann Pearce, Deputy Director of Education and Human Resources Policy; Alanna Porter, Legislative Assistant; Alison Ream, Professional Staff Member; Deborah Samantar, Committee Clerk/Intern Coordinator; Kathleen 

Smith, Professional Staff Member; Jo-Marie St. Martin, General 

Counsel; Ellynne Bannon, Minority Legislative Associate; Tom 

Kiley, Minority Press Secretary; John Lawrence, Minority Staff Director; Ricardo Martinez, Minority Legislative Associate; Alex 

Nock, Minority Legislative Associate; Joe Novotny, Minority Legislative Staff; Lynda Theil, Minority Legislative Associate; and Mark 

Zuckerman, Minority General Counsel. 

Chairman BOEHNER. The Committee on Education and the 

Workforce will come to order. A quorum being present, the Committee meets today to hear testimony on ‘‘Fiscal Responsibility and 

Federal Consolidation Loans: Examining Cost Implications for Taxpayers, Students, and Borrowers.’’ 

Under the Committee rules, opening statements are limited to 

the Chairman and Ranking Member. If other Members have statements, we will keep the record open for 14 days to include those 

statements and other extraneous material referred to during today’s hearing. 

With that, I ask unanimous consent for the record to remain 

open. 

Without objection, so ordered. 

2

STATEMENT OF HON. JOHN A. BOEHNER, CHAIRMAN, 

COMMITTEE ON EDUCATION AND THE WORKFORCE 

Good morning to our witnesses and to all of our guests that are 

here today. Today’s hearing is the latest in our ongoing series of 

hearings on the reauthorization of the Higher Education Act. 

We are here today to examine the Federal Consolidation Loan 

Program, and how student lending issues fit within our broader 

goal of expanding access to higher education for low and middle income students. 

In particular, we have witnesses before us who will help us understand the cost of consolidation loans—the cost to taxpayers, the 

cost to graduates repaying their loans, and most importantly, the 

cost to low and middle income students in college today, or striving 

to attend college tomorrow. 

For the past 2 years, our Committee has been holding these 

hearings, meeting with members of the higher education community, and moving ahead with legislation to meet one central goal: 

expanding access to higher education for low-to-middle-income students who strive to attend a university or college of their choice. 

Our proposals for reauthorization of the Higher Education Act 

will reflect that goal, and today’s hearing will help shed light on 

the role of student loans, and particularly consolidation loans, in 

our efforts to ensure that low and middle income students have access to a higher education. 

The Federal Consolidation Loan Program is different than other 

student aid programs, because it doesn’t provide subsidies to people 

who are currently students. Rather, it provides billions in subsidies 

to people who are former students, most of whom I would imagine 

are graduates who have realized their dream of a college education 

and who have entered the workforce. 

The program was created to help college graduates repay their 

student debt. Consolidation loans allow borrowers with multiple 

loans, held by multiple lenders, to combine their debt into a single, 

often lower, monthly payment. 

While the program has been largely successful in helping college 

graduates repay their debt, changes in how the program has been 

used in recent years raise a number of questions about how the 

program should operate into the future. 

A recent report by the General Accounting Office warned that, as 

the program becomes more expensive, Congress needs to consider 

alternatives. I believe the implication of this report is that if we 

leave the Consolidation Loan Program on autopilot, the cost could 

balloon, taking billions of dollars away from the very low and middle income students that we are seeking to help. 

Chief among the topics we will examine today is the issue of interest rates. 

Unlike other Federal student loan programs, the Consolidation 

Loan Program locks borrowers into a fixed interest rate for the life 

of the loan. Because interest rates today are the lowest in the history of the Federal student loan programs—and I might add, the 

lowest interest rates we have seen in this country for 50 years—

many graduates are choosing to consolidate their loans simply to 

lock in these low interest rates. Can’t say that I blame them. 

3

However, the fundamental premise of the program was consolidation, not refinancing. This means consolidation loans were never 

intended to be a tool to secure low interest rates—low interest 

rates where the Federal Government, I might add, over the next 

30 years, will take all of the risk and absorb all of the additional 

cost. 

When the consolidation program began, interest rates were considerably higher than they are today. 

For example, consolidation loans made before July 1, 1994 had 

a fixed interest rate that was determined by the weighted average 

of the loans being consolidated, rounded to the nearest whole percent, or 9 percent, whichever was greater. That means consolidation loans had an interest rate of at least 9 percent. Compare that 

to today’s 3.42 percent interest rate. 

Clearly, when the program began it was never intended to be a 

tool to secure low interest rates, yet today’s historically low rates 

have resulted in unprecedented growth in the number of consolidation loans, and as a direct result, unprecedented growth in the Federal subsidy that is not targeted to helping today’s students, as opposed to graduates. 

Now, while we are all aware of the budget realities facing the 

Congress, with the limited resources, we must establish priorities, 

and I believe students should be our first priority. For that reason, 

I question whether dramatically expanding subsidies to non-students and/or graduates is justified. 

The Consolidation Loan Program fulfills an important purpose as 

it exists today, and there are reasonable steps Congress can and 

should consider to strengthen the program, but any effort to expand it will likely mean reduced resources for the low and middle 

income students whom we all hope to assist. 

If we are targeting our limited resources toward a particular 

group, I think that group should be students and those who are attempting to enter a college or university of their choice. 

I am eager to hear from our witnesses and their different perspectives on the cost of consolidation loans. 

In particular, this hearing will help us better understand how 

Federal subsidies are being used in the program, and how the fixed 

interest rate structure is different from the variable rate structure 

used for other Federal student loans, and the overall impact these 

issues have on our ability to assist current and future students. 

I would also encourage the witnesses to help shed light on proposals to change the Consolidation Loan Program. I think everyone 

would agree the program has been successful in its mission to help 

college graduates repay their loans. 

I oppose weakening the Consolidation Loan Program, but I also 

oppose isolating it from positive changes at the expense of low and 

middle income students. 

We should ask whether it would be best to maintain the program 

as it exists today, or make changes to the program in order to address questions about how the program itself has changed in recent 

years. 

We should ask whether it would be prudent to expand subsidies 

to non-students, as some have proposed, bearing in mind that a 

massive increase in this program could take resources away from 

4

the very low and middle income students that the Higher Education Act was created to serve. 

I look forward to a detailed discussion on this issue, and I am 

hopeful that this hearing will help us find the right balance as we 

look to reform the Federal student aid programs and strengthen 

the Higher Education Act on behalf of current and future students. 

I now yield to the gentleman from Michigan, our good friend, Mr. 

Kildee. 

[The prepared statement of Chairman Boehner follows:]

Statement of Hon. John A. Boehner, Chairman, Committee on Education 

and the Workforce Committee 

Good morning. Today’s hearing is the latest in our ongoing series of hearings on 

reauthorization of the Higher Education Act. We’re here today to examine the federal Consolidation Loan Program, and how student lending issues fit within our 

broader goal of expanding access to low and middle income students striving for college. In particular, we have witnesses before us who will help us understand the 

cost of consolidation loans–the cost to taxpayers, the cost to graduates repaying 

their loans, and most importantly, the cost to low and middle income students in 

college today or striving to attend college tomorrow. 

For the past two years, our committee has been holding hearings, meeting with 

members of the higher education community, and moving ahead with legislation to 

meet one central goal: expanding access to higher education for low and middle income students who strive for it. Our proposals for reauthorization of the Higher 

Education Act will reflect that goal, and today’s hearing will help shed light on the 

role of student loans–and particularly consolidation loans–in our efforts to ensure 

low and middle income students have access to a higher education. 

The federal Consolidation Loan Program is different than other student aid programs, because it doesn’t provide subsidies to people who are currently students. 

Rather, it provides billions in subsidies to people who are former students—graduates who have realized their dream of a college education and have entered the 

workforce. 

The program was created to help college graduates repay their student debt. Consolidation loans allow borrowers with multiple loans–held by multiple lenders–to 

combine their debt into a single, often lower monthly payment. While the program 

has been largely successful in helping college graduates repay their debt, changes 

in how the program has been used in recent years raise a number of questions 

about how the program should operate into the future. A recent report by the General Accounting Office warned that as the program becomes more expensive, Congress needs to consider alternatives. I believe the implication of this report is that 

if we leave the Consolidation Loan Program on autopilot, the cost could balloon, taking billions of dollars away from the very low and middle income students we are 

seeking to help. 

Chief among the topics we will examine today is the issue of interest rates. Unlike 

other federal student loan programs, the Consolidation Loan Program locks borrowers into a fixed interest rate for the life of the loan. Because interest rates today 

are the lowest in the history of the federal student loan programs, many graduates 

are choosing to consolidate their loans simply to lock in these low interest rates. 

However, the fundamental premise of the program was consolidation, not refinancing. This means consolidation loans were never intended to be a tool to secure 

low interest rates. 

When the Consolidation Loan Program began, interest rates were considerably 

higher than they are today. For example, consolidation loans made before July 1, 

1994 had a fixed interest rate that was determined by the weighted average of the 

loans being consolidated, rounded to the nearest whole percent, or 9 percent, which 

ever was greater. That means consolidation loans had an interest rate of at least 

9 percent. Compare that to today’s 3.42 percent interest rate. Clearly when the program began it was not intended to be a tool to secure low interest rates. Yet today’s 

historically low interest rates have resulted in unprecedented growth in the number 

of consolidation loans, and as a direct result, unprecedented growth in the federal 

subsidy that is not targeted to helping today’s students. 

We are all aware of the budget realities facing this Congress. With limited resources, we must establish priorities and I believe students should be priority number one. Not just one priority of many, but our first priority. For that reason, I question whether dramatically expanding subsidies to non-students is justified. The ConVerDate 0ct 09 2002 12:37 Oct 14, 2004 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6621 H:\DOCS\92613.TXT EDUWK PsN: NNIXON
5

solidation Loan Program fulfills an important purpose as it exists today, and there 

are reasonable steps Congress can and should consider to strengthen the program. 

But any effort to expand it will likely mean reduced resources for the low and middle income students we all hope to assist. If we are targeting our limited resources 

toward a particular group, I think that group should be students first and foremost. 

I am eager to hear from our witnesses and their different perspectives on the cost 

of consolidation loans. In particular, this hearing will help us better understand how 

federal subsidies are being used in the Consolidation Loan Program, how the fixed 

interest rate structure is different than the variable rate structure used for other 

federal student loans, and the overall impact these issues have on our ability to assist current and future students. 

I would also encourage the witnesses to help shed light on proposals to change 

the Consolidation Loan Program. I think everyone would agree this program has 

been successful in its mission to help college graduates repay their loans. I oppose 

weakening the Consolidation Loan Program, but I also oppose isolating it from positive change at the expense of low and middle income students. We should ask 

whether it would be best to maintain the program as it exists today, or make 

changes to the program in order to address questions about how the program itself 

has changed in recent years. We should ask whether it would be prudent to expand 

subsidies to non-students as some have proposed, bearing in mind that a massive 

expansion of this program could take resources away from the low and middle income students the Higher Education Act was created to serve. 

I look forward to a detailed discussion on this issue, and I am hopeful that this 

hearing will help us find the right balance as we look to reform the federal student 

aid programs and strengthen the Higher Education Act on behalf of current and future students. With that, I would yield to Mr. Miller for any opening statement he 

may have. 

Mr. KILDEE. Thank you, Mr. Chairman, and happy St. Patrick’s 

Day to you. 

Chairman BOEHNER. Thank you. 

Mr. KILDEE. I love your tie. 

Chairman BOEHNER. Everyone, a happy St. Patrick’s Day. 

Mr. KILDEE. Mr. Chairman, our colleague, Mr. Miller, has been 

temporarily delayed, so I would ask that his opening statement be 

submitted for the record. 

Chairman BOEHNER. Without objection. 

[The prepared statement of Mr. Miller follows:]

Statement of Hon. George Miller, Ranking Member, Committee on 

Education and Workforce 

Thank you Mr. Chairman. I am pleased to join you at today’s hearing on student 

loan consolidation. 

I particularly want to welcome Titus Hamlett to the committee today. I look forward to your testimony and the testimony of the other witnesses, too. 

Higher education has a long tradition of providing opportunities towards a better 

life for millions of Americans. Today, the Higher Education Act is more important 

than ever to succeeding in the global marketplace, lifting millions of Americans out 

of poverty, and keeping Americans safe in the post–9/11 society. 

Despite the need to expand access to an affordable education, college is fast becoming a pipe dream for too many students. States are cutting support for higher 

education and pushing higher tuition prices onto students and their families. 

In addition to budget cuts and rising prices, millions of students are taking on 

high debt levels that discourage college attendance and encourage default—which 

costs taxpayers billions of dollars. 

This year, almost 7 million students will borrow more than $50 billion in federal 

student loans—accounting for almost 70 percent of all federal financial aid. 

Over the past ten years, student loan debt has nearly doubled to $17,000 and 

about one-fifth of full-time working students spend 35 or more hours per week on 

the job to cover college costs. At the same time, student aid is falling further and 

further behind the cost of a college education. In fact, last year the maximum Pell 

Grant was worth $500 less than the maximum grant in 1975–76. 

6

It is imperative that we return to the original premise of the Higher Education 

Act of 1965—that no college qualified student should be denied a college education 

because he or she is lacks the financial resources. 

A key tool to ensuring that millions of students can access a college education is 

the low-fixed rate benefit of consolidation loans, which allows students to lock in a 

low rate and save thousands of dollars. In addition, borrowers can eliminate the 

need for dealing with multiple lenders, extend their repayment period, or enroll in 

payment plans based on a percentage of their income when they consolidate their 

loans. 

As more and more students take on high debt levels it is important to focus on 

the financial need of students both as they enter college and when they leave. For 

student borrowers, the cost of college does not impact them until they graduate and 

begin repayment. This is the critical time when consolidation can, and does, make 

repayment manageable for student borrowers. 

The benefits of consolidation are particularly important today, as graduates face 

a weakened economy and rising unemployment rates. A recent study by the Economic Policy Institute (EPI) found that the long-term unemployment among collegeeducated workers increased by nearly 300 percent between 2000 and 2003—almost 

double the increase of non-college graduates in the same time period. 

In addition, the General Accounting Office (GAO) found that the average annual 

income for consolidation borrowers is $47,000 and that their debt to ratio income 

is 9.4 percent—just above the 8 percent industry suggested standard for borrowers 

in repayment to maintain financial stability. 

A recent analysis by the State PIRGs’ Higher Education Project found that the 

average borrower with $20,000 in debt would be forced to pay more than $7,000 in 

additional interest if the low-fixed consolidation rate benefit is eliminated. 

At a time of rising college costs, high unemployment and little job growth, we 

should not be forcing students and their families to pay more for a college education. 

As we reauthorize the Higher Education Act, I look forward to working with my 

colleagues on the committee to strengthen loan consolidation program and to expand 

college access to low and middle-income students. 

Thank you Mr. Chairman. 

STATEMENT OF HON. DALE E. KILDEE, A REPRESENTATIVE IN 

CONGRESS FROM THE STATE OF MICHIGAN 

Mr. KILDEE. You mentioned that the students are attracted to 

consolidating their loans at a fixed rate. Well, they aren’t the only 

ones in this market right now. 

I, for the, I think, third time in 3 years, just refinanced my home 

mortgage—at the solicitation of the lender, by the way. They were 

afraid I might go someplace else. So I did reduce it, at a fixed rate 

also. The economy right now does attract people toward consolidation or refinancing. 

Thank you, Mr. Chairman. I want to join you in welcoming today’s witnesses before this Committee. This is indeed an important 

topic which deserves the attention of the Committee today, and I 

appreciate the fact that you are having this hearing. 

Everyone in this room would agree that a higher education is 

critical to future earning potential and the ability to provide for 

your family and your children. 

The reality facing most students, however, is high tuition, and 

grant aid from the Federal Government and state government that 

has lost much of its buying power. Also, student debt now is at an 

all-time high. 

Our economic policies have lost rather than created jobs, and 

worse, outsourced many of our jobs overseas. Students graduating 

from college and looking for employment simply can’t catch a break 

right now. 

