Report to the Chairman, Committee on 

the Budget, House of Representatives 

United States Government Accountability Office

GAO

August 2004 STUDENT 

CONSOLIDATION 

LOANS 

Further Analysis 

Could Lead to 

Enhanced Default 

Assumptions for 

Budgetary Cost 

Estimates 

GAO-04-843 
www.gao.gov/cgi-bin/getrpt?GAO-04-843.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Cornelia Ashby 

(202) 512-8403 ashbyc@gao.gov. 

Highlights of GAO-04-843, a report to 

House Committee on the Budget. 

August 2004

STUDENT CONSOLIDATION LOANS

Further Analysis Could Lead to Enhanced 

Default Assumptions for Budgetary Cost 

Estimates 

On average, during the 1995-to-2003 period, FFELP consolidation loan 

borrowers had higher levels of consolidation loan debt than FDLP 

consolidation loan borrowers. FFELP borrowers were also more likely than 

FDLP consolidation borrowers to have attended a 4-year school versus a 2-

year or proprietary school. As a group, FFELP borrowers were less likely to 

default on a student loan prior to consolidation than FDLP borrowers. 

However, both FFELP and FDLP borrowers who had defaulted prior to 

consolidation were more likely to default on their consolidation loan than 

those who did not default prior to consolidation. 

Over the 1998-to-2002 period, an increasing share of both FFELP and FDLP 

underlying loan volume was consolidated into FFELP, while a decreasing 

share of underlying loan volume was consolidated into FDLP. Defaulted 

loans, however, whether from FFELP or FDLP, were much more likely to be 

consolidated into FDLP. 

In general, Education incorporates borrower and loan characteristics and 

movement of loans between programs into its budgetary cost estimates by 

(1) grouping loans with similar characteristics in risk categories, (2) 

forecasting loan volume for each risk category, and (3) applying various 

assumptions to each risk category based on historical and other economic 

data. Education incorporates the default history of borrowers into its cost 

estimates by grouping consolidation loans with underlying defaulted loans in 

a risk category and applying higher default rate assumptions to loans in this 

category. However, Education has not analyzed whether borrowers with an 

underlying defaulted loan will default on their consolidation loans at 

different rates based on the type of school attended. Education does 

incorporate assumptions based on variations in default rates by school type, 

but only for nonconsolidation loans. As shown below, our analysis 

demonstrates that the extent to which borrowers with an underlying 

defaulted loan default on their consolidation loan varies according to the 

type of school they attended. 

Default Rate of Consolidation Loan Borrowers Who Defaulted on a Loan Underlying Their 

Consolidation Loan, by Program and School Type, Fiscal Years 1995 to 2001 

0

10.0

20.0

30.0

40.0

50.0

29.6 26.9

40.4

30.5

45.5

33.7

26.1 25.9

31.9

22.7

Percent

FFELP FDLP

4-year 2-year Proprietary 2- and 4-year All other

Source: GAO analysis of Education’s National Student Loan Data System data.

The number of borrowers 

consolidating their federal student 

loans has increased substantially in 

recent years, with the total amount 

of loans being consolidated rising 

from $13 billion in fiscal year 1999 

to over $41 billion in fiscal year 

2003. This increase in 

consolidation loan volume and 

recent interest rate trends have 

increased the overall estimated 

long-term cost to the federal 

government of providing 

consolidation loans under the 

Department of Education’s 

(Education) two major student 

loan programs—the Federal Family 

Education Loan Program (FFELP) 

and the William D. Ford Federal 

Direct Loan Program (FDLP). 

GAO is providing information on 

(1) the differences that exist 

between FFELP and FDLP 

consolidation loans and borrowers, 

(2) the extent to which borrowers 

with student loans under one 

program obtain consolidation loans 

under the other, and (3) how 

FFELP and FDLP borrower and 

loan characteristics and the 

movement of loans between the 

two programs are incorporated into 

Education’s budgetary cost 

estimates for consolidation loans. 

GAO recommends that Education 

consider the type of schools 

consolidation borrowers attended 

in developing the risk categories 

for the department’s budgetary cost

estimates. Education generally 

agreed with our recommendation. 
Page i GAO-04-843 Student Consolidation Loans 

Letter 1

Summary of Key Findings 2

Further Analysis Could Lead to Enhanced Default Assumptions for 

Consolidation Loan Cost Estimates 4

Recommendation for Executive Action 10

Agency Comments 11

Scope and Methodology 11

Briefing Slides 13 

Appendix I Comments from the Department of Education 52 

Figures 

Figure 1: Default Rate of Consolidation Borrowers Who Defaulted 

on a Loan Underlying Their Consolidation Loan, by 

Program and School Type, Fiscal Years 1995 to 2001 6

Figure 2: Percentage of FFELP Consolidation Loan Borrowers with 

an Underlying Default by School Type 8

Figure 3: Percentage of FDLP Consolidation Loan Borrowers with 

an Underlying Default, by School Type 9

Abbreviations 

FDLP William D. Ford Direct Loan Program 

FFELP Federal Family Education Loan Program 

NSLDS National Student Loan Data System 

Contents 

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Page 1 GAO-04-843 Student Consolidation Loans 

August 20, 2004 

The Honorable Jim Nussle 

Chairman, Committee on the Budget 

House of Representatives 

Dear Mr. Chairman: 

Consolidation loans—available under both of 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)1

—allow borrowers who have multiple student 

loans, possibly from different lenders and from different loan programs, to 

combine their loans into a single new loan and extend their repayment 

period. Consolidation loans can reduce borrowers’ monthly repayments, 

which may lower default risk and thereby reduce federal costs of loan 

defaults. Current provisions of the program also allow borrowers to lock 

in a fixed interest rate on their consolidation loans, unlike other FFELP 

and FDLP student loans, which carry an interest rate that varies from year 

to year. As we reported in October 2003 and in March 2004,2

 the number of 

borrowers consolidating their federal student loans has increased 

substantially, with the total amount—or volume—of loans being 

consolidated rising from $13 billion in fiscal year 1999 to over $41 billion in 

fiscal year 2003. This increase in consolidation loan volume and the lower 

interest rates available to borrowers in recent years have increased the 

 1

Under FFELP, private lenders make consolidation loans to borrowers, with Education 

guaranteeing lenders loan repayment and a minimum rate of return. Under FDLP, 

Education uses federal funds to make direct student loans. 

