Accessible Version

CREDIT REFORM

Current Method to 

Estimate Credit 

Subsidy Costs Is 

More Appropriate for 

Budget Estimates 

Than a Fair Value 

Approach

Report to the Ranking Member, 

Subcommittee on Financial Services 

and General Government, Committee 

on Appropriations, U.S. Senate

January 2016

GAO-16-41

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-16-41, a report to the 

Ranking Member, Subcommittee on Financial 

Services and General Government, 

Committee on Appropriations, U.S. Senate

January 2016

CREDIT REFORM

Current Method to Estimate Credit Subsidy Costs Is 

More Appropriate for Budget Estimates Than a Fair 

Value Approach

What GAO Found

The Federal Credit Reform Act of 1990 (FCRA) requires agencies to estimate the 

cost to the government of extending or guaranteeing credit. This cost, referred to 

as subsidy cost, equals the net present value of estimated cash flows from the 

government (e.g., loan disbursements and claim payments to lenders) minus 

estimated cash flows to the government (e.g., loan repayments, interest 

payments, fees, and recoveries on defaulted loans) over the life of the loan, 

excluding administrative costs. Discount rates that reflect the federal 

government’s cost of financing are used to determine the net present value of 

estimated cash flows. Agencies generally update—or reestimate—subsidy costs 

annually to reflect both actual loan performance and changes in expected future 

loan performance. 

Based on GAO’s analyses of credit program reestimates for direct loans and loan 

guarantees obligated or committed from fiscal years 2001 through 2014 and 

considering various factors to identify trends, GAO did not identify any overall 

consistent trends in under- or overestimates of subsidy costs across federal 

credit programs government-wide. Overall, both direct loan and loan guarantee 

programs government-wide underestimated costs by $3.1 billion and 

$39.0 billion, respectively, over the 14-year period. These amounts represent 

less than 1 percent of the amounts disbursed or guaranteed during the period. 

Annual reestimates fluctuated from year to year, indicating both under- and 

overestimates of subsidy costs. Further, significant lifetime reestimates could 

generally be explained by specific events affecting a few large programs. For 

example, the Department of Housing and Urban Development’s Mutual Mortgage 

Insurance Program reported underestimating costs over this period because of a 

variety of factors, including long-term housing prices and interest rate changes 

stemming from the mortgage and financial crises in the late 2000s. 

Fluctuations in Direct Loan and Loan Guarantee Programs’ Annual Net Reestimates, 2006-

2014

Why GAO Did This Study

Federal direct loans and loan 

guarantees outstanding have nearly 

doubled from $1.5 trillion at the end of 

fiscal year 2008 to $2.9 trillion at the 

end of fiscal year 2014. For the past 

several years, concerns have been 

raised by some experts both in and out 

of the federal government that FCRA 

may understate credit program subsidy 

costs. Some of these experts have 

suggested that FCRA be modified with 

an approach—referred to as the fair 

value approach—to include certain 

market risk not currently considered 

under FCRA. 

GAO was asked to examine the 

budgetary treatment of the cost of 

federal credit programs. This report 

addresses (1) whether trends exist in 

subsidy cost reestimates and what 

factors, if any, help explain any 

significant trends in reestimates and 

(2) the implications of using the fair 

value approach to estimate subsidy 

costs in the budget and whether GAO 

believes such concepts should be 

incorporated into subsidy cost 

estimates for the budget. 

GAO analyzed reestimate data from 

fiscal years 2001 to 2014 as reported 

in the President’s Budgets and 

conducted interviews with 30 experts.

What GAO Recommends

GAO supports maintaining the current 

FCRA method for estimating credit 

subsidy cost for the budget and 

therefore is not making any 

recommendations. The Congressional 

Budget Office and the Office of 

Management and Budget provided 

technical comments on a draft of this 

report, which have been incorporated 

as appropriate.