7

There are so many people out there who graduated from my University of Michigan still looking for a job, even with all the talents 

they have accrued there at the University of Michigan. 

On top of all this comes today’s discussion about changing the interest rate structure on consolidation loans from a fixed rate to a 

variable rate. 

Let us be clear. Once we cut through all of the arguments, one 

fact is undeniable. This proposal will heap thousands of dollars in 

increased interest costs on the backs of students and recent college 

graduates. 

You will hear a lot today about helping current students, and 

that we should be investing in programs which provide benefits to 

students who are entering college, and I couldn’t agree with that 

more. However, financing those up-front benefits on the backs of 

those who have consolidated their loans I do not think is the proper 

approach. 

Cutting benefits from one part of the program to finance another 

doesn’t increase access. Rather, I believe it short-changes those 

who are struggling to find employment in an economy which isn’t 

even producing enough jobs to keep pace. 

If members want to reduce origination fees, and consider whether we should increase loan limits, we should not be robbing Peter 

to pay Paul. Instead, let us get the resources we need to enact 

these changes. The Senate budget resolution includes $5 billion in funding to 

address these types of higher education priorities. Our goal should 

be to expand our higher education programs, not move resources 

around an already paltry pie. 

In closing, I want to again stress what this proposal will mean 

for students. 

A variable rate structure for consolidation loans means that the 

average student will face thousands of dollars in increased interest 

rate cost. When the Bush administration proposed this very change 

just 2 years ago, Mr. Chairman, it was met with bipartisan opposition because of its impact on students. I hope today’s discussion 

keeps these points in mind. 

Thank you, Mr. Chairman. I yield back the balance of my time. 

Chairman BOEHNER. Thank you, Mr. Kildee. 

It is my pleasure to introduce our witnesses today. 

Our first witness will be Ms. Cornelia Ashby. Ms. Ashby has 

served in numerous capacities since she joined the U.S. General 

Accounting Office in 1973. That is a few years ago, Ms. Ashby. 

Currently, Ms. Ashby serves as the Director of Education, Workforce, and Income Security, directing studies in numerous areas, including higher education. Prior to this position, Ms. Ashby was 

GAO’s Associate Director for Tax Policy and Administrative Issues. 

In addition to her job as Director, Ms. Ashby is presently pursuing her Ph.D. in sociology at American University. 

Then we will hear from Mr. Titus Hamlett. Mr. Hamlett is currently a student at the University of Maryland, majoring in government and politics. In addition to his studies, Mr. Hamlett is also 

engaged in numerous extra-curricular activities. He is an active 

member of the Student Government Association and the Maryland 

Student Legislature, a non-profit organization that organizes deleVerDate 0ct 09 2002 12:37 Oct 14, 2004 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 H:\DOCS\92613.TXT EDUWK PsN: NNIXON
8

gates from colleges and universities across Maryland to research 

and debate issues of local and national importance. 

Then we will hear from Dr. Tom Neubig. Dr. Neubig is a partner 

and also the National Director of Quantitative Economics and Statistics in the national tax department of Ernst & Young, LLP. He 

was a consultant to numerous public and private clients from Federal and state tax policy issues before joining Ernst & Young. 

Dr. Neubig served as director and chief economist at the U.S. 

Treasury Department’s office of tax analysis and is the top executive branch career economist in tax policy. 

Lastly, we will hear from Dr. Robert Shapiro. Dr. Shapiro is a 

founding partner and current Chairman of Sonecon, LLP, a private 

economic advisory firm. In addition, Dr. Shapiro is a non-resident 

senior fellow of the Brookings Institution and also the Progressive 

Policy Institute. From 1997, Dr. Shapiro served as the Under Secretary of Commerce for Economic Affairs, providing economic policy 

oversight for the Commerce Department. 

Dr. Shapiro was the principal economic advisor to President Bill 

Clinton in his 1991-1992 Presidential campaign, and also served as 

legislative director and economic counsel to Senator—former Senator and late Senator—Daniel Moynihan. 

Let me explain the lights. You will have 5 minutes to give your 

testimony. We are not real rough on people who want to talk a little longer than that, unless you get too carried away, and then I 

will gently remind you. 

And with that, Ms. Ashby, you may begin. 

STATEMENT OF CORNELIA M. ASHBY, DIRECTOR, EDUCATION, 

WORKFORCE, AND INCOME SECURITY ISSUES, U.S. GENERAL 

ACCOUNTING OFFICE, WASHINGTON, D.C. 

Ms. ASHBY. Mr. Chairman and members of the Committee, thank 

you for inviting me here today to discuss issues related to consolidation loans and cost implications for taxpayers and borrowers. My 

testimony will focus on recent changes in interest rates and consolidation loan volume, and how these changes have affected Federal 

costs for FFELP and FDLP consolidation loans. 

My comments are based on our October 2003 loan consolidation 

report done for this Committee. For this testimony, we updated our 

numbers to reflect recent estimates made by the Department of 

Education. 

In recent years, there has been a drop in interest rates for student loan borrowers, along with dramatic overall growth in consolidation loan volume. From July of 2000 to June 2003, the interest 

rate for consolidation loans dropped by more than half, with consolidation loan borrowers obtaining rates as low as 3.5 percent as 

of July 1, 2003. 

From fiscal year 1998 through fiscal year 2003, the volume of 

newly originated consolidation loans rose from $5.8 billion to over 

$41 billion. 

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 

loans at low fixed rates. The chart on the screen shows this relaVerDate 0ct 09 2002 12:37 Oct 14, 2004 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6602 H:\DOCS\92613.TXT EDUWK PsN: NNIXON
9

tionship. Note that the interest rates set on July 1 of each year corresponds to the loan volume for the following fiscal year. 

In addition, increased marketing effort has likely contributed to 

the record level of consolidation loan volume. Many lenders, including newer companies that are specializing in consolidation loans, 

have aggressively marketed consolidation loans to compete for consolidation loan business, as well as to retain the loans of their current customers. 

Recent transit interest rates in consolidation loan volume have 

affected the cost of 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 about 

$650 million for loans made in fiscal year 2002 to over $2 billion 

for loans made in fiscal year 2003. Both higher loan volumes and 

lower interest rates in fiscal year 2003 increased these costs. 

Education’s estimate of over $2 billion in subsidy costs is based 

on the assumption that the guaranteed lender yield will rise over 

the next several years. 

The effect of this rise is shown on the chart on the screen, where 

the bottom line shows the fixed borrower rate for an FFELP consolidation loan made in the first 9 months of fiscal year 2003, and 

the top line shows Education’s estimate values for the guaranteed 

lender yield over time. 

In fiscal year 2003, market interest rates were such that the 

guaranteed lender yield was actually below the borrower rate. 

Lenders, therefore, received only the rate paid by borrowers. No 

special allowance payment, or SAP, was 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 with a SAP. As the chart 

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. 

Changing interest rates and loan volumes affected costs in the 

FDLP loan consolidation program, as well. In both fiscal years 

2002 and 2003, there was no subsidy cost to the government because the interest rate paid by borrowers who consolidated their 

loans was greater than the interest rate education paid to the 

treasury to finance the lending. 

However, the drop in loan volume and interest rates that occurred in fiscal year 2003 contributed to cutting the government’s 

estimated gain from $570 million in fiscal year 2002 to $543 million for loans made in fiscal year 2003. 

Administration cost is not specifically tracked for either Consolidation Loan Program, but available evidence indicates that these 

costs have risen, primarily reflecting increased overall loan volume. 

In our October 2003 report, we recommended 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 suggested options that include targeting the program to borrowers at risk of default: extending existing consolidation alterVerDate 0ct 09 2002 12:37 Oct 14, 2004 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 H:\DOCS\92613.TXT EDUWK PsN: NNIXON
10

natives to more borrowers and changing from a fixed to a variable 

rate the interest charged to borrowers on consolidation loans. 

We noted that, in conducting such an assessment, Education 

should also consider how best to distribute program costs among 

borrowers, lenders, and taxpayers. Education agreed with our recommendation. 

Mr. Chairman, this concludes my statement. I would be pleased 

to answer any questions. 

[The prepared statement of Ms. Ashby follows:]

Statement of Cornelia M. Ashby, Director, Education, Workforce, and 

Security Issues, U.S. General Accounting Office 

Mr. Chairman and Members of the Committee: 

Thank you for inviting me here today to discuss issues related to consolidation 

loans and their cost implications for taxpayers and borrowers. Consolidation loans, 

available under the Department of Education’s (Education) two major student loan 

programs—the Federal Family Education Loan Program (FFELP) and the William 

D. Ford Direct Loan Program (FDLP)—help borrowers manage their student loan 

debt. By combining multiple loans into one loan 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. Consolidation loans under FFELP and FDLP accounted for about 48 percent of the $87.4 billion in total new student loan dollars that originated during fiscal year 2003. FFELP consolidation loans comprised about 84 percent of the fiscal 

year 2003 consolidation loan volume, while FDLP consolidation loans accounted for 

the remaining 16 percent. 

Two main types of federal cost pertain to consolidation loans. One is ‘‘subsidy’’—

the net present value of cash flows to and from the government that result from 

providing these loans to borrowers. 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. 

My testimony today will focus on two key issues: (1) recent changes in interest 

rates and consolidation loan volume and (2) how these changes have affected federal 

costs for FFELP and FDLP consolidation loans. My comments are based on the findings from our October 2003 report for this Committee, Student Loan Programs: As 

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

(GAO–04–101, October 31, 2003). Those findings were based on review and analysis 

of data from a variety of sources, including officials from Education’s Office of Federal Student Aid and Budget Service, and representatives of FFELP lenders; a sample of student loan data extracted from Education’s National Student Loan Data 

System (NSLDS)—a comprehensive national database of student loans, borrowers, 

and other information; relevant cost analyses prepared by Education; and statutory, 

regulatory and other published information. For this testimony, we updated our 

numbers to reflect recent estimates made by the Department of Education. Our 

work was conducted in accordance with generally accepted government auditing 

standards. 

In summary: 

• Recent years have seen a drop in interest rates for student loan borrowers along 

with dramatic overall growth in consolidation loan volume. From July 2000 to 

June 2003, the interest rate for consolidation loans dropped by more than half, 

with consolidation loan borrowers obtaining rates as low as 3.50 percent as of 

July 1, 2003. From fiscal year 1998 through fiscal year 2003, the volume of consolidation loans made (or ‘‘originated’’) rose from $5.8 billion to over $41 billion. 

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. 

11

1State 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. 2 Both subsidized and unsubsidized Stafford loans 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. The federal 

government pays the interest on behalf of subsidized loan borrowers while the student is in 

school. Students can qualify for unsubsidized Stafford loans regardless of financial need. 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. 3Perkins 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 

Continued

• Recent trends in interest rates and consolidation loan volume have affected the 

cost of 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 $0.651 billion 

for loans made in fiscal year 2002 to $2.135 billion for loans made in fiscal year 

2003. Both higher loan volumes and lower interest rates available to borrowers 

in fiscal year 2003 increased these costs. Lower interest rates increase 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. 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 the Treasury to finance 

its lending. However, the drop in loan volume and interest rates that occurred 

in fiscal year 2003, contributed to cutting the government’s estimated net gain 

from $570 million in fiscal year 2002 to $543 million for loans made in fiscal 

year 2003. Administration costs are not specifically tracked for either Consolidation Loan Program, but available evidence indicates that these costs have risen, 

primarily reflecting increased overall loan volumes. 

In our prior report, we recommended 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. Education agreed with 

our recommendation. 

Background 

Consolidation loans differ from other loans in the FFELP and FDLP programs in 

that they enable borrowers who have multiple loans—possibly from different lenders, different guarantors, 1 and even from different loan programs—to combine their 

loans into a single loan and make one monthly payment. 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 the underlying 

loans. Maximum repayment periods allowed vary by the amount of the consolidation 

loan (see table 1). 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, including subsidized and unsubsidized Stafford loans, PLUS loans, 2 and, in some instances, consolidation loans. Both subsidized and unsubsidized Stafford loans, and 

PLUS loans are variable rate 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 (HEAL).3

12

to eligible graduate students in specified health professions. HEAL was discontinued on September 30, 1998. 4Present 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). 5For 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 on the 

loans in their portfolio. 6 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—specifically, in 

the 2.64 percent add on paid over and above the 3-month rate on commercial paper. 

The Federal Credit Reform Act (FCRA) of 1990 helps define federal costs associated with consolidation loans and was enacted to require agencies, including Education, to more accurately measure federal loan program costs. Under FCRA, Education is 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. Subsidy cost estimates are calculated based on the present value of estimated net cash flows to and 

from the government that result from providing loans to borrowers.4 For FFELP 

consolidation loans, cash flows include, for example, fees paid by lenders to the government 5 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. Unlike FFELP, FDLP involves no guaranteed yields or special allowance 

payments to lenders because the program is a direct loan program. The subsidy 

costs of FDLP consolidation loans are also affected by the interest Education must 

pay to Treasury to finance its lending activities. Another type of cost pertaining to 

consolidation loans is administration, which includes such items as expenses related 

to originating and servicing direct loans.6

In estimating loan subsidy costs, Education first estimates the future economic 

performance (net cash flows to and from the government) of direct and guaranteed 

loans when preparing its annual budgets. These first estimates establish the subsidy estimates for the current-year originated loans. The data used for the first estimates are reestimated in later years to reflect any changes in actual loan performance and expected changes in future 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. 

Borrowers’ Rates Have Dropped, and Loan Volume Has Risen 

Recent years have seen a drop in interest rates for student loan borrowers along 

with dramatic overall growth in consolidation loan volume. From July 2000 to June 

2003, the interest rate for consolidation loans dropped by more than half, with consolidation loan borrowers obtaining rates as low as 3.50 percent as of July 1, 2003. 

From fiscal year 1998 through fiscal year 2003, the volume of consolidation loans 

made (or originated) rose from $5.8 billion to over $41 billion. Over four-fifths of the 

fiscal year 2003 loan volume is in FFELP. While overall volume rose in 2003, the 

trends differed by program. FDLP consolidation loan volume for fiscal year 2003 decreased, but loan volume in the larger FFELP increased, resulting in total consolidation loan volume of well over $41 billion. 

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. Figure 1 shows the 

relationship between these two factors. When interest rates are low, some borrowers 


92613.032
13

7 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. 

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 and avert default.

Underscoring the potential attractiveness of these loans to potential borrowers, 

many lenders, including newer loan companies that are specializing in consolidation 

loans, have aggressively marketed 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. 

Changes in Interest Rates and Loan Volume Affect FFELP and FDLP Costs in Different Ways but in the Aggregate, Estimated Costs Increased 

While the estimated future costs for consolidation loans can vary greatly from 

year to year, low interest rates and recent loan volume changes have resulted in 

substantial increases in overall costs to the federal government. However, in light 

of the differences between how FFELP and FDLP operate, the subsidy costs within 

these two programs were affected in very different ways. For FFELP, the result was 

a substantial increase. 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. 

FFELP Subsidy Costs Affected by Increased Special Allowance Payments to Lenders 

and Increased Loan Volume 

Estimated subsidy costs for FFELP consolidation loans rose from $0.651 billion 

for loans made in fiscal year 2002 to $2.135 billion for loans made in fiscal year 

2003. The increase is largely 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 and the result of greater loan volume. 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 7 interest rate plus an additional 2.64 percent. When this guaranteed yield is higher than the amount of interest being paid 

by borrowers, Education makes up the difference. 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 $2.135 billion in subsidy costs for FFELP consolidation 

loans made in fiscal year 2003 is based on the assumption that the guaranteed lendVerDate 0ct 09 2002 12:37 Oct 14, 2004 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6621 H:\DOCS\92613.TXT EDUWK PsN: NNIXON

92613.033
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8While 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. 

er 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. The effect of this rise is shown in figure 2, where the bottom 

line shows the fixed borrower rate for a FFELP consolidation loan made in the first 

9 months of fiscal year 2003, and 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, therefore, received only the rate paid by 

borrowers; no SAP was 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 figure 2 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.

An increase in loan volume also played a role in the subsidy cost increase from 

fiscal years 2002 to 2003. However, the effect of the increased loan volume was not 

as large as that of the higher interest subsidies the government is expected to pay 

to lenders in the future. 