2

GAO, Student Loan Programs: As Federal Costs of Loan Consolidation Rise, Other 

Options Should Be Examined, GAO-04-101 (Washington, D.C.: October 31, 2003) and 

Student Loan Programs: Lower Interest Rates and Higher Loan Volume Have Increased 

Federal Consolidation Loan Costs, GAO-04-568T (Washington, D.C.: March 29, 2004). 

United States Government Accountability Office

Washington, DC 20548 
Page 2 GAO-04-843 Student Consolidation Loans 

overall estimated long-term cost to the federal government of providing 

consolidation loans.3

This report addresses your request that we expand upon the information 

provided in our earlier reports on consolidation loans by determining (1) 

what differences exist between FFELP and FDLP consolidation loans and 

borrowers, (2) the extent to which borrowers with student loans under 

one program obtain consolidation loans under the other, and (3) how 

FFELP and FDLP borrower and loan characteristics and the movement of 

loans between the two programs are incorporated into Education’s 

budgetary cost estimates. Our work is based on an analysis of a 

representative sample of borrowers from Education’s National Student 

Loan Data System (NSLDS), a national database of student loan recipients. 

Our analysis primarily focused on FFELP and FDLP borrowers in the 

sample who originated consolidation loans from 1995, the first full year in 

which loans were available under FDLP, through June 2003. On May 20, 

2004, we briefed your staff on the results of our work. This report 

transmits the slides we used to brief your staff and conveys additional 

school type information requested by your staff at the briefing. Our key 

findings provided at the briefing are summarized below, followed by the 

additional information we are reporting in response to your staff’s request. 

At the end of this letter, we provide additional details on the scope and 

methodology of our work. 

In determining differences that exist between FFELP and FDLP 

consolidation loans and borrowers, we found that on average, FFELP 

consolidation loan borrowers, during the 1995-to-2003 time period, had 

higher levels of consolidation loan debt than did FDLP consolidation loan 

borrowers. The average consolidation loan amount among FFELP 

borrowers was about $26,400 versus about $20,000 for FDLP borrowers. 

FFELP consolidation borrowers were less likely than FDLP consolidation 

borrowers to have attended a proprietary (for profit) school prior to 

consolidation and were more likely to have borrowed while attending 

 3

Lower interest rates available to borrowers have increased the cost to the federal 

government because FFELP consolidation loans carry a government-guaranteed rate of 

return to lenders that is projected to be higher than the fixed interest rate consolidation 

borrowers pay. Higher loan volumes in the FFELP program also add to the estimated costs 

of consolidation loans. FDLP consolidation loans are made by the government and thus 

carry no interest rate guarantee to lenders, but changing interest rates and loan volumes 

affect the costs in this program as well. 

Summary of Key 

Findings 
Page 3 GAO-04-843 Student Consolidation Loans 

graduate school. Overall, FDLP borrowers had higher default rates in 4 out 

of the 7 years between fiscal years 1995 through 2001. Additionally, for 

borrowers who had defaulted prior to consolidation, borrowers from both 

FFELP and FDLP were more likely to have defaulted on their 

consolidation loan than those who did not default prior to consolidation. 

From fiscal year 1998 to fiscal year 2002, the share of underlying FFELP 

and FDLP loan volume consolidated into FFELP increased, while the 

share of underlying loan volume consolidated into FDLP decreased.4

 In 

fiscal year 2002 alone, 84 percent of FFELP loan volume that was 

consolidated was done so under FFELP, while 16 percent was 

consolidated under FDLP. With regard to FDLP loan volume consolidated, 

58 percent was consolidated under FFELP, while 42 percent was 

consolidated under FDLP. Defaulted loans, however, whether from FFELP 

or FDLP, were much more likely to be consolidated into FDLP. For 

example, in fiscal year 2002, 87 percent of defaulted underlying FFELP 

loan volume and 92 percent of defaulted underlying FDLP loan volume 

were consolidated under FDLP. According to Education officials, it is not 

surprising that a larger share of defaulted underlying FFELP and FDLP 

loan volume is consolidated into FDLP because requirements for 

consolidating defaulted loans under this program are often less stringent 

than those imposed by FFELP lenders. For example, FFELP lenders may 

chose not to offer repayment plans based on income levels, while FDLP is 

required to offer such a plan to eligible borrowers. In addition, an FFELP 

lender may require that the borrower be employed, while FDLP does not 

have such a requirement. 

Education incorporates FFELP and FDLP borrower and loan 

characteristics, and the movement of loans between the two programs, 

into its budgetary cost estimates by (1) grouping loans that share similar 

characteristics in risk categories, (2) forecasting loan volume for these 

categories, taking into account the movement of loans between the two 

programs, and (3) applying various assumptions to the categories, such as 

rates of interest, estimates of loan prepayment, and rates of default. 

Among the risk categories Education uses to estimate costs, for example, 

is one that includes consolidation loans with underlying defaulted loans. 

Education forecasts the expected loan volume for this risk category and 

 4

The combination of declining interest rates and increased consolidation loan marketing 

efforts by lenders has likely contributed to the increase in the share of underlying loans 

consolidated into FFELP. 
Page 4 GAO-04-843 Student Consolidation Loans 

then applies various assumptions to derive an estimated budget cost for 

the loans. For example, Education assumes that a certain proportion of 

loans placed in this risk category will eventually go into default, thus 

increasing the federal government’s cost of the loans. Education 

sometimes makes different assumptions for different groups. For example, 

Education assumes that consolidation borrowers who have defaulted on 

an underlying loan will default on their consolidation loans at a higher rate 

than will consolidation loan borrowers who have not previously defaulted. 

In estimating the costs of nonconsolidation loans—those that borrowers 

may ultimately consolidate—Education groups loans based on the type of 

schools borrowers attended (2-year, 4-year, proprietary, and so forth) 

because experience has shown that these borrowers default on their loans 

at different rates. However, Education does not group consolidation loan 

borrowers in this way because consolidation loans could reflect multiple 

underlying loans with different risk categories, and it believes that other 

differences, such as default rates of underlying loans, are more likely to 

significantly affect the estimated costs of consolidation loans. For 

consolidation loans, however, Education has not analyzed whether 

borrowers who consolidate a defaulted loan default again, or redefault, at 

different rates based on the type of school they attended. Because of data 

limitations, Education was, until recently, unable to link consolidation 

loans to borrowers’ underlying loans. Education can now do this, making 

it possible to determine whether redefault rates vary by type of school. As 

a result of the additional analysis we conducted after the briefing, we are 

making a recommendation to the Secretary of Education that he direct 

Education’s Director, Budget Service, to consider the type of schools 

consolidation borrowers attended in developing the risk categories for the 

department’s budgetary cost estimates. 