View GAO-16-41. For more information, 

contact Cheryl E. Clark at (202) 512-9377 or 

clarkce@gao.gov, Susan J. Irving at (202) 

512-6806 or irvings@gao.gov, or Susan Offutt 

at (202) 512-3763 or offutts@gao.gov.
Highlights of GAO-16-41 (Continued)

While subsidy cost estimates under the fair value approach may provide useful information to decision makers for 

evaluating the costs against the benefits of credit programs, GAO does not support the use of the fair value approach to 

estimate subsidy costs for the budget. Proponents of the fair value approach have asserted that beyond the cash flows 

associated with a direct loan or loan guarantee, costs are imposed on taxpayers who would, in a similarly risky private 

market transaction, require compensation for bearing the risk associated with making the loan or guarantee. Taxpayers as 

investors with diversified portfolios would still demand compensation, or a premium, for bearing the risk that the 

macroeconomy—the national or global economy—may falter. This risk—referred to as aggregate risk (a portion of overall 

market risk)—arises from the possibility of significant economic downturns, when even a well-diversified portfolio of 

financial investments will decrease in value. To incorporate the cost of bearing aggregate risk into subsidy cost estimates 

for the budget, the fair value approach adds an aggregate risk premium to the discount rate used in FCRA calculations, 

which is based on interest rates of Treasury securities. Including the aggregate risk premium incorporates a noncash cost 

into the subsidy cost estimate. The actual cash flows to and from the federal government associated with a credit program 

are the same under the fair value approach and FCRA. The debate over the fair value approach rests on whether the cost 

associated with aggregate risk should be considered in the subsidy cost estimates for the budget of the federal 

government.

Differences between Market and Treasury Interest Rates

United States Government Accountability Office

Reflecting a different concern, some proponents of the fair value approach cited as motivation the perceived overreliance 

on federal credit programs as a policy tool and the desire to correct any bias toward underestimates of costs under FCRA. 

Raising the subsidy cost would likely result in fewer loans being made. In contrast, some proponents of FCRA stated that 

any overreliance on credit programs should be addressed as a policy decision, and that to the extent that agencies were 

underestimating subsidy costs under FCRA, improvements in the subsidy estimation process should be pursued.

The additional market risk recognized under the fair value approach does not reflect additional cash costs beyond those 

already recognized by FCRA. The introduction of market risk into subsidy costs under the fair value approach would 

(1) be inconsistent with long-standing federal budgeting practices primarily based on cash outlays; (2) be inconsistent with 

the budgetary treatment of similarly risky programs; (3) introduce transparency and verification issues with respect to 

inclusion of a noncash cost in budget totals; and (4) involve significant implementation issues, such as the need for 

additional agency resources. Consequently, GAO does not support the use of the fair value approach to estimate subsidy 

costs for the budget and believes the current FCRA methodology is more appropriate for this purpose as it represents the 

best estimate of the direct cost to the government and is consistent with current budgetary practices.
Letter 1