FDLP Loans also Affected by Changing Interest Rates 

Subsidy costs can occur within FDLP as well, but in a different way. FDLP’s consolidation program is a direct loan program and, therefore, involves no guaranteed 

yields to private lenders. Still, the program has potential subsidy costs if the government’s cost of borrowing is higher than the interest rate borrowers are paying. The 

government’s cost of borrowing is determined by the interest rate Education pays 

Treasury to finance direct student loans, which is equivalent to the discount rate.8

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 declines from $571 million in fiscal year 2002 to $543 million in fiscal year 2003. 

The smaller net gain that occurred in fiscal year 2003 reflects both a decrease in 

the loan volume and a narrowed difference between the discount rate and the borrower rate. Loan volume in fiscal year 2003 was $6.7 billion, a decrease from $8.8 


92613.034
15

9GAO–04–101. 

billion in fiscal year 2002. 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 1.2 percentage points, from 6.3 percent in fiscal 

year 2002 to 5.1 percent in fiscal year 2003. The discount rate, on the other hand, 

dropped by only 0.88 percentage points, from 4.72 percent in fiscal year 2002 to 3.84 

percent in fiscal year 2003. The resulting interest rate spread decreased from 1.59 

percent to 1.22 percent (see table 2). In other words, each $100 of consolidated 

FDLP loans made in fiscal year 2002, will result in $1.59 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 $1.22 more in interest for the 

government.

Administration Costs also Increase, 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 does not include overhead costs, which include costs incurred for 

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 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 a large portion of FFELP 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. 

Concluding Observations 

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. The movement 

of subsidy costs for consolidation loans made in future years will depend heavily on 

what happens to interest rates. As we have shown, subsidy cost estimates for 

FFELP consolidation loans can increase substantially, depending on how much the 

guaranteed lender yield rises above the fixed rate paid by borrowers, which, in turn, 

requires the federal government to pay subsidies to lenders. Conversely, if borrowers obtained consolidation loans with a fixed interest rate at a time when rates 

were expected to decrease in the future, federal subsidy costs could be lower, than 

is currently the case, because the borrower rate could exceed the rate guaranteed 

to lenders, and the federal government might not be required to pay lender subsidies. 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. 

We noted in our prior report 9 that borrowers’ choices between obtaining a fixed 

rate consolidation loan or retaining their variable rate loans can significantly affect 

federal costs. While consolidation loans may be an important tool to help borrowers 

manage their educational debt and thus reduce the cost of student loan defaults, 


92613.035
16

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. Providing for these larger interest subsidies on behalf of a broad 

spectrum of borrowers 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. 

In our October 2003 report, we also discussed the extent to which repayment options other than consolidation loans allow borrowers to simplify loan repayment and 

reduce repayment amounts. We found that other repayment options that allow borrowers to make a single payment to cover multiple loans and smaller monthly payments are now available for some borrowers under both FFELP and FDLP, but 

these alternatives are not available to all borrowers. In that report, we concluded 

that 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 change 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. 

In our October 2003 report, we recommended 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 suggested options that 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. We 

also noted that, 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. Furthermore, if Education determines that statutory changes are needed to implement more cost-effective repayment options, we believe it should seek such changes from Congress. Education agreed with our recommendation. 

Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the Committee may have. 

GAO Contact and Acknowledgments 

For further contacts regarding this testimony, please call Cornelia M. Ashby at 

(202) 512–8403. Individuals making key contributions to this testimony include Jeff 

Appel, Susan Chin, Cindy Decker, and Julianne Hartman–Cutts.

[Attachments to Ms. Ashby’s statement follow:] 

17


92613.023
18

Chairman BOEHNER. Thank you, Ms. Ashby. 

Mr. Hamlett, you may begin. 

STATEMENT OF TITUS M. HAMLETT, STUDENT, UNIVERSITY 

OF MARYLAND 

Mr. HAMLETT. Thank you, Chairman Boehner and distinguished 

Committee members, for inviting me here today to speak on consolidation loans and financing a college education. 

I just wanted to mention that this is my first time testifying. I 

am a little nervous and I am also feeling a little under the weather 

today, so please bear with me. 

My name is Titus Hamlett. I am a senior at the University of 

Maryland, College Park. I will graduate this May with a degree in 

government and politics, and I plan to pursue a career in public 

service. I will be the first person in my family to graduate from college, which is a major accomplishment, and I am very proud of 

that. 

I currently work at the U.S. Department of Justice as a student 

paralegal. I am actually in the Civil Division and I do work with 

the U.S. attorneys. I do a lot of research and different things for 

them. 

Basically what I want to talk about is the effects of student loans 

on students, and the effects of tuition increases on students. 

As you all know, many students like myself struggle to pay for 

higher education today. In the University of Maryland system, tuition prices have risen by 20 percent in the last year alone. Despite 

rising prices, growing student loan debt, and more students working to pay for college, the Governor in Maryland has continued to 

cut funding for higher education, unfortunately. 

The real impact has been that, along with thousands of other 

University of Maryland students, I have had to take out more loans 

and work longer hours for these unexpected, and they are unexpected, tuition increases. I am currently working 20-plus hours a 

week while balancing an 18-credit course load, which is tough, but 

it’s what I have to do, because I have to graduate, and I have to 

pay for my college education. 

My mother, who is a single parent, works two full-time jobs, but 

even with her two jobs, she cannot afford to pay a significant 

amount toward my college education, so I rely on some help from 

my mother—financial help, that is. 

I work during the summer; as I mentioned, I work throughout 

the school year; and I have also received Pell Grants, which have 

helped a lot. However, I primarily rely on student loans to pay for 

my college education. 

When I graduate this May, unfortunately, I will have about 

$41,000 in Federal education loan debt. I have taken out $22,000 

in subsidized Stafford loans, and $19,540 in unsubsidized Stafford 

loans. 

When I graduate, I plan to consolidate my loans in a locked low 

interest rate, hopefully, to save thousands of dollars, and to make 

repaying my college loans manageable. 

In addition to my loans, working through school and receiving 

scholarships and grants have made it possible for me to attend college. However, as I near graduation, I worry that I am not going 

19

to be able to manage the $41,000-plus that I am going to have in 

undergraduate loan debt. 

I would like to pursue a career in public service, because I feel 

that it’s important for me to give back to my community and my 

country, but if my monthly student payments are too high once I 

graduate, I may have to reconsider whether or not I want to go into 

the public sphere or into the private sector. 

I really, really like—my heart is into public service. It’s what I 

want to do. But I may have, you know, more debt than I would 

make in my first year as a graduate, and I have to take that into 

consideration when I apply for a job once I graduate. 

I believe the grants and the loans that I received while I have 

been in college have been key to making my education possible. 

As I mentioned before, given that both tuition prices and student 

debt has been constantly rising, I was shocked to learn that Congress may consider eliminating the low fixed rate benefit for student borrowers. 

Eliminating this benefit will push higher prices on thousands of 

students like myself, and increase the numbers of student borrowers who simply won’t be able to manage repaying their student 

loans. 

When I graduate this spring, I plan to continue working at the 

Department of Justice because, like I mentioned before, I really 

want to work in public service and give back to my country. I know 

that this is possible for me, because consolidation will allow me to 

save thousands of dollars on my loans overall and make my monthly payments a lot lower. 

I strongly support making college more affordable by allowing 

student borrowers to consolidate their loans to a low, fixed interest 

rate. 

Chairman Boehner and Ranking Members of the Committee, I 

urge you to retain the low fixed interest rate for student borrowers, 

and I oppose any efforts to raise costs on student loans. 

Thank you for allowing me to testify today. 

[The prepared statement of Mr. Hamlett follows:]

Statement of Titus M. Hamlett, Student, University of Maryland 

Thank you Chairman Boehner, Ranking Member Miller and distinguished committee members for inviting me here to speak today on the issue of student loan 

consolidation and financing a college education. 

My name is Titus Hamlett and I am a senior at University of Maryland College 

Park. I will graduate this May with a degree in Government and Politics and I plan 

to pursue a career in public service. I will be the first person in my family to graduate from college. I currently work at the U.S. Department of Justice in the Civil 

Division as a part-time paralegal. 

As you know, many students like myself struggle to pay for higher education 

today. In the University of Maryland system tuition prices have risen by 20 percent, 

or over $1000 (for in-state students), in the last year alone. Despite rising prices, 

growing student loan debt and more students working to pay for college, The Governor of Maryland has continued to cut funding for higher education. The real impact has been that along with thousands of other University of Maryland students, 

I have had to take out more loans and work longer hours to pay for these unexpected tuition increases. I am currently working 20 plus hours a week while balancing an 18-credit course load. 

My mother, who is a single parent, works two full-time jobs, but even with her 

two jobs she cannot afford to pay for my college education. I rely on some financial 

help from my mother; I work during the summer and throughout the school year, 

20

and I also received a $4050.00 Pell Grant this year. However, I have primarily relied on student loans to pay for my college education. 

When I graduate this May I will have $41,540.00 in federal education loan debt. 

I have taken out $22,000.00 in subsidized Stafford loans and $19,540.00 in unsubsidized Stafford loans. When I graduate I plan to consolidate my loans and lock in 

a low interest rate to save thousands of dollars and to make repaying my college 

loans manageable. 

In addition to my loans, working through school and receiving scholarships/grants 

have made it possible for me to attend college. However, as I near graduation I am 

worried that I will not be able to manage the $41,000.00 that I have in undergraduate loan debt. I would like to pursue a career serving my community and country. I am counting on the benefit of a low-fixed rate consolidation loan, which would 

save me thousands of dollars, to help make my career in public service possible. 

Otherwise, I may have no other choice but to go into the private sector. 

I believe that the grants and loans that I received while I was in college were 

key to making my college education possible. However, the impact of my loans won’t 

really hit me until I graduate and have to make monthly payments. It’s important 

to have financial assistance at both points for students with need. 

If I were not able to consolidate my loans under a fixed rate, I would have to pay 

thousands more for my education. Higher total and monthly payments would dictate 

where I work, when or if I am able to purchase a home, and various other important 

life choices. 

Given that both tuition prices and student loan debt have been rising rapidly, I 

was shocked to learn that Congress may consider eliminating the low-fixed rate benefit for student borrowers. Eliminating this benefit would push higher prices on 

thousands of students and increase the number of student borrowers who cannot afford to repay their loans. 

When I graduate this spring, I plan to continuing working at the Department of 

Justice, because I believe that it is important to give back to the community and 

my country. I know that this is possible for me because consolidation will allow me 

to save thousands of dollars on my loans overall and lower my monthly payments. 

I strongly support making college more affordable by allowing student borrowers 

to consolidate their loans and lock in a low-fixed interest rate. Chairman Boehner, 

Ranking Member Miller and all of the distinguished members here today I urge you 

to retain the low-fixed rate benefit for student borrowers and oppose any efforts to 

raise the cost of student loans. Thank you for allowing me to testify here today. 

Chairman BOEHNER. Thank you, Mr. Hamlett. 

Dr. Neubig. 

STATEMENT OF THOMAS S. NEUBIG, NATIONAL DIRECTOR, 

QUANTITATIVE ECONOMICS AND STATISTICS, ERNST & 

YOUNG, LLP, WASHINGTON, D.C. 

Dr. NEUBIG. Mr. Chairman and members of the Committee, 

thank you for inviting me to testify on the results of two recent 

studies I prepared on the costs and benefits of the consolidation 

student loan program. The results of both reports rely heavily on 

Congressional Budget Office interest rate projections, and I have 

included some updated estimates based on CBO’s most recent projections. 

In today’s hearing, you are going to see large differences in the 

cost estimates of the Consolidation Loan Program, and if I can 

leave you with two takeaways, I would like you to understand why 

the cost of the program has changed over time, and also why different cost methodologies show vastly different results. 

When I trained to be an economist, I did not want to be a crystal 

ball gazer, forecasting GDP, employment, interest rates. At the 

U.S. Treasury Department, we estimated tax revenue and tax policy changes, taking the macroeconomic forecasts of CBO and OMB 

as a given. 

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Economists rarely agree on future projections, especially interest 

rates. Even OMB and CBO disagree on the magnitude and timing 

of the interest rate changes. One advantage of using CBO interest 

rate projections is that they underlie all congressional budget estimates. 

Since accurate forecasting of the future is impossible, budget 

numbers should at least be consistent across programs. The principal reason for the varying costs of the Consolidation Loan Program is that the cost is tied to the direction of interest rate movements. As interest rates change over time, the cost of each year’s 

loans also changes. 

I like to think of the consolidation loans as falling into three 

buckets. 

The first bucket includes loans consolidated before 2003. That’s 

when interest rates were high, but then fell sharply. 

Due to that pattern of interest rate changes, lender-paid fees on 

these loans will exceed the cost of the interest subsidy to the tune 

of almost $4 billion over the entire life of those loans. 

The second bucket includes loans consolidated between 2003 and 

2006, and those loans have low interest rates for the students, and 

interest rates are projected to increase. 

Based on the CBO projections of increasing interest rates, I estimate that those loans consolidated in those 4 years will cost Federal taxpayers $6 billion over the life of the loans. That is a 180-

degree cost change, but it is due to the shift from stable, or falling 

interest rates, to a rapidly rising interest rate environment. 

The third bucket includes loans consolidated after 2006, when future interest rates stabilize. In this stable interest rate period—you 

know, again, based upon the CBO interest rate forecast—consolidation loan fees will again exceed the interest subsidy for a positive 

$2 billion benefit to the U.S. Treasury between 2007 and 2010. 

When you look at the cost of the Consolidation Loan Program 

over the 16-year period between 1995 and 2010, and you combine 

all three buckets of loans, the program is positive in the initial 

years. It’s quite costly for today’s loans, and then it is positive 

again once interest rates stabilize. If you look at the program over 

16 years, it is essentially cost-neutral. Lender-paid fees roughly 

match the interest subsidy. 

Now, if you are uncomfortable with people forecasting future interest rates, you can look at the actual budget cash-flow experience 

of the program to date. 

From 1995 to 2003, the government collected $2.6 billion in fees 

and only spent $400 million in special allowance payments. That’s 

a net positive of $2.2 billion. You can see those actual budget numbers on Page 3 of my testimony. 

The cost estimates I have provided the Committee follow the 

Federal Credit Reform Act requirement to discount future cashflows from Federal loan guarantee programs to current dollars. 

This recognizes that a dollar in 2024 is worth much less than a dollar today. If future cash-flows are not discounted, the estimates 

will be inflated and also inconsistent with other loan guarantee 

program cost estimates. 

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Up to this point, I’ve focused on the cost side, but let me briefly 

describe one of the benefits of the current program. That is the 

one-time ability to lock in a fixed interest rate. 

Similar to mortgage refinancing, consolidation loans have become 

very popular at the current low interest rate. Changing the consolidation loan interest rate formula from a fixed rate to a variable 

rate would roughly double the interest cost paid by students taking 

out a consolidation loan today, based on the CBO interest rate forecast. 

Whether student borrowers or the Federal taxpayer should bear 

the risk of future interest rate increases is a key public policy question. 

I hope my testimony is helpful in the Committee’s deliberations. 

Thank you. 

[The prepared statement of Dr. Neubig follows:]

Statement of Dr. Thomas S. Neubig, National Director, Quantitative 

Economics and Statistics, Ernst & Young LLP 

I am the National Director of Ernst & Young LLP’s Quantitative Economics and 

Statistics practice. I was previously the Director and Chief Economist of the U.S. 

Treasury Department’s Office of Tax Analysis. 

I appreciate the invitation to testify before the Committee to discuss the results 

of two studies on the costs and benefits of the Federal Family Education Loan 

(FFEL) consolidation student loan program. The two reports, ‘‘The Net Incremental 

Cash Flow and Budget Effects of the FFEL Consolidation Loan Program, fiscal year 

2005–FY2010’’ and ‘‘The Effect on Student Borrowing Costs if Consolidation Loans 

Were Variable Rate Loans Rather Than Fixed Rate Loans,’’ are also submitted for 

the record. Both reports were prepared at the request of Collegiate Funding Services 

LLC. My testimony summarizes the key findings from the reports, with estimates 

updated for the most recent loan volume and interest rate projections. 