Education’s recently acquired ability to link consolidation loans to 

borrowers’ underlying loans allows it to conduct additional analyses, 

which could be used to refine its budgetary cost estimates. In particular, 

Education could expand its risk categories that currently segregate 

consolidation loans by whether they have an underlying default to also 

segregate by the type of schools borrowers attended. Our analysis 

demonstrates that the extent to which borrowers redefault on 

consolidation loans varies according to the type of school they attended. 

By analyzing the extent to which borrowers will default on their 

consolidation loans based on the type of school attended, Education could 

determine the resulting impact on budgetary cost estimates. This could be 

important since the proportion of consolidation loan borrowers by type of 

Further Analysis 

Could Lead to 

Enhanced Default 

Assumptions for 

Consolidation Loan 

Cost Estimates 
Page 5 GAO-04-843 Student Consolidation Loans 

schools attended has varied over time. As these proportions vary, the total 

rate of default on consolidation loans will likely vary as well, given that the 

type of school borrowers attended affects default rates. In its report on 

internal control, Education’s auditor recently recommended that the 

department better monitor consolidation loan activity and conduct studies 

of the assumptions used in estimating the budgetary costs of consolidation 

loans. 

According to our analysis, the extent to which borrowers consolidated 

loans that included at least one loan on which they had defaulted, and then 

subsequently defaulted on their consolidation loan, varies by the type of 

school borrowers attended. For both FFELP and FDLP consolidation 

loans originated from fiscal years 1995 to 2001, the overall default rate for 

consolidation loan borrowers with an underlying default was higher for 

borrowers who had attended a 2-year or proprietary school than for those 

who had attended a 4-year school. As figure 1 shows, for FFELP, the rate 

of default was 45.5 percent for borrowers who had attended proprietary 

schools, compared with 29.6 percent for borrowers who had attended a 4-

year school. We observed similar relative default rates with respect to 

FDLP consolidation loans. The lower rate of redefault among 

consolidation loan borrowers who attended a 4-year school is consistent 

with the lower risk of nonconsolidation loan borrowers who attended a 4-

year school, compared with borrowers who attended other types of 

schools. 

Extent to Which 

Consolidation Loan 

Borrowers Redefault 

Varies by Type of School 

Attended 
Page 6 GAO-04-843 Student Consolidation Loans 

Figure 1: Default Rate of Consolidation Borrowers Who Defaulted on a Loan 

Underlying Their Consolidation Loan, by Program and School Type, Fiscal Years 

1995 to 2001 

Notes: 

(1) Analysis based on borrowers in the NSLDS sample who originated a consolidation loan from fiscal 

years 1995 through 2001, plus any underlying loans these borrowers originated from January 1, 

1980, through September 2001. 

(2) Four-year, 2-year, and proprietary represent borrowers whose underlying loans were obtained 

exclusively while attending these types of schools. Two-and 4-year category represents borrowers 

whose underlying loans were obtained while attending both 2-and 4-year schools. All other 

represents borrowers whose underlying loans were obtained while attending some combination of 4-

year, 2-year, proprietary, and foreign schools other than the categories listed above. 

While figure 1 presents borrower rates of redefault, by school type, we 

also analyzed borrowers’ default rates by year of consolidation, by school 

type. On this basis, we also observed differences by school type. 

Moreover, we observed different borrower default rates by school type for 

consolidation loans without an underlying loan default, and we observed 

different dollar volume default rates by school type for both consolidation 

loans with and without an underlying loan default. Because Education 

assumes a similar rate of default among consolidation loan borrowers 

without regard to the type of school borrowers attended, Education’s cost 

estimates may be excluding important risk factors associated with specific 

Percent

0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

29.6

26.9

40.4

30.5

45.5

33.7

26.1 25.9

31.9

22.7

FFELP

FDLP

4-year 2-year Proprietary 2- and 4-year All other

Source: GAO analysis of NSLDS data.
Page 7 GAO-04-843 Student Consolidation Loans 

school types. However, the impact of this exclusion will not be known 

until Education performs an analysis of the sensitivity of the cost 

estimates to different school types. 

Overall, the number of borrowers consolidating their student loans has 

increased significantly in recent years, while the proportion of borrowers 

by type of school attended has varied over time. As these proportions vary, 

the overall rate of default on consolidation loans will likely vary as well, 

given that the type of school borrowers attended affects default rates. As 

shown in figure 2 for FFELP and figure 3 for FDLP, generally there was an 

increasing share of consolidation loan borrowers with an underlying 

defaulted loan who had attended a 4-year school. At the same time there 

was a decreasing share of consolidation loan borrowers with an 

underlying defaulted loan who had attended a proprietary school. For 

example, for FFELP, the percentage of consolidation loan borrowers with 

an underlying default who had attended a 4-year school increased from 

over 30 percent in fiscal year 1995 to almost 50 percent in fiscal year 2001. 

In contrast, the percentage of consolidation loan borrowers with an 

underlying default who had attended a proprietary school dropped from 

almost 50 percent in fiscal year 1995 to about 26 percent in fiscal year 

2001. Similar patterns are also observed with regard to FDLP 

consolidation loans beginning in fiscal year 1996. 

Share of Consolidation 

Loan Borrowers by Type of 

Schools Attended Varied 

over Time 
Page 8 GAO-04-843 Student Consolidation Loans 

Figure 2: Percentage of FFELP Consolidation Loan Borrowers with an Underlying 

Default by School Type 

Note: Analysis based on borrowers in the NSLDS sample who originated a FFELP consolidation loan 

from fiscal years 1995 through 2001, plus any underlying loans these borrowers originated from 

January 1, 1980, through September 2001. 