Two Key Considerations 

Two key considerations for policymakers considering the cost implications of consolidation loans during the coming Higher Education Act reauthorization are: 

1. Consolidation student loans are not all alike from a cost perspective. The cost 

of future consolidation loans will be much less than the estimated cost of the 

current 3.5% loans. 

Depending on the interest rate environment, a year’s issuance of consolidation 

loans could bring in significant fee revenue to the U.S. government or could require 

significant expenditures. Three groups of consolidation loans should be distinguished: 

• Loans made before fiscal year 03 have already generated $1.7 billion of consolidation loan fees from lenders to date with only $0.3 billion of government payments to lenders. The estimated net cost of the Consolidation Loan Program for 

loans originated in fiscal year 1995–2002 is a positive $3.7 billion over the life 

of the loans. 

• Loans made between fiscal year 03 and fiscal year 06 are expected to have significant future subsidy costs if the predicted sharp increase in interest rates occurs. Consolidation loans made at historically low interest rates during this 

four-year period are estimated to cost $6.1 billion over the life of the loans in 

net present value. 

• Loans made after fiscal year 06, when the interest rate forecast is relatively stable, are estimated to have fees that will exceed expenditures. The estimated net 

cost of loans made in fiscal year 2007–2010 is a positive $2.3 billion. 

The large estimated cost of current consolidation loans is due to current historically low interest rates combined with projected higher future interest rates. These 

loans will provide significant interest savings to student borrowers if the projected 

interest rate increases occur. The costs and benefits of these loans have already 

been committed. This is why the August 2003 report focused primarily on future 

loans. 

2. The real cost of the Consolidation Loan Program is its additional cost over and 

above the cost of the underlying Stafford/Plus loans (i.e., its ‘‘incremental’’ net 

cost) less lender-paid consolidation fees. 

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Measuring the real cost of the Consolidation Loan Program is not easy, and its 

further complicated by the many different types of estimates that are possible. I believe the appropriate cost for policymakers to consider will include: 

Fee offset. The cost of the Consolidation Loan Program from defaults and special 

allowance payments is partially offset by the 0.5% origination fee and the annual 

1.05% consolidation loan holder fee. These lender-paid fees are generated from consolidation loans and reduce the net cost of those loans. 

Incremental cost. If fewer consolidation loans were made, there would be more interest subsidy paid on the Stafford/Plus loan program. The cost of consolidation 

loans is the cost over and above the interest subsidy on the underlying Stafford/Plus 

loans, less the lender-paid consolidation fees. 

Discounted present value of future cash flows. The Federal Credit Reform Act 

(FCRA) of 1990 requires the budget effect to be calculated as the net present value 

of the future cash flows over the life of the loans issued in each year. Simply adding 

future dollars without discounting is inconsistent with the FCRA and overstates the 

costs of the consolidation program. 

Future interest rate projections. Interest rate forecasts, like interest rates, change 

over time as the economy changes. For budgeting purposes, the Congressional Budget Office and Office of Management and Budget forecast interest rates over the next 

5–10 years. These forecasts underlie not only student loan costs, but also the government’s interest expense, the macroeconomic forecast of GDP, employment and 

tax revenues. Extreme scenarios of interest rate increases are inconsistent with 

every other budget forecast. 

Estimates that do not take these issues into account will overstate the cost of the 

FFEL Consolidation Loan Program. 

The Budget Cost of Consolidation Loans 

The August 2003 report on ‘‘The Net Incremental Cash Flow and Budget Effects 

of the FFEL Consolidation Loan Program, fiscal year 2005–FY2010’’ showed that on 

a cash flow basis the program has been a net plus to the federal government since 

1995. I have updated the numbers for the most recent Department of Education 

budget numbers and loan volume forecasts, plus the CBO’s most recent interest rate 

projections. 

Consolidation loan fees have totaled $2.6 billion through fiscal year 03 while gross 

special allowance payments have been only $0.4 billion. Based on the most recent 

Department of Education fiscal year 05 Budget numbers, the FFEL Consolidation 

Loan Program will bring in an additional $2.2 billion of lender-paid fees, with only 

$0.5 billion of expenses in fiscal year 04 and fiscal year 05. These cash flow numbers 

represent the actual fiscal experience to date of the program, but they are not the 

full cost, which requires projecting future interest rates and the future cash flow 

for the entire life of the loans.


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The figure below shows the estimated cost of the three groups of FFEL consolidation loans based on the latest loan volume estimates and CBO interest rate projections. These estimates take into account both special allowance payments and fees, 

the incremental cost of consolidation loans in excess of Stafford/Plus loans, and the 

discounted present value of the future cash flows. 

The cost of the Consolidation Loan Program varies over time with different interest rate environments. When loan rates at the time of consolidation are high and 

then interest rates fall (fiscal year 1995–2002), the program is estimated to have 

a net effect of positive $3.7 billion. When loan rates at the time of consolidation are 

low and interest rates are expected to rise (fiscal year 2003–06), the cost is estimated to be $6.1 billion over the four years. When interest rates are relatively stable (fiscal year 2007–10), consolidation loans will again return to a positive net effect of $2.3 billion. Over the 16-year period, the FFEL Consolidation Loan Program 

is estimated to be essentially cost neutral (less than negative $0.2 billion). 

When the HEA reauthorization occurs, only changes to the Consolidation Loan 

Program will be scored for budget purposes. The expected cost of the current loans 

has already been included in prior budgets, and will not affect the HEA reauthorization budget.

The Benefit Side 

The FFEL Consolidation Loan Program was enacted to provide student loan borrowers with a simpler loan repayment plan, plus a one-time opportunity to lock in 

a longer payment term and a fixed interest rate to reduce the likelihood of default. 

A lower, fixed monthly payment was thought to result in lower default rates for student borrowers. How much of the lower default effect is due to the extended repayment period, the fixed interest rate, or the type of student refinancing the loans, 

has not been studied, but that information would be helpful for policymakers to 

know. 

One benefit, particularly during the current low interest rate environment, is the 

ability of student borrowers to lock in a fixed interest rate. This is similar to what 

has happened in the residential mortgage market, where there has been an explosion of refinancing to lower families’ mortgage interest expense and monthly payments. Recent developments in the mortgage market to allow borrowers to choose 

fixed rate or variable rate loans with different maturities have been a major benefit 

to both borrowers and the residential housing market. Private market lenders are 

willing to lend money at 4–6% interest rates for 15–30 years. If interest rates go 

up as the CBO projects, many mortgage lenders will experience lower returns on 

those fixed mortgages, while the borrowers will view them as very beneficial. 


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Similarly, the potential cost of the FFEL Consolidation Loan Program for loans 

originated between July 1, 2002 and June 30, 2004 could be large if interest rates 

rise as the CBO projects. The total net incremental cost of those two years of loans 

is an estimated $3.4 billion in net present value terms. On the borrower side, the 

student loan borrowers will benefit significantly from the low 3.5% fixed interest 

rate. The March 2004 study, ‘‘The Effect on Student Borrowing Costs If Consolidation Loans Were Variable Rate Loans Rather Than Fixed Rate Loans,’’ shows the 

effect on borrower costs if those consolidation loans had not been available at a fixed 

rate. 

Using a $30,000 20-year consolidation loan originated in July 2003 at 3.5%, and 

the CBO interest rate projections, the monthly payment would increase 34% from 

$174 under a fixed rate loan to $233 in 2008 if it had been a variable rate loan. 

The total interest expense would increase from $11,800 to $22,900 over the life of 

the loan, a 95% increase. The variable rate loan would have the same total interest 

cost as a comparable 6.32% fixed rate loan, 2.72% above the current fixed consolidation loan rate. 

The benefits of the fixed interest rate include potentially lower default rates and 

the ability to lock in a lower rate. Congress has limited the ability of student borrowers to refinance their student loans more than once. The budget cost, which provides the interest rate subsidy for the borrower’s benefit, is one reason for the limitation on student loan refinancing. 

Conclusion 

The FFEL Consolidation Loan Program is an important part of the Higher Education Act reauthorization. The Consolidation Loan Program’s benefits and costs are 

not easily measured, and continually revised interest rate projections and different 

methodologies result in a myriad of numbers. I hope these two reports and these 

updated estimates provide the Committee with useful information for your deliberations, particularly the important considerations that: 

• Consolidation student loans are not all alike from a cost perspective. The net 

cost of future consolidation loans will be much less, even positive, compared to 

the estimated cost of the current 3.5% loans. 

• The reported cost of the Consolidation Loan Program will be overstated unless 

lender-paid loan fees, the net cost above the cost of the otherwise underlying 

Stafford/Plus loans, the discounted present value of future cash flows, and government interest rate projections are included in the analysis. 

That concludes my testimony. I would be happy to answer any questions about 

my testimony and the two consolidation loan studies.

[Attachments to Dr. Neubig’s statement follow:]

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Chairman BOEHNER. Thank you, Dr. Neubig. 

Dr. Shapiro. 

STATEMENT OF ROBERT J. SHAPIRO, CHAIRMAN, SONECON, 

LLP AND SENIOR FELLOW, BROOKINGS INSTITUTION AND 

PROGRESSIVE POLICY INSTITUTE, WASHINGTON, D.C. 

Dr. SHAPIRO. Mr. Chairman and members of the Committee, it’s 

an honor to be here today. I have come to discuss a new study 

which my colleague Dr. Kevin Hassett and I conducted to analyze 

the long-term costs of the current student loan consolidation program. 

There is no doubt that Federal student loans are a great success. 

More than 62 percent of high school graduates go on to higher education, and one of the reasons is that we provide more than 7 million students and parents, like Mr. Hamlett, more than $50 billion 

a year in Federal assistance. 

The loan consolidation program, however, is different, and not 

only because it doesn’t actually help anybody go to college. 

To limit public costs, and so maintain strong public support, underlying student loans carry interest rates that are adjusted annually. This limits the subsidy and ensures a stable relationship between the price of the funds to the students and the cost of the 

funds to lenders. 

But under the consolidation program, former student borrowers 

consolidate their loans at a subsidized rate that remains fixed for 

up to 30 years. This fixed interest rate is the source of a problem 

which could well cost taxpayers tens of billions of dollars over 20 

years, perhaps much more. 

The greatest costs occur when market interest rates have fallen 

sharply, as they did over the last 3 years, and then rise again. 

Unless our economy enters a sustained period of economic stagnation, it is virtually certain that over the next three, five, or seven 

years, market interest rates will return to the levels of the 1990’s, 

or worse, the 1980’s, if serious inflation were to occur. 

When that happens, those who consolidated their loans in 2002, 

2003, and this year, will still pay interest based on the 1 percent 

Treasury bill rates of this period, while those who lent them the 

funds will receive payments from the government based on market 

rates that have become much higher. The gap between the lockedin fixed rate and the potential future commercial paper rate is 

what determines the additional cost of this program. 

Estimating the taxpayer’s liability here is straightforward—apply 

a baseline projection of interest rates to the stock of outstanding 

consolidated debt—but it’s not simple. 

For example, loan consolidations are not distributed evenly. They 

rise when interest rates are low, and decline when rates are relatively high. From 1995 to 2001, about 211,000 students a year 

consolidated FFELP loans. In 2002 and 2003, with low interest 

rates, the average jumped to 964,000 a year. 

From 1995 to 2001, when the interest rate for a typical consolidation loan was 7.9 percent, consolidations averaged about $5 billion a year. As the interest rate fell to about 4 percent in 2002 and 

3.5 percent in 2003, the total jumped to almost $23 billion and $35 

billion, respectively, rising from $5 billion a year to $35 billion. 

49

To analyze these costs systematically, we applied simulation procedures to generate the most likely paths of future interest rates, 

based on historical experience. 

Let me say we would have preferred to use CBO. Unfortunately, 

the CBO forecast ends 5 years out, and then simply assumes a stable interest rate environment at that level. 

We also constructed estimates of the likelihood of possible deviations from these paths. 

The results show that the commercial paper rate will likely rise 

to more than 5 percent in the next 4 years, and then range from 

5.6 to 5.9 percent. Let me say that for the years in which CBO was 

estimating, and we were estimating, our approach produced an interest rate path entirely consistent with CBO’s forecast. 

We also found that the stock of outstanding debt for consolidated 

loans is more than $100 billion today. It’s expected average lifetime 

is nearly 21 years, and the average fixed rate is 5.52 percent. 

With these results, we could calculate the cost to taxpayers. 

Given the most likely future path of interest rates, taxpayers will 

pay almost $14 billion over the next 20 years to subsidize the interest on the existing stock of consolidated loans, and if interest rates 

are 2 to 3 percentage points higher than that—that is what economists call one standard deviation, an outcome consistent with historical experience—taxpayers will pay more than $48 billion to 

service the current stock of loans. 

We can also estimate the cost of future loan consolidations, assuming that the program is unchanged. Remember that the high 

cost associated with the current stock of consolidated debt came 

about because interest rates fell after rising sharply, and then rose 

again. This will occur again, and it will affect future loans, and 

when it does, those costs will also be high. 

We estimate that loans likely to be consolidated over the next 8 

years will cost taxpayers another $36 billion in subsidy payments 

over a 20-year term. 

One final point: 

While student loan programs generally provide equal subsidies to 

all students, the consolidation program produces very large inequities. 

The basic problem is that, since the interest rate on these loans 

rises or falls each year and then remains fixed for the life of the 

loan, the long-term cost of the consolidated loan to the former student depends on when he or she happens to consolidate. This produces large disparities in interest costs. 

For example, $22,000 in student loans consolidated in 1995 or 

1996 will cost a former student borrower $25,000 in interest over 

20 years. That’s three times the 20-year interest cost of $8,600 for 

the same debt consolidated in 2003. It simply depends on the moment you consolidate, which is usually the year you happen to 

graduate from college. 

The current program will generate tens of billions of dollars in 

taxpayer costs, along with significant equities. You can address 

both problems by shifting the program from a fixed interest rate 

to annually adjusted rates, and if the program is not reformed, taxpayers may not be the only ones bearing the cost. 

50

As government payments for consolidations rise sharply, as they 

certainly will, these costs could squeeze out some of the underlying 

loan programs. At a minimum, reforming the loan consolidation 

program so that the interest rates on these loans adjust annually, 

as they do for all other student loans, will save billions of dollars 

that could be available for future college students. 

Thank you. 

[The prepared statement of Dr. Shapiro follows:]

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Chairman BOEHNER. Let me thank all of our witnesses for their 

excellent testimony. 

Mr. Hamlett, we appreciate your coming in, not feeling up to 

speed, and let me assure you that you will have no problem consolidating your loans. I’m sure you’re getting all types of marketing 

phone calls already getting you all set up for the day you graduate, 

and you can go ahead and lock in these historically low rates. 

Now, before we get too far into this, my good friend, Mr. Kildee, 

in his opening statement, talked about, well, we need to do a lot 

on access, but, you know, we also need to help all of those who are 

out of school, as well. While we would all like to be Santa Claus, 

you know, we can’t be. We got elected to Congress to be decisionmakers in the public policy arena, and regardless of what the size 

of that pie is, there is some limit to the size of the pie, and we’re 

elected to make choices. 

So if, in fact, our goal with the Higher Education Act is to help 

low to moderate income students attend a college or university of 

their choice, we need to make sure that we are meeting our goal 

in providing the tools for those qualified students to attend an inVerDate 0ct 09 2002 12:37 Oct 14, 2004 Jkt 000000 PO 00000 Frm 00060 Fmt 6633 Sfmt 6602 H:\DOCS\92613.TXT EDUWK PsN: NNIXON

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stitution that they wish to attend, and that means that we need 

to make choices as we begin to reauthorize this program. 

Ms. Ashby, you pointed out in your testimony that these consolidated loans do, in fact, receive considerable subsidies. 

Dr. Neubig, in his testimony, said, in effect, and I will paraphrase this—if I am incorrect, Dr. Neubig, certainly correct me—

that the fees paid by lenders are, in the short term, outweighing 

the subsidies, and long-term, that it’s basically a wash. 

Are you in agreement with this? 

Ms. ASHBY. Well, I am not sure about the wash and the longterm. 

It is true that the fees—and we’re talking about the annual 1.05 

percent, I presume—that the annual fees do reduce the net outflow 

to the government and, in that way, reduce the taxpayer’s ultimate 

cost. But based on the work we did, we didn’t—we took the Department of Education’s numbers, and we looked basically at loans that 

were consolidated in fiscal year 2003, and we looked at the difference between the subsidy cost for those and loans consolidated 

the prior year, prior fiscal year. 

So I really can’t comment on Dr. Neubig’s study. 

Chairman BOEHNER. Ms. Ashby, Dr. Neubig, Dr. Shapiro, do you, 

any of you, disagree with the fact that interest rates are likely to 

rise? 

Dr. SHAPIRO. No. Certainly not. 

Chairman BOEHNER. Dr. Neubig? 

Dr. NEUBIG. I guess I don’t take a position, you know, in terms 

of what’s going to happen. I guess I am buying inflation index 

bonds at the moment, and clearly OMB and CBO both forecast 

higher interest rates. 

Ms. ASHBY. I am certainly in no position to disagree with the experts. 

Chairman BOEHNER. So we all agree that interest rates are going 

to rise, and we know that if interest rates rise, someone has to bear 

that risk. Nobody disagrees with that? 

So the question is, who should bear the risk? And whether the 

loan was made in 2001, 2002, 2003, or, for that matter, 2006, there 

is risk that someone has to bear, and there are the three parties 

that could bear that risk. 

They could be the government, they could be the lender, or they 

could be the graduate, the student—not the student, the post-student years. Those are the three categories. 

Now, it will not be the lenders, because they sell off these, they 

are pretty well insulated, and if they are not—if they are exposed 

to this risk, they probably will not make the loans. So we can take 

them out of the equation pretty quickly. 

So now we are down to two parties who are going to bear this 

risk. Is it going to be the Federal Government and/or, let’s be honest, the taxpayers, or is it going to be people who have graduated 

from college bearing that risk? 

Now, for those who have received student loans, let us review the 

bidding. 

The Federal Government provided them, in many cases, a student loan, whether it be subsidized or unsubsidized. In many cases, 

we bore the interest for those subsidized loans during the life of 

58

that student being in school, or at least deferred the interest for 

those unsubsidized loans. 

After they are out of school, we provide a 6-month grace period, 

where there are no payments required, and if the student wants to, 

and has multiple loans with multiple lenders, we allow the student 

to consolidate those loans to make one payment. 

We also provide for extended repayment in many of those cases, 

especially for large loans, over a longer period of time. 

Not only has the Federal Government provided all of this while 

the student is in school and for a short time after they are at 

school, all the way through these guarantees—these are all guaranteed loans. 

You do not have to apply for them, you do not get rejected, they 

are guaranteed, and there is a cost for that guarantee, so we have 

subsidized all of this for students until such time as we believe 

that most of them are out of school and into the work force. 

I guess the question I am asking the panel is, is it fair to expect 

the student to bear that risk of what interest rates may be in the 

future—that graduate to bear those risks—or should the taxpayers 

continue to bear that risk? 

Dr. Shapiro? 

Dr. SHAPIRO. Well, I just want to note that students bear the risk 

if they happen to consolidate when interest rates are high. 

That is, there are—the reason that the program has thus far 

shown a generally positive cash-flow is because, every year except 

one, the consolidation loan rate has been falling. The problems 

arise in this program after the rates have fallen and then they 

begin to rise again. 

So, of course, if you only look at a period in which interest rates 

are falling, have been falling, and the consolidation loan rate has 

been falling, you’re going to get a kind of rosy scenario. 

The fact is, we are subsidizing consolidation loans as well as the 

underlying student loans. The fact is that students are not bearing 

an even risk today. 

When Dr. Neubig said that, based on the CBO interest rate forecast, that moving to a variable rate would double the interest costs 

of students who are consolidating today, the implication of that is 

that students who consolidate later will be paying double the interest of those today, which is, indeed, what’s happened in the past. 

We have the interest burden paid by someone consolidating this 

year is one-third the level of the interest payment borne by someone who consolidated 6 years ago. So, students are bearing a risk, 

depending on when they happen to graduate. In fact, the risk 

would be equalized if everyone’s consolidation loan rate were to be 

adjusted annually. 

Chairman BOEHNER. Dr. Neubig? 

Dr. NEUBIG. I guess I do not have a view, in terms of who should 

bear the interest rate risk. I guess I think there is the possibility 

that it’s more than just a choice between taxpayers and the government. 

Currently in the residential mortgage market, we have private 

sector lenders offering both variable rate and fixed rate 15-year 

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gage markets, they have been able to, you know, hedge those risks 

to people who are willing to accept those risks. 

So I think it’s more than just a choice between taxpayers and the 

government. 

Chairman BOEHNER. Are home mortgages, are those subsidized? 

Are they guaranteed? 

Dr. NEUBIG. No, they are not, in most cases, but even on the private sector side, there are advances in the markets, you know, that 

allow some of this interest rate risk to be taken by people who are 

willing to accept the risk. 

Chairman BOEHNER. The chair recognizes the gentleman from 

Michigan. 

Mr. KILDEE. Thank you very much, Mr. Chairman. 

We have a vote going on over in the House, and I will have to 

leave shortly, as all of us will, but let me ask this, so we can get 

this on the record. 

For students who will consolidate their loans in the next few 

years—and without using your crystal ball, just your own best 

guesstimate—would changing consolidation interest rates from a 

fixed to a variable rate make student loans more costly for students? 

Let me start with Dr. Shapiro and go down. 

Dr. SHAPIRO. It would make them more costly for students who 

consolidated today, and probably less costly for those who consolidated later, when interest rates were high, as interest rates fell 

again. 

Mr. KILDEE. Dr. Neubig? 

Dr. NEUBIG. Again, based upon the CBO projections, it would increase the cost of students taking out consolidation loans probably 

in 2003, 2004, and probably 2005, 2006. At some point, you know, 

they will stabilize. 

Mr. KILDEE. Mr. Hamlett? 

[No response.] 

Mr. KILDEE. You can pass if you want. We do that around here, 

too. 

Mr. HAMLETT. I’m not really an expert on this particular issue, 

so I’m just going to speak from my personal experience. Having a 

fixed low interest rate would definitely help me, in particular, and 

a lot of other American families. 

I think that changing it from a fixed interest to a variable interest rate is going to cost families money, and to me that’s just something that you wouldn’t want to do to middle to lower income families. 

Mr. KILDEE. Ms. Ashby? 

Ms. ASHBY. In the simplest case, without considering all the various factors, and presuming that the experts are right that interest 

rates are not likely to go much lower than they are today, and that 

they will increase in the future, going to a variable rate will increase the costs for students. 

But one of the other factors is the length of time the student 

holds that loan, and one of the advantages, for some students anyway, is a longer payment period, and of course, over a longer payment period, you’re paying more interest over the life of that loan. 

Mr. KILDEE. Thank you, Mr. Chairman. 

60

I believe I will go over and cast my vote now. 

Chairman BOEHNER. Well, we do have several votes on the 

House floor, interrupted by 10 minutes worth of debate. I would 

suggest that the earliest we would be back here would be about 

noon. 

So the Committee will stand in recess until about 12. 

[Recess.] 

Chairman BOEHNER. The Education and the Workforce Committee will come to order. 

Sorry for the delay. Unavoidable, though. 

The chair recognizes the gentleman from Wisconsin, Mr. Petri. 

Mr. PETRI. Thank you very much. 

Thank you all for your testimony, and the work that went into 

your prepared statements, as well. 

I wonder if it would be possible to explore an area that was hinted at in Dr. Neubig’s recent answer. 

We probably—do you agree or disagree that there is a problem 

with the consolidation in that there is a mismatch between a longterm repayment and a short-term number, and in the mortgage 

area and others, they peg a long-term block into a longer-term 

bond, so that it’s anyone’s guess what interest rates are going to 

be, but that guess is not made by the financial institution or the 

lender, they lay that off on the market and collect their margin to 

stay in business. 

Would that be a more appropriate fix of this problem, or what 

would the implications of trying to emulate, you know, the student 

loan consolidation lock-in area, what is done in the rest of the 

world, be? 

Borrowers are familiar with the options they have now with refinancing and mortgages and various periods of time. 

I don’t know what the average student loan repayment is, but 

that wouldn’t be hard to determine. It’s probably somewhere between—around 10 years, or something like that. 

So we could pick a number in the Treasury world and add some 

points for overhead or whatever, and let them lock it in at that, 

and then, well, it wouldn’t be subsidized by the Treasury or the 

taxpayer. We could figure out a way of it being subsidized by an 

insurance company or whoever buys the parallel private bond. 

Would you care to comment on whether that would be an appropriate way to approach this? 

Dr. NEUBIG. I think as you identified, there is some 

mismatching, you know, between sort of the asset and liability side 

in the current program which is causing, you know, the big positive, big negative, big positive, and there are ways of addressing it 

beyond just moving to a variable rate. 

Things that are being done in the financial markets are something that I think the Committee should perhaps explore. I haven’t 

analyzed, you know, what those might be, but I think it isn’t just, 

you know, a win-lose situation between the Federal taxpayer and 

the student. 

Mr. PETRI. How would you suggest we go about getting some 

help in doing this appropriately? Dr. Shapiro, do you have a comment? 

61

Dr. SHAPIRO. Well, you know, I do. You know, I think your comment about the mismatch is very apt. 

It is—part of what we did in our study was to look at a most 

likely, what we considered a most likely case, and then less likely, 

and nightmare scenarios—how bad can it get—and there is a 

range. 

When it gets very bad, it is—and indeed all the costs here arise 

out of this mismatch—it is essentially the same problem in form 

that we saw in the S&L crisis, and that we saw in the Asian financial crisis, and that is borrowing short and lending long. 

Over interest rate cycles, it might even out if consolidations occurred evenly, but of course, they don’t. 

That is, they rise enormously when the rates are very low, in 

order to lock in the rate, and that’s what causes this disproportionate problem. It does go positive, negative, positive, negative, 

but the negatives are a lot bigger, because the volume is so much 

greater at the low rates than of consolidation than at the high 

rates. 

Mr. PETRI. Dr. Neubig, did you have a further comment? 

Dr. NEUBIG. Well, this is an area I would certainly be eager to 

explore, because we do have one solution, but it may not be the optimal solution from the point of view of the students and the government and the taxpayer. We are in the business of not just saving the taxpayer money, but trying to make this a user-friendly 

program. 

I think people would understand they had to pay a higher rate 

for locking in a longer-term mortgage, because they face that every 

day in the marketplace, and they can make the choice and decide 

what is most appropriate in their own—given their own financial 

circumstances, but denying a long-term lock-in to students as one 

option seems to me to be giving up something that is beneficial to 

a lot of people. 

Chairman BOEHNER. The chair recognizes Mr. Andrews. 

Mr. ANDREWS. Thank you, Mr. Chairman. 

I would like to thank the panel for its patience during our vote. 

Mr. Hamlett, let me say you did great, you did not sound nervous 

at all, and as a student at the University of Maryland, I am sure 

that you are aware of the fact that the reason for the Terrapins’ 

recent basketball success is because their coach, Gary Williams, 

grew up in South Jersey, in my congressional district. 

[Laughter.] 

Chairman BOEHNER. And trained as a good coach in Ohio. 

[Laughter.] 

Mr. ANDREWS. Well, Ohio is where you go to train, and New Jersey is where you go to excel. 

[Laughter.] 

Mr. ANDREWS. That may just cut my time. I am sure that does 

not come off my time, Mr. Chairman. 

Chairman BOEHNER. If I recall, there are some games this weekend that we may want to discuss. 

[Laughter.] 

Mr. ANDREWS. OK. We may discuss, but never wager, because 

that is illegal. 

Chairman BOEHNER. Not between friends, it is not. 

62

Mr. ANDREWS. That is true, and that would be a legal wager 

based on that principle. 

I very much appreciate the witnesses’ testimony on this very 

complicated subject. 

Ms. Ashby, I had a chance to read the GAO report that you 

wrote, or led the authorship of. As usual, it was exceptionally excellent from the GAO. I wanted to ask you to characterize a couple 

of conclusions that I think I drew. 

Is it accurate to say from your report that people who consolidate 

their loans as a whole are higher-income, when compared to the 

student lending population generally? Is that correct? 

Ms. ASHBY. Well, we are looking at consolidators versus nonconsolidators. 

Mr. ANDREWS. Right. 

Ms. ASHBY. So yes, those who consolidated their loans tended to 

be higher income. 

Mr. ANDREWS. I think I read that 39 percent of the consolidators 

had incomes in excess of $50,000 a year. That is in your report? 

Ms. ASHBY. I don’t have the numbers, but my colleague is saying 

yes. 

Mr. ANDREWS. The other thing I think I read in your report is 

that consolidators are more likely to be people that went to graduate school than people who did not, relative to the rest of the 

lending population. 

Ms. ASHBY. For consolidators, a larger percentage, yes, had gone 

to graduate or professional schools. 

Mr. ANDREWS. I believe it was 28 percent had done some graduate school borrowing, as compared to 12 percent of the nonconsolidators, if I read the report correctly. So that’s a fair characterization of the people who were consolidating. 

If I were writing the budget resolution, which I am not, I would 

have a very different set of choices here. 

I would not have a tax cut nearly as big as the one that we have, 

and I would choose to fund a very liberal consolidation program, as 

well as significant increases in support for students who are in 

school, and if that were the budget resolution before us, that’s what 

I would do. It isn’t. 

Realistically, the choice in front of us is what to do with very 

scarce mandatory spending higher education dollars, and I particularly want to focus on that choice with respect to minority students 

and the consequences of the choice we have between liberal consolidation and other choices that we might make. 

Dr. Shapiro, first of all, I appreciate the great work you did in 

the Clinton administration over all those years, and I wonder, do 

you have a number on your projected cost over the 5-year future 

that we’re legislating for for the present consolidation regime? 

In other words, if we didn’t change it, just left it where it was, 

how much do you think that costs the Federal Treasury? 

Dr. SHAPIRO. Well, we have an estimate of the lifetime cost of 

loans which we believe will be consolidated over the following 7 

years, and that estimate is about $21 billion. 

Mr. ANDREWS. About $21 billion. 

63

Is it accurate to say that if we made a change to variable rate 

consolidation, if, that most of that $21 billion would then, in effect, 

be saved, would be recaptured? 

Dr. SHAPIRO. The majority, and it would depend on how you designed the variable rate program. 

Depending on how you designed it and how you adjusted the fees 

paid by consolidators, you could go anywhere from a system which 

converted it all to savings to one which converted part of it to savings. 

Mr. ANDREWS. If, as I suspect, we are in a position where we 

have to design a bill that is budget-neutral, that doesn’t increase 

mandatory outlays for higher education, in effect that gives us a 

pool of money somewhere short of $21 billion that we could look at 

spending by making the reduction in outlays, which could be offset 

by an increase in outlays, one of the increases in outlays I would 

be interested in would be an abolition of the origination fees that 

students pay. 

Mr. Hamlett, you have done some extensive borrowing. You are 

aware of the fact that there is a 3 percent origination fee each time 

you borrow a student loan that you tack on, which is a lot of 

money. 

I did some research on origination fees, looking at subsidized 

loans, and one of the striking statistics is that 86.8 percent of African American students get a subsidized loan, and 86.8 percent of 

Hispanic students get a subsidized loan; so one of the consequences 

of eliminating origination fees is, it would have a substantially 

positive impact for minority students who are in school. 

Dr. Shapiro, would you agree or disagree with that characterization? 

Dr. SHAPIRO. I would absolutely agree with that. 

It is—there are—the student loan consolidation program does not 

affect all kinds of students equally. 

It is—consolidators tend to be people with larger student debt, as 

GAO established. They tend to be people who have gone to graduate school, because those are the ones who pile up the largest 

debt. 

The average debt of the current stock of consolidated loans, 

which includes loans which have been half paid off, for example, 

is $22,000. That is greater than the maximum an undergraduate 

could borrow under the FFELP program. 