0

10

20

30

40

50

60

70

80

90

100

1995 1996 1997 1998 1999 2000 2001

Percent

Fiscal year

All other

2- and 4-year

Proprietary

2-year

4-year

Source: GAO analysis of NSLDS data.
Page 9 GAO-04-843 Student Consolidation Loans 

Figure 3: Percentage of FDLP Consolidation Loan Borrowers with an Underlying 

Default, by School Type 

Note: Analysis based on borrowers in the NSLDS sample who originated a FDLP consolidation loan 

from fiscal years 1995 through 2001, plus any underlying loans these borrowers originated from 

January 1, 1980, through September 2001. 

While figures 2 and 3 present the variations in the percentage of 

consolidation loan borrowers with an underlying default by school type, 

we also analyzed volume changes by school type. On this basis, we also 

observed similar variations in proportions by school type. Because default 

rate assumptions are based in part on loans consolidated years ago that 

had a different distribution of underlying loans by school type than current 

consolidation loans, they may be less reliable than they could be. This 

could result in less precise cost estimates for consolidation loans. 

0

10

20

30

40

50

60

70

80

90

100

1995 1996 1997 1998 1999 2000 2001

Percent

Fiscal year

All other

2- and 4-year

Proprietary

2-year

4-year

Source: GAO analysis of NSLDS data.
Page 10 GAO-04-843 Student Consolidation Loans 

While Education received an unqualified audit opinion on its fiscal year 

2003 financial statements, the auditor’s report on internal control5

identified certain matters that it considers to be reportable conditions,6

including matters related to Education’s cost estimates. Among other 

things, the report noted that Education had made progress in refining 

various assumptions used in estimating costs related to consolidation 

loans based on its recently acquired ability to link consolidation loans to 

the paid-off underlying loans. In light of the significant increase in 

consolidation loans in recent years, however, the auditor recommended, 

among other things, that Education continue to identify and gather data to 

better monitor and report on consolidations, and accelerate studies to 

validate the basis of assumptions used to determine the effect of loan 

consolidations, to ensure timely updates of its cost estimates for the best 

available information. To assist in addressing the auditor’s 

recommendations, as well as address recommendations contained in our 

January 2001 report,7

 Education officials have established a “credit reform 

working group” to formalize and document assumptions used in 

developing its budgetary cost estimates and to make its estimates more 

transparent.8

To better reflect the impact of consolidation loans on Education’s 

budgetary cost estimates, we recommend that the Secretary of Education 

direct Education’s Director, Budget Service, to consider the type of 

schools consolidation borrowers attended in developing the risk 

categories for the department’s budgetary cost estimates. Education could 

 5

For the report of independent auditors, see Fiscal Year 2003 Performance and 

Accountability Report, U.S. Department of Education, November 14, 2003. 

6

Reportable conditions are matters that come to the auditor’s attention that in the auditor’s 

judgment should be communicated because they represent significant deficiencies in the 

design or operation of internal control, which could adversely affect the organization’s 

ability to record, process, summarize, and report financial data consistent with the 

assertions of management in the financial statements. 

7

GAO, Department of Education: Key Aspects of the Federal Direct Loan Program’s Cost 

Estimates, GAO-01-197 (Washington, D.C.: January 12, 2001). 

8

As we reported in March 2004, the credit reform working group will also consider more 

formalized procedures related to performing and documenting sensitivity analysis of its 

budgetary cost estimates, according to Education officials. For additional information, see 

GAO, Department of Education’s Federal Direct Loan Program: Status of 

Recommendations to Improve Cost Estimates and Presentation of Updated Cash Flow 

Information, GAO-04-567R, (Washington, D.C.: March 29, 2004). 

Education’s Fiscal Year 

2003 Financial Statements 

Auditor Reported That 

Improvements Were 

Needed in Education’s 

Cost Estimation Process 

Recommendation for 

Executive Action 
Page 11 GAO-04-843 Student Consolidation Loans 

use the credit reform working group as a vehicle to help the Director, 

Budget Service, monitor this effort and assess the impact of including the 

type of schools borrowers attended in the assumptions Education uses to 

develop its budgetary cost estimates. 

We provided a draft of this report to Education for review and comment. 

In commenting on the draft, Education, in general, agreed with our 

findings and recommendation. Education noted that it will conduct an 

analysis to determine whether expanding risk categories is the best 

approach and that if it does not expand risk categories it will track and 

report on consolidating borrowers by school type. Education’s written 

comments appear in appendix I. 

To answer the three research questions, we analyzed a randomly drawn, 

representative sample of borrowers from NSLDS, which is a 

comprehensive national database of Title IV loan and grant recipients. Our 

analysis of the characteristics of borrowers and loans focused on FFELP 

and FDLP borrowers in the sample who originated consolidation loans 

from 1995, the first full year that FDLP loans were made, through June 

2003. Including only those years when both programs were in operation 

allowed for more meaningful comparisons between programs. For the 

borrowers in our analysis, we included underlying loans originated from 

January 1, 1980, through June 2003. To determine the extent to which 

borrowers with student loans under one program obtain consolidation 

loans under the other, we linked sample borrowers’ consolidation loans to 

their underlying loans and analyzed these data to determine the extent of 

loan movement between programs. This linking analysis included 

borrowers who originated consolidation loans from fiscal years 1995 

through 2002, the most recent linking methodology data file available at 

the time of our review. In order to develop the additional information 

requested by your staff on consolidation loan default rates by year and of 

borrowers by type of school attended, we focused on FFELP and FDLP 

borrowers in the NSLDS sample who originated consolidation loans from 

fiscal years 1995 through 2001. For these borrowers we reviewed default 

information through June 2003 in order to determine if these borrowers 

had subsequently defaulted on their consolidation loans. This approach 

allowed sufficient time for more recent loans that subsequently defaulted 

to appear as defaulted loans in NSLDS. We interviewed officials at 

Education to determine how Education incorporates FDLP and FFELP 

consolidation loan and borrower characteristics and the movement of 

loans from one program to the other in its cost estimates. We assessed the 

Agency Comments 

Scope and 

Methodology 
Page 12 GAO-04-843 Student Consolidation Loans 

reliability of the NSLDS data by reviewing financial statement audit 

reports and Education’s annual reports on NSLDS data reliability. We also 

interviewed external auditors and Education officials on the reliability of 

NSLDS data. In addition, we performed electronic testing of key variables 

in our sample for obvious problems in accuracy and completeness. We 

determined that NSLDS data were sufficiently reliable for this review. We 

conducted our work from December 2003 through July 2004 in accordance 

with generally accepted government auditing standards. 