Mr. ANDREWS. In the difficult choices the Committee faces, and 

there are no easy answers to this, one of the things I’m going to 

be looking for and paying attention to is which expenditure of these 

scarce dollars does the most to help moderate income students generally, minority students who have traditionally not had the access 

that other people have had to higher education. 

I favor the abolition of origination fees. I favor the expansion of 

income-contingent and income-sensitive repayments, so that students like Mr. Hamlett, who may want to take a career in public 

service, would not be penalized for doing so, and frankly, I also 

think we have to look at higher loan limits as a way to help people 

bridge the gap between the shortfall in Pell aid and the realities 

of rising tuition. 

64

You know, again, in a world that I would create, we could do 

both that and very liberal consolidation, but in a world where we 

have to choose how to allocate the scarce dollars, I think those are 

issues that we have to focus on. 

Thank you, Mr. Chairman. 

Chairman BOEHNER. The chair recognizes the gentleman from 

Michigan, Mr. Hoekstra. 

Mr. HOEKSTRA. Thank you, Mr. Chairman. 

I have a statement I would like to just submit for the record. 

Chairman BOEHNER. Without objection. 

[The prepared statement of Mr. Hoekstra follows:]

Statement of Hon. Pete Hoekstra, a Representative in Congress from the 

State of Michigan 

Mr. Chairman, I want to thank you for convening this hearing today. The issue 

of a strong loan consolidation program has been very important to me for many 

years. We should make no mistake; federal loan consolidation is an essential tool 

for making higher education more affordable for students. It is a program with proven results for students. 

As we’ve heard from our witnesses today, federal consolidation loans allow recent 

graduates to refinance their multiple underlying student loans into a single, fixed 

rate loan with a lower monthly payment. The federal student loan consolidation program benefits borrowers in all walks of life, and public support for this program is 

broad. 

With the cost of higher education growing, today’s college students graduate with 

an average student loan debt 66% greater than 6 years ago. The problem can be 

even more acute for those completing postgraduate and professional programs, 

many of whom graduate with debt in excess of $100,000. As a result, a significant 

number of graduates at all levels see their debt as unmanageable, and consequently, 

as imposing limits on their career choices. A more manageable monthly repayment 

obligation is an important factor both in opening up those choices and in averting 

student loan default. Loan consolidation is especially essential in removing the barriers that student loan debt presents to those college and professional school graduates who want to work in the public and non-profit sectors of the economy. It is 

noteworthy that nurses and teachers combined were the largest group taking advantage of loan consolidation during the last 5 years. 

The widely popular federal student loan consolidation program (utilized last year 

by more than 726,000 student borrowers) has proven beneficial to the federal government as well. In the last fiscal year, the 0.5% lender-paid origination fee on consolidation loans generated $210 million to the federal government. Consolidation 

lenders are also required to pay a 1.05% portfolio fee/tax each year to the federal 

government on the outstanding principal of all consolidation loans held by the lender. That is, each outstanding consolidation loan generates a lender-paid fee each 

year to the federal government. This fee does not apply to other student loans. Over 

the past 7 years, the revenue to the federal treasury from these origination and 

portfolio fees has totaled nearly 2 billion dollars. 

Fixed rate consolidation loans work for student borrowers. We should not attempt 

to change the program to variable rates without seriously considering the impact 

of this change on students. It is imperative that the loan consolidation program be 

preserved and expanded as a vital element in graduates’ efforts to cope with student 

loan debt. I thank the Chairman for this hearing and pledge during our Reauthorization of the Higher Education Act to work closely with the Chairman and my 

Committee Colleagues to ensure that the Committee’s legislation includes a strong 

federal student loan consolidation program. 

Mr. HOEKSTRA. I want to build off a little bit of what Mr. Petri 

was talking about. 

Why couldn’t student loans be worked much like you work the 

home mortgage? 

For somebody who is willing to take the risk, you get a variable 

rate mortgage. For those who, you know, want a lower interest 

fixed rate, they may go to a 15-year, and for somebody else they 

65

go to a 30-year. Why couldn’t the same kind of formula plan be put 

in place for student loans? 

For anybody on the panel. 

Yes. 

Dr. SHAPIRO. You could, Congressman. It would maximize the 

budgetary costs. 

Mr. HOEKSTRA. Why would it maximize the budgetary costs? 

Dr. SHAPIRO. People consolidating at a time of high rates would 

choose variable rates, which would reduce their payments as interest rates came down, and those consolidating in a low interest rate 

environment would pick fixed rates. 

Mr. HOEKSTRA. I do not think you are understanding what the— 

Dr. SHAPIRO. OK. 

Mr. HOEKSTRA. I mean, if you consolidated a low interest rate, 

where it says, ‘‘This will be your interest rate for 7 years,’’ it is not 

going to be adjusted. My 15-year mortgage at home is not adjusted 

every year. 

So that then becomes the fact of life for the person who is loaning the money, that you have agreed to the loan at this rate for 

15 years. 

Dr. SHAPIRO. Right. 

Mr. HOEKSTRA. So why would that maximize the cost to the Federal Government? It would no longer cover the difference. 

Dr. SHAPIRO. Where the Federal Government would no longer 

cover—if the interest rates go up, the payments to the lenders rise 

with interest rates. Whether or not— 

Mr. HOEKSTRA. No, that is not what I am saying. They would not 

rise to the lender. 

Dr. SHAPIRO. Oh. Well, then I think you would have—I do not 

know. I would guess that you would have some difficulty getting 

private lenders into this market. 

Mr. HOEKSTRA. Why? I mean, you do not have trouble getting 

people into the mortgage market. 

Dr. SHAPIRO. Yes, but students have traditionally, typically, very 

few assets— 

Mr. HOEKSTRA. But it is a Federal guarantee. 

Dr. SHAPIRO. —no salary history. They are not good credit risks, 

which is why, in the private market—which is why we subsidize 

it in a public market. 

Mr. HOEKSTRA. But I mean, it is still a guaranteed loan, in terms 

of for the principal. 

Chairman BOEHNER. If the gentleman would yield? 

Mr. HOEKSTRA. Yes. 

Chairman BOEHNER. Think about it this way. 

We would still have the guarantee for the lenders, the guarantee, 

but if the variable rate or the fixed rate floated at market levels, 

it would seem to me it would take away the risk in the marketplace, and the lender could choose. 

Is there a way that that would work? 

Now, Ms. Ashby, maybe you could shed some light on this. 

Ms. ASHBY. Well, I am speculating, of course, because no one has 

done a study of this, as far as I know. 

I don’t know. I mean, it is possible that it would work if lenders, 

as Dr. Shapiro said, if there were lenders that were willing to acVerDate 0ct 09 2002 12:37 Oct 14, 2004 Jkt 000000 PO 00000 Frm 00069 Fmt 6633 Sfmt 6602 H:\DOCS\92613.TXT EDUWK PsN: NNIXON
66

cept such a system, and to make it clear, there would be no guaranteed lender yield, then. 

Is that what you are saying, that there would be the government 

guarantee as we currently have, but no guaranteed lender yield for 

the FFELP program? 

I don’t know. It is possible that this might work. 

Mr. HOEKSTRA. I mean, what happens in mortgages is, you know, 

you shift the risk, and if we’re interested in shifting the risk from 

the Federal Government, this is one way of doing it. 

Ms. ASHBY. Then lenders would—yes. I mean, currently the taxpayer or the Federal Government is the only group that has risk, 

really. 

Students with the current low interest rates have very little risk, 

since it is very unlikely the rates will go lower, and lenders bear 

almost no risk, because of the guarantee and their guaranteed 

yield— 

Mr. HOEKSTRA. Right. 

Ms. ASHBY.—and the guarantee of repayment, so it might shift 

the distribution somewhat. 

Dr. NEUBIG. I think, Congressman, that you have a number of 

different policy instruments or variables that you could make adjustments to that might mitigate some of the risk. 

I guess, looking over the last 16 years, we found that the current 

fixed rate of consolidation loans probably is cost-neutral, and the 

reason is because there is also a lender fee that offsets that. 

Now, I thought I heard you perhaps suggesting that in the residential mortgage market, people who take out a fixed rate mortgage currently do pay maybe 100 basis points more than someone 

taking out a variable rate. 

Mr. HOEKSTRA. Right. 

Dr. NEUBIG. Currently, you know, consolidation loans only have 

the option of a single fixed rate, and it’s exactly the same, other 

than the one-eighth of a percent rounding up, to the variable Stafford loan. 

So I think both in terms of the rates and also, you know, the fee, 

you have got to factor those into the analysis and the options that 

you have, in terms of trying to make improvements to the program. 

Mr. HOEKSTRA. Yes, but I am—yes. 

I think the bottom line is, you could go to some type of more 

market-based access for the dollars, and students at that point in 

time, depending on what lenders made available, you know, they 

could at that point in time choose whether they wanted to go variable rate or whether they wanted to go to a fixed rate for a certain 

period of time. 

Chairman BOEHNER. The gentleman’s time has expired. 

Mr. HOEKSTRA. Thank you, Mr. Chairman. 

Chairman BOEHNER. Mr. Miller? 

Oh, Mr. Tierney is recognized for 5 minutes. 

Mr. TIERNEY. I am happy to yield to the Ranking Member, if he 

wants. 

Thank you, Mr. Chairman. 

You know, I listened to all of the conversation, and it seems that 

the only choice that is being presented is to cut the support for subsidies and increase the cost for students that graduate so that now 

67

we will have, you know, students that graduate paying enormously 

higher loan rates on their loans over a period of time, as well as 

having difficulty having children or students fund their way 

through college to begin with. 

This is a fairly profitable area. I mean, look at Sallie Mae, who 

deals primarily in student loans. They are a pretty big bank, and 

they make a lot of money. 

So I am wondering a little bit why we do not look at the element 

of dealing with the people that are making the money as lenders, 

why aren’t we looking at their aspect of this, so that perhaps there 

is money to be had there from the situation, instead of just cutting 

the subsidies. 

What do people think about that, going at that end of it? 

We can start—anybody that wants to step forward, we can start 

from right to left or left to right. 

Sir? 

Dr. NEUBIG. Well, I guess looking over the last 16 years, the 

lender-paid fees roughly equal the special allowance payments, 

and— 

Mr. TIERNEY. The special what payments? I’m sorry? 

Dr. NEUBIG. The special allowance payments, the interest subsidy. 

So over the long term, there are lender-paid fees, and that has 

been profitable to the U.S. Treasury for the last 8 years and will 

be, you know, profitable probably for the next two or 3 years. It has 

sort of averaged out over the cycles. 

So they already—you know, there is a potential risk, but part of 

the interest rate risk is that interest rates are unlikely to go up 

to double-digit levels for extended periods of time. 

They might go up for—they did go up during the oil shocks of 

1973 and 1979, but it looks like the current program, with its lender fees, does get payments that are offsetting the interest subsidies. 

Mr. TIERNEY. Wouldn’t we want to move in a direction to make 

sure that that is ensured as we go forward, and not run the risk 

of having that fall into a contrary situation? 

Dr. NEUBIG. I guess part of the question is we are using the CBO 

interest rate projections in terms of looking at the future for the 

next 5 years, and looking at it over the life of the loans. 

You know, if you think that things are going to get, you know, 

much worse than what CBO and OMB are predicting, then perhaps 

you should consider some additional things, but a lot of other 

things will get enormously worse if we have, you know, double-digit 

short-term interest rates for, you know, the next, you know, 15 or 

20 years. 

Ms. ASHBY. As the discussion always gets around to in this area, 

it depends on what you believe will happen to interest rates and 

what assumptions you make about various payments and what’s 

likely to happen. 

Given what you have proposed, assuming that lenders would still 

be—and assuming that we continue with two programs, the direct 

loan and a guaranteed loan program—that lenders would be willing to loan money to students and their parents in the market 

without, either without a guaranteed yield or with a guaranteed 

yield that is somewhat different than the current one, and that is— 

68

Mr. TIERNEY. Well, given how profitable they are, I think it is a 

pretty fair assumption that they will continue in the game. 

Ms. ASHBY. Well, that is the issue, and the work we did, of 

course, did not address this directly because we were not looking 

at that. 

But we certainly, in recommending that the Department do an 

assessment of the consolidation programs, that is certainly an option and something that should be considered. 

Mr. TIERNEY. Well, I mean, why hasn’t anybody looked at that, 

I guess? 

We are sitting here, we are testifying here today. It seems to me 

that that would be an area that we would hone in on. This is a 

profitable area. 

We have one of the largest bank institutions in the world doing 

primarily this type of loan, and no matter how much people want 

to complain that it’s a bad deal, it seems to be a pretty good deal, 

so it seems to me that we would look at that and talk about what 

could be done there. 

If they are not willing to do it, then we could do direct loans, but 

my feeling is there will be more than enough people lining up for 

this market. Everybody is just doing what businesses do, trying to 

make sure they get as much profit as possible. 

Mr. MILLER. Will the gentleman yield? 

Mr. TIERNEY. I will yield. 

Mr. MILLER. Just on that point and Mr. Hoekstra’s point earlier, 

there have been a number of suggestions—I am sorry, I have been 

in and out of this hearing. 

But in the time I have been here, there have been a number of 

suggestions from different members about, isn’t there a way that 

the students could have more choice, or they could—this thing 

could look more like the mortgage market. 

But what is before us, I guess, is sort of a suggestion that we 

are going to take this program and we are going to convert it to 

a variable rate program, and we are going to go on about our business, and there will be some huge savings, and that would be converted to help other students as opposed to the graduating students. 

I am kind of struck each time these questions get asked. 

Ms. Ashby, you keep suggesting we really do not know, because 

we have not looked at the particulars of the impact of this over a 

period of time. 

You can tell us what has happened historically, but if you were 

to change the mix, the suggestion is that there are only two groups 

of people here. You can shift the cost between those in school and 

those out of school, and somehow that is the choice—or the taxpayer. 

But there is also, as Mr. Tierney pointed out, there is the question of the fee structure. Should that be modified or not modified? 

It’s modified so a student can have a choice and make those decisions and decide, based upon what they think their career opportunities are going to be, or what their immediate lifestyle. They can 

take a choice. One might be higher than another, one fee might be 

different than the other. I do not know. 

69

All I see is, I think the group of lenders are saying, ‘‘We want 

to hold onto this the way it is, and it will not work any other way.’’ 

Well, you are just deciding to dump thousands of dollars of additional interest cost on the backs of people, depending on where they 

show up, which is a decision they do not make. 

That, you know, that is not just a ‘‘Well, I am out of school now, 

so now I am going to make a fresh decision,’’ when people look at, 

‘‘Am I going to school, what is my lifetime cost, what is my lifetime 

opportunity, what is my lifetime revenues, does this make sense for 

me?’’ 

So to pretend like these are two different audiences, these are 

just the same people at a different place in their life, and they have 

got to make those adjustments. 

We spend a huge amount of time here talking about forgiving 

loans to people because they can’t make choices to become policemen, firemen, teachers, nurses, and what have you—we really do 

not do that, we talk about it more than we do it—but we recognize 

that the cost of paying off loans impacts people’s decisions and 

works against the public interest. 

So why is it we are just now, without a lot of evidence, suggesting we are just going to throw this onto these people after they 

graduate? 

And I think the answer is, we do not know. Maybe we should be 

asking the department or somebody else. 

I mean, we sort of have dueling studies here, both of which each 

side can raise questions about, but we ought to be asking something else before we decide we are going to saddle these students 

with, with apparently very little notice, that all the sudden the cost 

of their education could increase dramatically. 

As you pointed out, you are buying interest index bonds. You 

know, somebody thinks this is going in the other direction, and so 

their costs are going up. They have already incurred the debt. We 

are now just restructuring what the cost of that debt is going to 

be to them. 

I think we ought to know a lot more about this before we just 

dive off this cliff and we start ruling out who is a participant and 

who is not a participant. We do not know enough about this, at 

least from what I see, in terms of the questions from the members. 

Maybe you do, and maybe I am wrong, but it seems to me the 

answers keep coming back from that side of the table, ‘‘We need 

more information. We would have to know more about this if you 

want to structure it this way or not.’’ 

That is a comment, you do not have to respond to it, but I think 

this hearing has pointed out a real dearth of information here that 

could be helpful to the members. 

Chairman BOEHNER. The chair recognizes the gentleman from 

California, Mr. McKeon. 

Mr. MCKEON. Thank you, Mr. Chairman. 

Actually, the students that graduate this year, probably when 

they started school four or 5 years ago, were looking at an 8 percent interest rate. Now they are looking at a much lower interest 

rate. So this varies with time and with the cycle of lending and borrowing. 

70

Back to that mortgage comparison again. I think we need to clarify that a little bit. 

If you tried to compare a student loan with a—that is a subsidized loan that is a government loan, for the most part—with a 

mortgage that really is free market, I mean, any of us can go out 

at any time and refinance our mortgage. 

We might have to pay points, depending on what we get, and we 

could get a fixed rate or we could get a variable rate, and again, 

that would vary. There are all kinds of options, but there is no government subsidy on any of that. 

Now, when we talk about a student that graduates and then 

wants to refinance or consolidate his loan, then it just seems like 

there is not much of a comparison there. 

Can you address that? 

Dr. SHAPIRO. Well, the reason the comparison is hard to make is 

that the interest rate, the fixed interest rate for consolidated loans 

is not set by the market, it is set by the government, it is set by 

law, and then there is, in addition, a guarantee and a subsidy built 

into that rate. 

Mr. MCKEON. It has a rate and it has a top that it cannot— 

Dr. SHAPIRO. Yes. 

So that if I understood the proposal which was described 10 minutes ago by your colleague, sir, that you would have a choice of a 

fixed or a variable rate, but that the subsidy to the lender for the 

fixed rate would be reduced or eliminated, then the lender would 

simply charge the borrower a higher fixed rate. 

Mr. MCKEON. I am not sure I understood that, either. I do not 

think he was—I cannot speak for him, but I do not think he meant 

to eliminate the subsidy, but if you eliminate the subsidy, then you 

are just going out and refinancing your loan on the open market. 

Dr. SHAPIRO. Right. Then it is a market. 

Mr. MCKEON. And then— 

Chairman BOEHNER. Will the gentleman yield? 

Do not forget, there is a guarantee here. There is a guarantee on 

the part of the government to the lender that they are going to get 

paid. Now, that is worth something. 

Mr. MCKEON. Yes, but what I was getting at is, if you eliminate 

that guarantee, then you should be able to, you know, go to the 

open market and refinance your loan; and I don’t think anybody 

has any quarrel with that. It is where you want to refinance that 

loan and keep the guarantee and keep the lower rate. 

In other words, then the government and the taxpayers are left 

on the hook for that cost. 

Dr. SHAPIRO. We can certainly provide the guarantee and the 

subsidy and a very, very low fixed rate. There is no way to provide 

that without it having significant cost consequences. 

I do want to make one point, and that is that—one additional 

point. 

We have not really been through a full interest rate cycle with 

the consolidation program. We have only been—we have—with 1 

year of the last 8 years, the rate has been consistently falling, so 

we have not had the experience yet of what happens when you 

have very large rates of consolidation at very low rates, what happens when the rates rise. 

71

So when the—I guess I do not agree that we have seen that 

there is a wash over the cycle, because we have not had the whole 

cycle. We are about to enter it over the next three to 4 years. 

Mr. MCKEON. That was a question I wanted to ask Dr. Neubig. 

We have had—the chart that we had up here from GAO showed 

that as the interest rates have gone down, consolidation has been 

really a big thing these last couple of years, and I was wondering 

how you can guarantee these numbers going out into the future. 

Say that it is going to cost the government a lot in the next couple of years, but then it will change. I guess that is what you were 

talking about, Dr. Shapiro, about we have not gone through that 

cycle and we really do not know how these numbers are going to 

be until we complete that cycle. 

Dr. NEUBIG. I definitely cannot guarantee these numbers. 

I can tell you that they are based on the, you know, volume forecasts of the consolidation loans, you know, from the Department of 

Education and the CBO’s interest rate projections, and so it is 

linked to what the government is assuming, and those assumptions 

affect a lot of other programs besides the Consolidation Loan Program. 

This is sort of the best estimate, based upon the CBO interest 

projections. Clearly, interest rates do fluctuate, and CBO does keep 

their rates stable at historical levels out beyond 2010, 2011, and we 

know that they are going to bounce around. 

I guess, you know, part of a sensitivity analysis is showing not 

only what happens on the upside, or the bad news, but also what 

would happen on the downside, the good news, and there is sort 

of a 50 percent chance that things would go worse than the CBO 

projects and a 50 percent chance things would go better than CBO 

projects, and so these numbers going out into the future might be 

both too low, if things go south on us, or, you know, the cost might 

be too high, you know, for these current loans if interest rates were 

to stay at rates below what CBO is projecting. 

And you know, there are some forces in the economy, in terms 

of, you know, concern about deflation, that might make the, you 

know, interest rates be lower than what CBO— 

Mr. MCKEON. Wouldn’t that argument lend itself, then, to go to 

a variable rate, which would fluctuate with those changes? 

Dr. NEUBIG. Well, that is one of the possibilities that you have. 

Chairman BOEHNER. The chair recognizes Mr. Miller. 

Mr. MILLER. Thank you, Mr. Chairman. 

Ms. Ashby, in your testimony on if you consolidate through the 

direct student loan program, that we earn—what is it, for every 

$100 the government earns $1.12, or something? Is that right? 

Ms. ASHBY. Yes. We did have an example in the testimony. I 

have to look at it to get the exact numbers. Are you referring to 

Table 2 in our testimony? 

Mr. MILLER. I had it here, but I do not have it. 

Ms. ASHBY. And we have updated the numbers in the testimony, 

so they will be slightly different than what is in the report. 

Mr. MILLER. Are we better off directing students to consolidate 

through the direct program? 

Ms. ASHBY. Are we better off in terms of the taxpayer, the government? Well, as with everything else, it depends on what is going 

72

to happen with interest rates. It looks like today we are, but depending on what happens in the future, in terms of—and with the 

direct loan program, there are a number of variables. There is the 

rate that the government pays to borrow from the Treasury. There 

is the rate that is charged to students. 

I cannot give you a definitive answer on that. It would depend 

on what happens with these various rates and how much the interest spread is, and so forth. But with this example, yes, $1.22 is 

lower than $1.59, but this is only for one cohort at one point in 

time. 

Mr. MILLER. You are saying that to read your information correctly, again, we have to know a lot more about the various moveable parts in terms of the cost of borrowing money, and the rest 

of that? 

Ms. ASHBY. Correct. 

Mr. MILLER. But potentially, in some environments, interest rate 

environments, it would appear that it is better for the taxpayer to 

have people consolidate through the direct program? 

Ms. ASHBY. Well, given the current interest rates and what the 

rate was to borrow from Treasury at the time that these numbers 

were calculated—and this is based on a Department of Education 

re-estimate, we should have a report in October—that would appear to be true, but as I said, the volume of loans makes a difference. There are at least two interest rates that come into play 

here. 

So there is not a definitive answer to your question. 

Mr. MILLER. No, and I appreciate that. 

I think that is part of the point I am trying to make here, is that 

to make this single sort of dramatic shift, I am just not convinced 

that we have the evidence that suggests that that is the—that that 

should be done without further examination of what truly makes 

sense for all the parties involved. 

We are each presenting the scenario from one point of view, saying, ‘‘This is kind of the good way to go, based upon our needs here 

and our needs here.’’ 

But I think at some point the policymaker has got to kind of look 

at all the parties and play out a number of different scenarios. If 

low interest rates continue for a decade, or if the interest rates 

move back to—if they tend back to norm, I guess which they will 

over various periods of time, you would want to know that. 

Ms. ASHBY. That’s right, and that is why we recommended that 

the Department do an assessment of the consolidated loan program— 

Mr. MILLER. We are getting the bill ahead of the assessment a 

little bit here. That is my problem. 

Thank you. 

Chairman BOEHNER. The chair recognizes the gentleman from 

Florida, Mr. Keller. 

Mr. KELLER. Thank you, Mr. Chairman. 

I kind of watch this debate as sort of like an umpire here. I don’t 

have a dog in this fight. I have kind of dedicated myself on this 

Committee to focusing on Pell Grant-related issues, and after reading your complicated testimony, I think I am going to stay with the 

Pell Grant-related issues. 

73

[Laughter.] 

Mr. KELLER. But as I sit here as sort of a layman, I kind of see 

three issues from where I sit. 

One, do we allow consolidation or not? Two, if so, should it be 

fixed or variable? And three, will there be a second bite of the 

apple through reconsolidation? 

And to tell you my two cents analysis, having sat through this—

and I do not pretend it to be worth that—on the first issue, do we 

allow consolidation, I know that there is some powerful interest 

against it. I am near certain that we are going to allow consolidation. That is just too valuable a tool. 

As someone who is in his thirties and not that far removed from 

college and law school, I remember how valuable a tool that is to 

be able to take various diverse loans and put them into one source 

and extend the payments. That is really helpful to a young person 

when you are first coming out of college, when you can least afford 

it. So that is going to happen. 

We are not going to—I can’t imagine, I am not leadership here, 

but I cannot imagine that we are not going to allow consolidation. 

The second issue, fixed versus variable, if I was sitting where 

Mr. Hamlett is and someone told me the choices between a longterm fixed rate or an unlimited variable rate, I of course would say 

essentially what he said. I would like the long-term fixed rate. On 

the surface, that seems to be the best thing. 

But I think what we are looking at is the scenario on the variable side, where you would give young people the benefit of the low 

variable rates. Like right now, they are at 3.42 percent, but you 

would cap their exposure at, like, 8.25 percent, so you are never 

going to pay the super jacked-up rate. 

If you look at, in fact, what the law is, that effective 2006 the 

fixed rates are going to go to 6.8 percent, and you are faced with 

6.8 percent versus the variable rate of 3.42 percent with a cap 

slightly above the 6.8 percent, you may well be better off with a 

variable rate. 

So I do not know what we are going to do there, but I am pretty 

sure it is going to be in the strike zone. Either we are going to give 

you a pretty good fixed rate, or we are not going to expose you to 

unlimited rates, we are going to cap it at some amount. 

On the reconsolidation, the second bite of the apple, I do not 

know what the Committee is going to do there, but even if the 

Committee does not allow the second bite of the apple on reconsolidation, you still have the option to go to your private sources. 

If you have a home, you may be better off getting a home equity 

loan and paying off that student loan so you can write off your 

home equity loan. 

So I think there is good news, no matter what we do for students 

here in the future. I am not pessimistic at all. But again, I look 

at this as sort of an amateur here. 

Let me start with you, Dr. Shapiro. 

Isn’t it the current situation that we are set to go to a fixed rate, 

effective 2006, of 6.8 percent? 

Dr. SHAPIRO. We are set to go to a cap. That is not a—that is 

the capped rate, not the—yes, as I understand it. 

74

Chairman BOEHNER. Well, that is in a basic program he is referring to. 

Mr. KELLER. Yes. 

Dr. SHAPIRO. Right. 

Mr. KELLER. The basic loan, yes, of 6.8 percent. 

So if you were a student and you had to choose between a variable rate of essentially half that versus the 6.8 percent cap, there 

could be scenarios where it is beneficial to go with a variable rate. 

Is that right? 

Dr. SHAPIRO. Yes, certainly. 

Mr. KELLER. Dr. Neubig, I know you have had kind of competing 

reports. 

What is your opinion on that same question? 

Dr. NEUBIG. My understanding of the 6.8 percent fixed rate is 

that that would be for loans that are taken out in 2006— 

Mr. KELLER. Right. 

Dr. NEUBIG.—and beyond. If someone is taking out a loan in 

2003, you know, they are—or in 2004—they are going to lock in the 

3.5 percent, you know, for the life of that loan, and it is only if they 

take out a loan after 2006 that it would be 6.8 percent. 

Mr. KELLER. Well, as I understood your testimony, it is essentially you believe it’s better for the existing graduates now to go 

with a long-term fixed rate, that they would save more money than 

if you switched to variable, but my question to you, what about the 

students who graduate or who are in college after 2006? 

If they were faced with the fixed rate of 6.8 percent versus whatever the market is for variable rates—and at 3.42 now—wouldn’t 

there be scenarios that they would be better off with a variable 

rate, provided there is a cap? 

Dr. NEUBIG. We are definitely seeing CBO interest rate projections, the variable rate would be very close to the 6.8 percent in 

2006 and beyond. 

Mr. KELLER. OK. Mr. Chairman, I will yield back. 

Chairman BOEHNER. The chair recognizes the gentleman from 

Oregon, Mr. Wu. 

Mr. WU. Thank you very much, Mr. Chairman. 

I am going to make a couple of general comments, probably inquiring as much of the Chairman and the staff as of our witnesses. 

We perhaps—or I, perhaps—along with others had, you know, 

brought up a concept of permitting variable rates under certain 

scenarios, partially to address inequities going forward, and partially to address inequities looking backward, and so like Mr. Keller referred to, in multiple bites of the apples and in reconsolidation, and the desire was to eliminate or to permit people who had 

consolidated once at high interest rates to reconsolidate, and to reconsolidate perhaps multiple times, and as a quid pro quo for that 

reconsolidation, to reconsolidate at a variable rate to reduce the 

cost to the Federal taxpayer going forward. 

Sitting where I am today, I do not know if this reconsolidation 

or potential multiple reconsolidation concept is on life support, or 

beyond consideration. 

Chairman BOEHNER. Will the gentleman yield? 

Mr. WU. I certainly would. 

75

Chairman BOEHNER. It is deader than a doornail, and let me explain why. 

We allowed people who had consolidated their loans to make that 

choice, to consolidate them at a fixed rate, and they made that decision based on their own economic viability. 

Now that paper is issued. It is out there in the marketplace, at 

some rate, you know? 

We’ve got a staffer over here who did hers at 9 percent. She 

would probably like to have—sorry, Kathleen—she would probably 

like to have another bite at the apple at 3.42 percent, but she made 

that election herself. But somebody holds that paper. 

Now, when you talk about reconsolidation at a lower rate—fixed 

rate, market rate, pick your rate—somebody loses, somebody. Either we stick the investor, who has loaned the money to the loan 

program, we stick it to the lender, or we stick it to the taxpayer. 

Those are the three options, and I, frankly, do not understand why. 

If you look at your proposal, $6 billion, $8 billion, $10 billion cost, 

who is going to pay that? 

I do not think we want the lenders to do it, because if they do, 

guess what? They are not going to loan money to the program. We 

will run them away. I do not think we want to stick the taxpayers 

with that. 

And the fact is that those graduates made those choices when, 

in fact, they took out their consolidation loan. 

Probably another argument why we ought to be looking at something more like a variable rate is, because if we had had a variable 

rate over the last eight or 9 years we would not have this problem 

with people making an election to consolidate at 9 percent, 8 percent, et cetera. 

Mr. WU. Well, reclaiming my time, Mr. Chairman. The proposal 

we had would have substantially—first of all, we have not been 

able to get an accurate scoring, so I do not know how much it costs, 

and I am not sure that anyone does, but with the origination fees 

and reconsolidating at a variable rate, all of that was intended to 

reduce the cost of reconsolidation, and the variable had a cap on 

it of 6.8 percent. 

We are looking at a proposal today of a cap which is higher than 

that, and part of the argument for having this variable rate is to 

prevent inequity by cohort, depending on when you fixed, and if 

you permit a variable rate instead, then you eliminate that inequality by cohort, by when you fixed, and I, as one member, would 

find it more appealing to try to fix the future inequality, while at 

the same time addressing some of the past inequality, based on 

when someone chose to consolidate that one time, and perhaps if 

your staffer at 9 percent wants to move over to this side of the 

aisle, she would be very, very welcome. 

Chairman BOEHNER. Would the gentleman yield? 

Mr. WU. Yes, absolutely. 

Chairman BOEHNER. I appreciate the gentleman yielding. 

And the way your proposal is structured to allow for a reconsolidation—or we will call it a second bite at the apple—and going to 

a variable rate, the variable rate part of it I think makes a great 

deal of sense. 