We are sending copies of this report to the Secretary of Education, the 

Director of Education’s Budget Service, and other interested parties. 

This report is also available at no charge on GAO’s Web site at 

http://www.gao.gov. If you have any questions about this report, please 

contact me at (202) 512-8403 or Jeff Appel, Assistant Director, at (202) 512-

9915. You may also reach us by e-mail at ashbyc@gao.gov or 

appelc@gao.gov. Key contributors to this assignment were Susan Chin, 

Julianne Hartman Cutts, Cindy Decker, and John Mingus. 

Sincerely yours, 

Cornelia M. Ashby 

Director, Education, Workforce, 

 and Income Security Issues 
Briefing Slides 

Page 13 GAO-04-843 Student Consolidation Loans 

Briefing Slides 

1

Student Loan Consolidation 

Program

Briefing for staff of Representative Jim Nussle, Chairman, House

Committee on the Budget

May 20, 2004
Briefing Slides 

Page 14 GAO-04-843 Student Consolidation Loans 

2

Introduction – History of Student 

Consolidation Loans

The consolidation loan program, as it is currently structured, began 

operating in 1987. The program aims to reduce default costs on 

federal student loans and help students repay loans by:

• simplifying loan repayment by combining multiple loans into a 

single loan,

• allowing a single monthly payment, and

• allowing repayment over a longer time period.
Briefing Slides 

Page 15 GAO-04-843 Student Consolidation Loans 

3

Introduction – Federal Student Loan 

Programs

Consolidation loans are available under both major federal

student loan programs.

The Federal Family Education Loan Program (FFELP)

Established in 1965, it guarantees loans provided by banks and 

other private lenders to students and their parents. If borrowers 

default, the federal government repays the loan. 

The William D. Ford Direct Loan Program (FDLP)

Established in 1993, it provides direct loans from the federal 

government, through schools or through Education’s 

contractors, to students and parents. 
Briefing Slides 

Page 16 GAO-04-843 Student Consolidation Loans 

4

Introduction – Consolidation Loan 

Volume 

In recent years the volume of consolidation loans originated 

each year has increased sharply.
Briefing Slides 

Page 17 GAO-04-843 Student Consolidation Loans 

5

Key Questions

• What differences exist between FFELP and FDLP 

consolidation loans and borrowers?

• To what extent do borrowers with student loans under one 

program obtain consolidation loans under the other?

• How are FFELP and FDLP borrower and loan characteristics 

and the movement of loans between the two programs 

incorporated into Education’s budgetary cost estimates?
Briefing Slides 

Page 18 GAO-04-843 Student Consolidation Loans 

6

Scope and Methodology

We analyzed a randomly drawn, representative sample of borrowers from the National 

Student Loan Data System (NSLDS), which is a comprehensive national database of 

Title IV loan and grant recipients. This sample contains records as of September 30, 

2003, of approximately 6.4 million loans, held by 1.7 million students or their 

parents.1

• Our analysis focused on FFELP and FDLP borrowers in the sample who 

originated consolidation loans from 1995, the first full year that FDLP loans 

were made, through June 2003. For these borrowers, we included underlying 

loans originated from January 1, 1980, through June 2003.2

• For the additional information requested by your staff of consolidation loan 

default rates by year, we focused on FFELP and FDLP borrowers in the sample 

who originated consolidation loans from fiscal years 1995 through 2001. For 

these borrowers, we included default information through June 2003, to allow 

sufficient time for more recent loans that subsequently defaulted to appear as 

defaulted loans in NSLDS.

1 In this briefing, at the 95 percent confidence interval, all percentage estimates reported have sampling errors of +/- 4 percent or less and all dollar 

estimates have sampling errors of +/- 2 percent or less.

2 We did not include loans originated prior to 1980 because of concerns about data reliability.
Briefing Slides 

Page 19 GAO-04-843 Student Consolidation Loans 

7

Scope and Methodology

We analyzed data from the sample using Education’s linking methodology for 

borrowers who originated consolidation loans from fiscal years1995 

through 2002—the most recent linking methodology file available at the 

time of our review — to:

• link sample borrowers’ consolidation loans to their underlying loans since NSLDS does not directly identify loans underlying borrowers’

consolidation loans, and

• determine the movement, via loan consolidations, of loan volume from 

one program to the other. 

We interviewed officials at Education to determine how the department 

incorporates FDLP and FFELP consolidation loan and borrower 

characteristics and the movement of loans from one program to the other in 

its cost estimates. 
Briefing Slides 

Page 20 GAO-04-843 Student Consolidation Loans 

8

Scope and Methodology

We determined that NSLDS data were sufficiently reliable for this 

review by:

• reviewing financial statement audit reports and Education’s annual reports on NSLDS data reliability, 

• interviewing external auditors who assessed NSLDS and reviewing their audit documents,

• discussing the reliability of NSLDS with Education officials, and

• performing electronic testing of key variables in our sample for obvious problems in accuracy and completeness.
Briefing Slides 

Page 21 GAO-04-843 Student Consolidation Loans 

9

Scope and Methodology

To determine whether Education has controls in place to ensure key 

assumptions are reasonable and considered in the cost estimates, we:

• interviewed external auditors who had reviewed and tested these 

controls,

• reviewed external auditors’ work, including audit programs and summary results, and

• discussed these controls with an Education official. 

The external auditors identified no material weaknesses related to internal 

controls.1

• However, they did note the lack of a formal process to document the development and approval of key assumptions, and the need to better 

monitor consolidation loan activity and conduct studies of the assumptions used to estimate budgetary costs of consolidation loans.

• Education officials agreed with these findings and are working to develop such a process and to better monitor and refine these 

assumptions.

1A material weakness is a reportable condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements caused by error or fraud in amounts that would be material in relation to the financial

statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions.
Briefing Slides 

Page 22 GAO-04-843 Student Consolidation Loans 

10

Summary of Results – Borrower and 

Loan Characteristics

• Compared with FDLP consolidation loan borrowers, FFELP consolidation loan 

borrowers are more likely to have: 

• higher average consolidation loan debt,

• attended 4-year versus 2-year or proprietary (for profit) schools prior to 

consolidation, and

• borrowed while in graduate school.

• For consolidation loans made in fiscal years 1995 to 2001, FDLP borrowers had 

higher default rates than FFELP borrowers for 4 of the 7 fiscal years. 