76

The problem is—you have got two problems. You have got there 

is a cost associated with it, and I would suggest to you there is a 

real cost, you know, the paper that is out there and who is going 

to lose. 

Secondly—and I think maybe even the bigger cost you cannot 

quite calculate—and that is the undermining of the paper for the 

student loan program in itself. If you look at the student loan program and the capital that comes to it, it is a very thin market, as 

opposed to home mortgages. There are very few players out there 

that are—I am talking about investors—that bring capital into this 

loan program, and frankly, we are dependent upon that capital in 

order to lend out to students. 

Over the last two higher ed reauthorizations, there were serious 

cuts in fees and yields to lenders. There was a lot of money saved 

going after the lenders and after the servicers in order to spend it 

somewhere else. 

I have to tell you, I have grave concerns. It came up earlier about 

going after lender yields. I think Mr. Miller brought up the subject. 

You don’t see people clamoring to get into this business. As a 

matter of fact, since the last reauthorization, you have seen an 

awful lot of people leave. You have seen an awful lot of originators—originators, people who originate loans—leaving the system. 

Of course, there are a lot of people in the consolidation business 

there today. But we have to be concerned about undermining the 

very paper, or the very foundation of the loan program, and that 

is the real huge under-estimated cost of reconsolidation. 

I have to tell you, I have looked at—I have been looking for 2 

years, trying to find a way to deal with reconsolidation. Now, I 

have not found one. I have not found one that does not cost billions 

and billions of dollars. As a result, really, I am kind of at a standstill. 

Now again, I said this earlier, but let us go back to who these 

people are. These are the people that we guaranteed them a loan, 

guaranteed. There is a cost associated there. 

It could have been a guaranteed subsidized loan, where we ate 

the interest for four or 5 years, or at least we deferred the interest 

for four or 5 years. 

We gave them a deferment after they were out of school for 6 

months. We gave them a chance to extend their payments based 

on their income. We gave them a chance to consolidate, if they 

wanted to. And now we are suggested THAT maybe we want to 

give them another bite at the apple. 

My question is, what is fair? 

If we are going to spend a lot of money at the back end of this 

program to reconsolidate at the expense of poor kids and moderate 

income kids who are trying to get into school, you know, as a public 

policymaker I would suggest that that does not seem to be fair, and 

as you all know, what we are trying to do here is to find a fair balance for students and those who are out of school. It is a tough 

choice. Go ahead. 

Mr. WU. Mr. Chairman, reclaiming my time. 

We have tried to propose this in a workable, responsible way, 

which holds costs down as much as possible to the taxpayer with 

a sense that that is ultimately where the cost is going to go. That 

77

is why the origination fee is there, that is why the proposal is made 

with a variable rate and with a cap. 

If we wanted to take a further step toward limiting the cost of 

reconsolidation or multiple reconsolidations, another concept that 

we could put on the table is limiting the multiple reconsolidations 

to those who have loans above a certain interest rate. 

My understanding is that those cohorts are relatively small—

that is, those people who have a big difference between the loans 

that they are holding and what is currently available on the market. 

By doing that, we certainly hold down the cost, and I think that 

it is, in many situations, difficult to justify large inequities in the 

system, and for that consideration alone, perhaps we should look 

at those folks who have large deltas, large margins between what 

they are currently holding and what the market is, and that would 

further reduce the cost. 

Chairman BOEHNER. Well, if the gentleman will yield? 

Mr. WU. Yes. 

Chairman BOEHNER. There is nothing that prevents someone 

who has already consolidated and does not like their interest rate, 

there is nothing to prevent them from going out and borrowing 

money in the real world, whether it be a home equity loan, borrowing any—there are all kinds of ways of financing all kinds of 

products. 

But what you are suggesting is a Federal guaranteed loan. That 

means money, because our guarantee means that we are guaranteeing the lender they are going to get paid, and do not forget the 

serious problem we have of undermining the existing paper that is 

out in the market place, and I’m not sure anybody could calculate 

what that is worth. 

The last point I would make is this. Let us say it cost $1. Let 

us just say it cost $1. That is $1 that could go to lowering origination fees, increasing loan limits, maybe something even on an enhanced Pell for kids. 

It is—again, let us get back to this fairness question, as to what 

is fair for all who are part of the system. The chair would recognize 

Mr. Miller. 

Mr. MILLER. No, I would just say you can argue this round or 

square, but the point is—I think Mr. Wu has raised it—if we are 

going to argue the fairness question, I think you have also got to 

incorporate in that the cost of the program. 

You know, we have increased the subsidy in this program. We 

guarantee the loans. You know, I think if we are really going to 

talk about changing the program, we’ve got to lay all of the costs, 

all of the benefits down on the table— 

Chairman BOEHNER. Which program? 

Mr. MILLER.—and decide how you want to apportion this— 

Chairman BOEHNER. Which program are we talking about? 

Mr. MILLER.—between the cost of all the programs, whether it is 

the reconsolidation or it is the person getting out and making a 

choice of where they are going to enter. I mean, that is what has 

got to be done. I do not think you can look at one segment of this 

program and say, ‘‘Well, the costs of this are such that we are 

going to shift them over onto this population,’’ you know. 

78

Chairman BOEHNER. Well, if the gentleman will yield, you know, 

the proposal that—as most of you know—that I have been looking 

at is going to a variable rate for both the consolidation programs 

and the basic program itself. That is the marketplace. 

The idea that the government can fix a rate, we can, but because 

it is guaranteed we take all of the risk, and the fact is that most 

of the marketplace is the variable rates for everything. 

Yes, you can get a fixed rate on your mortgage, your home mortgage, and if you do, you are going to pay a much higher percentage, 

a much higher interest rate, because you want a fixed rate, and 

you want to lock it in. 

But my goal here is to try to put this program, the entire student 

loan program, on a solid financial foundation for the long term, 

where we can control what our costs are, we know what our costs 

are, we know what the benefits are, and I think we can do that, 

but if there are other proposals that people want to pursue, I am 

happy to look at them. 

I think the idea offered by Mr. Hoekstra, and personally, by Mr. 

Petri, to say in a consolidation program, ‘‘All right, you can have 

a choice, you can have fixed or you can have variable without the 

subsidy,’’ and that fixed would be based on a market rate, means 

that someone who wanted to consolidate on a fixed basis, there 

would be a different rate, I’m sure, for 10 years, probably a little 

higher rate for 15, and maybe even a little higher rate for 30. 

That is what the marketplace would probably dictate, because 

the longer you go, the more risk that you take and the higher the 

rate is going to be, and they may decide that makes sense. They 

may decide, ‘‘Well, let’s go with a variable.’’ 

But the market should set the rates, and if the market sets the 

rates and people make choices, I think in the long run students, 

graduates, the government, and taxpayers are all better off. 

I’m sorry. I forget that Mr. Wilson had not asked any questions 

yet. Would you like to ask questions, Mr. Wilson? You are recognized for 5 minutes. 

Mr. WILSON. Thank you, Mr. Chairman. I, at this time, would 

like to submit a statement for the record. 

[The prepared statement of Hon. Joe Wilson follows:]

Statement of Hon. Joe Wilson, a Representative in Congress from the State 

of South Carolina 

Mr. Chairman, I want to thank you for convening this hearing today and I commend you for examining solutions on how to make college more affordable for every 

American. Many parents and high school students in South Carolina and around 

this great country are concerned that college is no longer affordable and students 

leave school with too much debt. The consolidation program alleviates much of this 

concern. 

As we all well know, the cost of higher education has grown and today’s college 

students will graduate with significantly more debt than when we last examined 

this issue 6 years ago. As a result, a number of graduates see their debt as unmanageable, and consequently, as imposing limits on their career choices, further depleting the pool who want to work in the public and non-profit sectors of the economy. 

The federal student loan consolidation program benefits borrowers from a wide 

spectrum of professions. It is especially attractive to those graduates wishing to 

enter into public service, as evidenced by the fact that nearly 20% of student loan 

borrowers who choose to consolidate their student loans are nurses, teachers and 

civil servants. Further, by lowering monthly payments, the program gives the borrower more flexibility and decreases the probability of default. 

79

This widely popular program has proven beneficial to the federal government as 

well. While consolidation loans are less profitable to lenders than the underlying 

student loans, the 0.5% origination fee and 1.05% portfolio fee paid to the federal 

government by consolidation companies have generated significant revenue for the 

federal treasury. These fees do not apply to other student loans. 

Fixed rate consolidation loans provide a great benefit to recent college graduates. 

For many students, the cost of college is only realized after they graduate and start 

repaying their student loans. Changing the program to variable rates could double 

the cost of a college education. I thank the Chairman for this hearing, and I pledge 

during our Reauthorization of the Higher Education Act to work closely with him 

and my Committee Colleagues on this Consolidation portion of the legislation. 

Mr. WILSON. Additionally, I would like to thank all of you for 

being here today, and Mr. Hamlett, in particular, I want to commend you, at your age, for being here. I am excited for you, as an 

undergraduate student, to be with such distinguished persons as 

you have to your right and to your left, and so thank you for coming. 

Additionally, I have enjoyed the topic. I was a real estate attorney for 25 years, until 2 years ago when I was elected, so these 

issues—I have been at closings and seen the discussions, and with 

contracts of sale for decades now, and it is interesting to see how 

this relates, and I appreciate the Chairman educating me on the 

difference between a mortgage and a student loan which is subsidized. 

So with that in mind, Dr. Shapiro, in your study—direct quote—

‘‘As a general proposition, economists usually favor adjustable interest rate debt instruments over fixed interest rate instruments 

because they make the economy more efficient.’’ And can you just 

tell us what would be the decision factors as to which route to go, 

say as an economist, as a consumer, or as an individual? 

Dr. SHAPIRO. The reason that economists generally prefer variable interest rate instruments over fixed rate instruments is that 

they reduce certain kinds of risk, and in particular, they reduce 

what economists call the wealth risk—that is, the value of the 

asset, of the loan, which changes if inflation changes in unexpected 

ways. 

We have a projection of inflation which we build into long-term 

interest rates. Those are our inflationary expectations. We are 

sometimes surprised, and inflation is greater or less. 

We had the kind of positive inflationary surprise in much of the 

1990’s, when we had less inflation than we expected, for various 

reasons. A variable rate instrument eliminates that risk, because 

it is adjusting at some regular interval to changes, whether they 

were anticipated or not, and consequently, it means that the resources can be distributed more efficiently. 

Mr. WILSON. And how does this relate, say, to the consumer? 

What should they be looking at? Obviously, the short-term monthly 

payment, but how would the consumer look at this, or student? 

Dr. SHAPIRO. Well, for a student, there is a—we say there is a 

risk associated with variable rates as well. It is called an income 

risk, rather than a wealth risk. 

I think for a student, a student getting out of school, the most 

important economic consideration with respect to a consolidation 

loan is, frankly, not whether the rate is fixed or variable. 

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The most important consideration is that the loan, the duration 

of the loan is increased significantly, and that reduces the monthly 

payment; and most students, most new graduates are most concerned with their monthly payments, as are most new homeowners. 

What is most attractive about a consolidation loan is it takes a 

10-year loan and makes it a 15 or a 20, or a 25, or a 30-year loan, 

depending on the size of the total debt being consolidated. That advantage, from the point of view of the student, is there at any time. 

I think the advantage of a variable rate, as opposed to a fixed 

rate for a student, there is an obvious advantage if they are consolidating at a time of high interest rates. When the interest rate 

goes down, their payment is going to go down. 

The other advantage is that it is a—it means that the burden is, 

in some sense, predictable. 

That is, it will increase or fall with the entire economy, and if 

changes in interest rates reflect changes in economic activity, 

which reflect—which lead to changes in income, then a variable 

rate allows an individual to feel some security that they will be 

able to adjust, that as conditions change they will be able to afford 

the interest payment on their loan. 

Mr. WILSON. One final question, and it would relate again to 

variable interest rate loans. Is there a concern there may be more 

borrower defaults with the variable rate, or how would you address 

that? 

Dr. SHAPIRO. Well, one of the primary purposes of the consolidation program was to reduce defaults, and the way it primarily did 

that, again, was by reducing the monthly payment by stretching, 

by extending the duration of the loan, and I think that it depends 

on when you consolidate it, sir. 

Mr. WILSON. Right. 

Dr. SHAPIRO. If you consolidated at 9 percent or 8.25 percent, 

which is the cap since 1997, you may be much more inclined to default in an interest rate environment of 3 percent. You are continuing to carry relatively high payments. 

If, look, if we offer, you know, large numbers of people the opportunity to consolidate a large amount of loans at 3.5 or less, I mean, 

if you do it in the 6-month grace period today, something I would 

recommend to Mr. Hamlett, you get another benefit, and it is actually, the interest rate is about 2.8 percent on current consolidated 

loans if you do it in the first 6 months after leaving school. 

Chairman BOEHNER. Mr. Hamlett, have you got that? 

Mr. WILSON. Thank you very much. And I noticed Mr. Hamlett 

wrote notes. 

Chairman BOEHNER. OK. Well, let me thank our witnesses for 

their patience and their valuable information, and all of those who 

have come today for your patience. It was a long day, but I think 

that the information that was presented was very helpful to the 

Committee, and I thank you. 

This hearing is adjourned. 

[Whereupon, at 1:38 p.m., the Committee was adjourned.] 

[Additional material submitted for the record follows:]

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Statement of Hon. Charlie Norwood, a Representative in Congress from the 

State of Georgia 

Mr. Chairman I thank you for holding today’s hearing to examine the future of 

the Federal Consolidation Loan Program. I look forward to the testimony of our witnesses, and as always, I appreciate their expertise in shedding light on this critical 

issue the Committee must consider as we continue to strengthen American Higher 

Education policy. 

More and more students each year are attending institutions of higher learning. 

As a result, the demand for student loans and financial assistance to help pay for 

the rising cost of an education at an American university is increasing as well. This 

rising demand for assistance in an era of economic change has created new challenges for the federal government, and we must therefore examine all aspects of our 

policy regarding federal aid; including the Consolidation Loan Program (CLP). 

Born during the reauthorization of the Higher Education Act in 1986, the CLP 

provides an opportunity for borrowers with more than one loan holder and a high 

debt level to consolidate that debt into one monthly payment under one lender. This 

gives borrowers the ability to stretch out a loan repayment period to a maximum 

of 30 years, which lowers their monthly payment, at a fixed interest rate determined by the weighted average of the loans being consolidated. 

Since the inception of the CLP in 1986, and especially since 1994, graduates have 

increasingly taken advantage of the program as interest rates have declined—

spurred on by new organizations that exist specifically to aggressively market consolidated loans by way of mail, phone, and the Internet. 

And while the proliferation of the consolidated student loan certainly has allowed 

borrowers to save considerable sums over their loan repayment period at a low fixed 

rate, the savings do not come without cost to the American taxpayer. In fact, the 

government pays subsidies (in the form of deferments interest paid on behalf of the 

borrower and allowances paid directly to vendors) to cover the cost of these consolidated loans over the life of their repayment period. This amounts to yet another 

burden on the American taxpayer to cover the cost of consolidated loans, even when 

it is unclear that a borrower needs to consolidate their loans. 

Mr. Chairman it is important for this Committee to take these considerations to 

heart as we continue the Reauthorization process for the Higher Education Act. Is 

the CLP fulfilling its original intent in light of recent trends in light of recent 

trends? Should the taxpayer continue to finance and subsidize the CLP at a fixed 

rate; or should Congress explore a variable rate structure to make the system more 

equitable? More importantly, should taxpayers continue to subsidize borrowers at a 

low fixed rate at the expense of providing access to students entering and attending 

post secondary education? 

It is critical to find commonsense answers to these questions if Congress is to ensure the future of the CLP in a fiscally responsible way. Borrowers must continue 

to enjoy access to consolidated loans over the lifetime of a long-term repayment period; but Congress must also ensure that students seeking access to higher education have the resources necessary to achieve their dreams. 

Mr. Chairman I look forward to hearing our witness’ thoughts on how Congress 

can achieve both of these worthy goals as we continue to work towards Reauthorization of the Higher Education Act, and thank you for providing continued leadership 

on this very important issue. 

I respectfully yield back the remainder of my time.

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