• Both FFELP and FDLP borrowers who have defaulted prior to consolidation are 

more likely to default on their consolidation loan than those who did not default prior 

to consolidation.

• A higher percentage of consolidation loan volume under the FDLP income 

contingent repayment plan is in default compared with loan volume in other FDLP 

repayment plans.1

1Under the income contingent repayment plan, borrowers’ repayments are based on annual income, loan balance, and family size. Other repayment 

plans are described later in this report. NSLDS does not contain information about repayment plans for FFELP loans.
Briefing Slides 

Page 23 GAO-04-843 Student Consolidation Loans 

11

Summary of Results – Movement of 

Loans across Programs

Fiscal Years 1998 – 2002

• The share of FFELP and FDLP loan volume consolidated into 

FFELP increased while the share of loan volume 

consolidated into FDLP decreased during the fiscal year 

1998-2002 period. 

• Defaulted loans, whether from FFELP or FDLP, were much 

more likely to be consolidated into FDLP. 
Briefing Slides 

Page 24 GAO-04-843 Student Consolidation Loans 

12

Summary of Results – Characteristics 

and Loan Movement in Cost Estimates

FFELP and FDLP consolidation loans:

In general, Education accounts for borrower and loan 

characteristics, and the movement of loans between the two 

programs, by:

• grouping loans sharing similar characteristics in risk categories, 

• forecasting future loan volume for these categories, and 

• applying various assumptions to these categories. 
Briefing Slides 

Page 25 GAO-04-843 Student Consolidation Loans 

13

Summary of Results – Characteristics 

and Loan Movement in Cost Estimates

FFELP and FDLP consolidation loans:

• Characteristics that can significantly affect the estimated cost of 

consolidation loans, and are incorporated into cost estimates 

include default history of borrowers, default rate of 

consolidation loans, and loan movement between programs. 

• Some characteristics are not specifically incorporated into cost

estimates for consolidation loans but are characteristics 

considered for nonconsolidation loans (e.g., type of school 

attended and borrower’s level of education).
Briefing Slides 

Page 26 GAO-04-843 Student Consolidation Loans 

14

Background – Borrower Eligibility for 

FFELP and FDLP Consolidation Loans

• Borrowers must meet certain requirements, including having at least one 

FFELP or FDLP loan eligible for FFELP or FDLP consolidation.1

• Borrowers with only FDLP loans may consolidate only with FDLP.

• Borrowers with FFELP loans only, or both FFELP and FDLP loans, may 

consolidate with

• any FFELP lender, if the borrower’s loans are held by 

• a single FFELP lender that declines to provide a consolidation loan or such a loan with an income sensitive repayment plan, or

• multiple FFELP lenders. 

• FDLP, if the borrower is unable to obtain a consolidation loan or a 

consolidation loan with income-sensitive repayment terms acceptable 

to the borrower and the borrower is eligible for the income contingent 

repayment plan under FDLP.

1Loans eligible for both FFELP and FDLP consolidation include FFELP and FDLP Stafford loans (subsidized and unsubsidized), PLUS loans, and 

consolidation loans. Other Federal student loans, such as Perkins loans, and Health Education Assistance Loans, may be included. Under FFELP, 

consolidation loans are eligible only when combined with at least one other eligible loan not yet consolidated. 
Briefing Slides 

Page 27 GAO-04-843 Student Consolidation Loans 

15

Background – When Borrowers Can 

Consolidate

• Borrowers may consolidate under either FFELP or FDLP if they 

have entered into the grace or repayment period of loans to be 

consolidated.1

• Borrowers consolidating under FFELP cannot be in enrolled in 

school at the time of consolidation. 

• In contrast, borrowers consolidating under FDLP may consolidate 

while enrolled in school if they have:

• FDLP loans only, 

• both FDLP and FFELP loans, or, 

• only FFELP loans and are in a school offering FDLP loans.

1A grace period is a period of time when repayment is not required by the borrower. It begins the day after a student is no longer enrolled 

in school at least half-time.
Briefing Slides 

Page 28 GAO-04-843 Student Consolidation Loans 

16

Background – Borrowers with Defaulted 

Loans

• To be eligible for a FFELP or a FDLP consolidation loan, borrowers 

with defaulted loans must have:

• made satisfactory repayment arrangements on loans in default, 

or

• agreed to repay defaulted loans under the income-sensitive 

plan for FFELP consolidation loans or under the incomecontingent plan for FDLP consolidation loans. 
Briefing Slides 

Page 29 GAO-04-843 Student Consolidation Loans 

17

Background – Interest Rates for 

Consolidation Loans

Consolidation loans offer interest rates to borrowers that 

currently are:

• fixed over the life of the loan and

• calculated based on the weighted average of the interest rate of loans consolidated, rounded up to the nearest 

one-eighth of 1 percent, not to exceed 8.25 percent.

By comparison, borrowers’ interest rates on most nonconsolidation loans vary annually over the life of the loan 

based on the 91-day Treasury bill rate.1

1 FFELP and FDLP nonconsolidation loans, such as subsidized and unsubsidized Stafford loans and PLUS loans, account for the majority of federal 

student loans and carry variable borrower interest rates. Other types of non-consolidation federal student loans made outside FFELP and FDLP, such 

as Perkins Loans and Health Professions Student Loans and Nursing Student Loans, may carry a variable or fixed borrower interest rate. 
Briefing Slides 

Page 30 GAO-04-843 Student Consolidation Loans 

18

Background – Consolidation Loan 

Repayment Options1

• Standard: Equal monthly payments up to 30 years based on loan 

balance for FFELP loans and up to 10 years for FDLP loans. 

• Graduated: Monthly payments increase over course of repayment, up 

to 30 years based on loan balance, for both FFELP and FDLP. 

• Extended: Fixed or graduated monthly payments up to 25 years for 

FFELP and fixed payments up to 30 years for FDLP based on loan 

balance. 

• Income-sensitive (FFELP)/ income-contingent (FDLP): Monthly 

payments up to 10 years for FFELP, with payments based on annual

income, and 25 years for FDLP, with payments based on annual 

income, loan balance, and family size.

1 Names of payment options may vary by program. Similar options are available for other student loans. However, they sometimes differ by the amount of time allowed to repay loans. Under FDLP, alternative repayment plans may also be provided by the Secretary on a case-by- case basis to accommodate a borrower’s unique circumstances.
Briefing Slides 

Page 31 GAO-04-843 Student Consolidation Loans 

19

Background – Consolidation Loan Repayment 

Periods by Loan Amount
Briefing Slides 

Page 32 GAO-04-843 Student Consolidation Loans 

20

Borrower and Loan Characteristics: Average 

Consolidation Loan Amount 

Average consolidation loan amount borrowed was higher among 

FFELP borrowers than among FDLP borrowers.

Notes: 

Analysis based on borrowers in the NSLDS sample who originated a consolidation loan from January 1995 through June 2003.

Based on borrowers’ most recent consolidation loan. 

Objective One
Briefing Slides 

Page 33 GAO-04-843 Student Consolidation Loans 

21

Borrower and Loan Characteristics: Type of 

School Attended

FFELP consolidation borrowers were more likely than FDLP 

borrowers to have attended a 4-year school and less likely to have 

attended a 2-year or proprietary (for profit) school.

Note: Analysis based on borrowers in the NSLDS sample who originated a consolidation loan from January 1995 through June 2003,

plus any underlying loans these borrowers originated from January 1, 1980, through June 2003. 

Objective One
Briefing Slides 

Page 34 GAO-04-843 Student Consolidation Loans 

22

Borrower and Loan Characteristics: Borrowed 

while in Graduate School

Thirty-one percent of FFELP consolidation loan borrowers borrowed 

while in graduate school, compared with 21 percent of FDLP 

consolidation borrowers.

Note: Analysis based on borrowers in the NSLDS sample who originated a consolidation loan from January 1995 through June 2003, plus any underlying loans these borrowers originated from January 1, 1980, through June 2003. 

Objective One

0

10

20

30

40

FFELP FDLP

Percentage of borrowers

31

21

Source: GAO analysis of NSLDS data.
Briefing Slides 

Page 35 GAO-04-843 Student Consolidation Loans 

23

Borrower and Loan Characteristics: 

Consolidation Loan Defaults

Borrower default rates for consolidation loans made from fiscal 

years 1995 to 2001 

Note: Analysis based on borrowers in the NSLDS sample who originated a consolidation loan from fiscal years 1995 through 2001,

including default information through June 2003. 

Objective One
Briefing Slides 

Page 36 GAO-04-843 Student Consolidation Loans 

24

Borrower and Loan Characteristics: Prior 

Loan Defaults

Fifteen percent of FFELP consolidation loan borrowers defaulted on a 

student loan prior to consolidation, compared with 36 percent of FDLP 

consolidation borrowers.

Note: Analysis based on borrowers in the sample who originated a consolidation loan from January 1995 through September 2002, plus any underlying loans these borrowers originated from January 1, 1980, through September 2002. 

Objective One
Briefing Slides 

Page 37 GAO-04-843 Student Consolidation Loans 

25

Borrower and Loan Characteristics: Prior 

Loan and Consolidation Loan Defaults

Of those borrowers who defaulted on a loan prior to consolidation, 

about equal percentages of FFELP and FDLP consolidation loan 

borrowers also defaulted on their consolidation loans.

Note: Analysis based on borrowers in the NSLDS sample who originated a consolidation loan from January 1995 through September 

2002, plus any underlying loans these borrowers originated from January 1, 1980, through September 2002. 

Objective One

FFELP FDLP

Percentage of borrowers

Source: GAO analysis of NSLDS data.

0

5

10

15

20

25

30

35

40

29

31
Briefing Slides 

Page 38 GAO-04-843 Student Consolidation Loans 

26

Borrower and Loan Characteristics: Prior 

Loan and Consolidation Loan Defaults

Of those borrowers who had not defaulted on a loan prior to 

consolidation, 2 percent of FFELP consolidation loan borrowers 

defaulted on their consolidation loans, compared with 6 percent of 

FDLP consolidation borrowers.

Note: Analysis based on borrowers in the NSLDS sample who originated a consolidation loan from January 1995 through September 

2002, plus any underlying loans these borrowers originated from January 1, 1980, through September 2002. 

Objective One

0

2

4

6

8

10

c FFELP FDLP

Percentage of borrowers

Source: GAO analysis of NSLDS data.

2

6
Briefing Slides 

Page 39 GAO-04-843 Student Consolidation Loans 

27

Borrower and Loan Characteristics: Defaults 

by Repayment Plan

A higher percentage of consolidation loan volume under the incomecontingent repayment plan for FDLP has defaulted compared with 

loan volume in other FDLP repayment plans.

Notes: 

Analysis based on borrowers in the NSLDS sample who originated a consolidation loan from January 1995 through September 2002. 

NSLDS does not contain information about repayment plans for FFELP loans.

Objective One
Briefing Slides 

Page 40 GAO-04-843 Student Consolidation Loans 

28

FFELP Loan Movement across Programs

Cumulative FFELP loan volume consolidated from 1998 through 2002:

• 25 percent was consolidated into FDLP

• 35 percent of FFELP loan volume that was consolidated into FDLP 

was in default compared with 5 percent of the volume consolidated 

into FFELP

Note: Data are weighted projections based on a randomly drawn, representative sample of borrowers in the NSLDS. The analysis is 

based on borrowers in the sample who originate,d a consolidation loan from October 1997 through September 2002, plus any underlying loans these borrowers originated from January 1, 1980, through September 2002. 

Objective Two
Briefing Slides 

Page 41 GAO-04-843 Student Consolidation Loans 

29

FDLP Loan Movement across Programs

Cumulative FDLP underlying loan volume consolidated from 1998 through 

2002:

• 40 percent was consolidated into FFELP

• less than 0.5 percent of FDLP underlying loan volume consolidated 

into FFELP was in default compared with 2.5 percent of the volume 

consolidated into FDLP

Note: Data are weighted projections based on a randomly drawn, representative sample of borrowers in the NSLDS. The analysis is based on borrowers in the sample who originated a consolidation loan from October 1997 through September 2002, plus any underlying loans these borrowers originated from January 1, 1980, through September 2002. 

Objective Two
Briefing Slides 

Page 42 GAO-04-843 Student Consolidation Loans 

30

FFELP Loan Movement across Programs by 

Fiscal Year

Share of underlying FFELP loan volume consolidated into 

FFELP and FDLP, fiscal years 1998-2002

Note: Analysis based on borrowers in the NSLDS sample who originated a consolidation loan from October 1997 through September 

2002, plus any underlying loans these borrowers originated from January 1, 1980, through September 2002. 

Objective Two

Source: GAO analysis of NSLDS data.

0

10

20

30

40

50

60

70

80

90

100

1998 1999 2000 2001 2002

Percentage of loan volume

Underlying FFELP loans consolidated into FFELP Underlying FFELP loans consolidated into FDLP

Fiscal year

71

29

60

40

72

28

70

30

84

16
Briefing Slides 

Page 43 GAO-04-843 Student Consolidation Loans 

31

FDLP Loan Movement across Programs by 

Fiscal Year

Share of underlying FDLP loan volume consolidated into 

FFELP and FDLP, fiscal years 1998-2002

Note: Analysis based on borrowers in the NSLDS sample who originated a consolidation loan from October 1997 through September 

2002, plus any underlying loans these borrowers originated from January 1, 1980, through September 2002. 

Objective Two
Briefing Slides 

Page 44 GAO-04-843 Student Consolidation Loans 

32

FFELP Loan Movement of Defaulted Loans 

across Programs by Fiscal Year

Share of defaulted underlying FFELP loan volume consolidated 

into FFELP and FDLP, fiscal years 1998-2002

Note: Analysis based on borrowers in the NSLDS sample who originated a consolidation loan from October 1997 through September 

2002, plus any underlying loans these borrowers originated from January 1, 1980, through September 2002. 

Objective Two
Briefing Slides 

Page 45 GAO-04-843 Student Consolidation Loans 

33

FDLP Loan Movement of Defaulted Loans 

across Programs by Fiscal Year

Share of defaulted underlying FDLP loan volume consolidated 

into FFELP and FDLP, fiscal years 1998-2002

Note: Analysis based on borrowers in the NSLDS sample who originated a consolidation loan from October 1997 through September 

2002, plus any underlying loans these borrowers originated from January 1, 1980, through September 2002. 

.

Objective Two
Briefing Slides 

Page 46 GAO-04-843 Student Consolidation Loans 

34

How Education Incorporates Characteristics 

and Loan Movement into Cost Estimates

In general, Education incorporates characteristics and loan movement into 

cost estimates by:

• identifying groups of loans, or risk categories, with similar characteristics that are expected to have about the same default rates 

and other costs (e.g., consolidation loans with underlying defaulted 

loans).

• forecasting loan volume for each risk category within each loan program and loan type (e.g., subsidized, unsubsidized, PLUS, and

consolidated).

• applying various assumptions based on historical data from each loan 

program (e.g., interest, prepayment and default rates), and other 

economic data, such as unemployment rates, to each risk category.

Objective Three
Briefing Slides 

Page 47 GAO-04-843 Student Consolidation Loans 

35

How Education Incorporates Characteristics 

and Loan Movement into Cost Estimates

Characteristics that can significantly affect the estimated cost of 

FFELP and FDLP consolidation loans, and are incorporated in cost

estimates for consolidation loans, include: 

• default history of borrowers, 

• default rates of consolidation loans, and 

• loan movement across programs.

Objective Three
Briefing Slides 

Page 48 GAO-04-843 Student Consolidation Loans 

36

How Education Incorporates Default History of 

Borrowers into Cost Estimates

• Education accounts for the default history of borrowers by defining 

risk categories for consolidation loans based on whether FFELP 

and FDLP consolidation loans have underlying defaulted loans and

then applying various default rate assumptions to each risk 

category. 

• Assumptions applied to risk categories are based on historical data 

showing that borrowers who previously defaulted are more likely to 

default again, resulting in higher estimated costs for consolidation 

loans with underlying defaulted loans than for consolidation loans 

without underlying defaulted loans.

Objective Three
Briefing Slides 

Page 49 GAO-04-843 Student Consolidation Loans 

37

How Education Incorporates Default Rate of 

Consolidation Loans into Cost Estimates

Education accounts for the higher default rate of FDLP consolidation loans—

primarily due to high levels of defaulted consolidation loans under the 

income contingent repayment plan—by: 

• defining separate risk categories for each repayment plan, and 

• applying higher default rate assumptions to defaulted consolidation loans under the income-contingent plan category.1

(Loans under this repayment plan account for about 36 percent of FDLP 

consolidation loan volume and over one-third of all defaulted underlying 

consolidation loan volume.)

Lower default rate assumptions are applied to consolidation loans under 

FFELP and other FDLP repayment plans because historically they have 

had somewhat lower default rates than income-contingent repayment plan 

consolidation loans.

1 FFELP repayment plan information is not available in NSLDS so Education does not analyze FFELP loans by repayment plan.

Objective Three
Briefing Slides 

Page 50 GAO-04-843 Student Consolidation Loans 

38

How Education Incorporates Loan Movement 

Across Programs into Cost Estimates

Education accounts for an increasingly higher percentage of FFELP and 

FDLP loans consolidated into FFELP by applying various loan volume 

forecasts and prepayment assumptions (estimates of the volume of loans 

paid off before maturity) to each program. 

Education accounts for the higher percentage of defaulted FFELP loan 

volume consolidated into FDLP by:

• assuming a higher default rate for the risk category that contains the defaulted underlying loans, and 

• assuming a higher default rate for defaulted consolidation loans under FDLP’s income contingent repayment plan, which takes into account 

that a majority of defaulted loans under this repayment plan were 

defaulted FFELP loans prior to consolidation into FDLP. 

Objective Three
Briefing Slides 

Page 51 GAO-04-843 Student Consolidation Loans 

39

How Education Incorporates Characteristics 

and Loan Movement into Cost Estimates

• Characteristics related to type of school attended and borrower’s level of 

education are not accounted for in cost estimates for consolidation loans.

• These characteristics are, however, used to define risk categories for

nonconsolidation loans.

• Education does not use these characteristics to define risk categories for 

consolidation loans because:

• consolidation loans could reflect multiple underlying loans with different risk categories, and 

• other differences, such as default rates of underlying loans, are more likely to significantly affect the estimated costs of consolidation loans, 

according to Education officials. 

Objective Three
Appendix I: Comments from the Department 

of Education 

Page 52 GAO-04-843 Student Consolidation Loans 

Appendix I: Comments from the Department 

of Education 

(130343) 
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