Page i GAO-16-41 Credit Subsidy Cost Estimates

Background 4

No Overall Consistent Trends Identified in Under- or 

Overestimates of Subsidy Costs, and Various Economic and 

Portfolio Changes Caused Certain Significant Reestimates 16

Fair Value Subsidy Cost Estimates May Be Useful, but They Are 

Not Consistent with Long-standing Federal Budgeting 

Practices, Involve Significant Implementation Challenges, and 

Should Not Be Recognized in Budget Costs 33

Concluding Observations 53

Agency Comments 53

Appendix I: Objectives, Scope, and Methodology 55

Appendix II: Analysis of Reestimates 59

Appendix III: Fair Value Approach Implementation Considerations 66

Appendix IV: GAO Contacts and Staff Acknowledgments 73

Appendix V: Accessible Data 74

Data Tables 74

Related GAO Products 79

Tables

Table 1: Direct Loan Programs Lifetime Upward and Downward 

Reestimates, 2001-2014 18

Table 2: Loan Guarantee Programs Lifetime Upward and Downward 

Reestimates, 2001-2014 20

Table 3: Discretionary and Mandatory Credit Program Reestimates, 

2001-2014 23

Table 4: Direct Loan Programs’ Lifetime Reestimates by Agency, 2001-

201460

Table 5: Loan Guarantee Programs’ Lifetime Reestimates by Agency, 

2001-2014 61

Table 6: Lifetime Upward and Downward Reestimates by Type of Direct 

Loan Program, 2001-2014 63

Contents
Table 7: Lifetime Upward and Downward Reestimates by Type of Loan 

Guarantee Program, 2001-2014 63

Data Table for Highlights Figure: Fluctuations in Direct Loan and Loan 

Guarantee Programs’ Annual Net Reestimates, 2006-

2014Figure 1: Federal Direct Loans and Loan Guarantees 

Outstanding, 2001-2014 74

Data Table for Figure 1: Federal Direct Loans and Loan Guarantees 

Outstanding, 2001-2014 74

Data Table for Figure 6: Direct Loan Programs Representing a 

Significant Percentage of Lifetime Upward and Downward 

Reestimates, 2001-2014 75

Data Table for Figure 7: Loan Guarantee Programs Representing a 

Significant Percentage of Lifetime Upward and Downward 

Reestimates, 2001-2014 75

Data Table for Figure 8: Fluctuations in Direct Loan and Loan Guarantee 

Programs’ Annual Net Reestimates, 2006-2014 76

Data Table for Figure 10: 2008 Direct Loan and Loan Guarantee 

Programs’ Reestimates during the Financial Crisis, 2006-2014 76

Data Table for Figure 14: Percentage Point Differences between Direct 

Loan and Loan Guarantee Programs’ Original and Most Recent 

Reestimated Subsidy Rates, 2001-2014 76

Figures

Page ii GAO-16-41 Credit Subsidy Cost Estimates

Figure 1: Federal Direct Loans and Loan Guarantees Outstanding, 2001-

2014 5

Figure 2: Agencies with the Highest Direct Loans and Loan Guarantees 

Outstanding as of Fiscal Year 2014 and Types of Credit 

Programs 6

Figure 3: Calculation of Subsidy Costs for Direct Loans and Loan 

Guarantees 8

Figure 4: Federal Credit Reform Act of 1990 Program and Financing 

Account Transactions for Direct Loans and Loan Guarantees 11

Figure 5: Effect of Discount Rates on the Value of Loan Repayments and 

Subsidy Costs for a Direct Loan 12

Figure 6: Direct Loan Programs Representing a Significant Percentage of 

Lifetime Upward and Downward Reestimates, 2001-2014 19

Figure 7: Loan Guarantee Programs Representing a Significant 

Percentage of Lifetime Upward and Downward Reestimates, 

2001-2014 21

Figure 8: Fluctuations in Direct Loan and Loan Guarantee Programs’

Annual Net Reestimates, 2006-2014 22
Figure 9: Primary Drivers of the Largest Overall Upward and Downward 

Lifetime Reestimates for Direct Loans and Loan Guarantees by 

Purpose of Program, 2001-2014 25

Figure 10: 2008 Direct Loan and Loan Guarantee Programs’ Reestimates 

during the Financial Crisis, 2006-2014 32

Figure 11: Aggregate Risk 35

Figure 12: Differences between Market and Treasury Interest Rates 37

Figure 13: Fair Value Costs versus Cash Cost over Time 42

Figure 14: Percentage Point Differences between Direct Loan and Loan 

Guarantee Programs’ Original and Most Recent Reestimated 

Subsidy Rates, 2001-2014 65

Page iii GAO-16-41 Credit Subsidy Cost Estimates

Abbreviations

CBO Congressional Budget Office

DOE Department of Energy

Ex-Im Export-Import Bank

FASAB Federal Accounting Standards Advisory Board

FCRA Federal Credit Reform Act of 1990

FCS Federal Credit Supplement

FFEL Federal Family Education Loan

GAAP generally accepted accounting principles

GSE Government Sponsored Enterprises

HUD Department of Housing and Urban Development

MBS Mortgage Backed Securities

MMI Mutual Mortgage Insurance
OMB Office of Management and Budget

SBA Small Business Administration

SBIC Small Business Investment Company

TARP Troubled Asset Relief Program

Treasury Department of the Treasury

USDA Department of Agriculture

VA Department of Veterans Affairs

Page iv GAO-16-41 Credit Subsidy Cost Estimates

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Page 1 GAO-16-41 Credit Subsidy Cost Estimates

441 G St. N.W.

Washington, DC 20548

January 29, 2016

The Honorable Christopher A. Coons

Ranking Member

Subcommittee on Financial Services and General Government

Committee on Appropriations

United States Senate

Dear Senator Coons:

The federal government uses credit programs that extend direct loans 

and loan guarantees as tools to support specific social and public policy 

objectives, such as those for housing, education, and small businesses. 

Twenty-five years ago, the enactment of the Federal Credit Reform Act of 

1990 (FCRA) changed the method used to budget for the cost of federal 

credit programs.1 Before fiscal year 1992, when FCRA took effect, the cost of 

credit programs was recorded in the budget on a cash basis (the expected 

amount of cash paid out minus the cash received in a given year). As a 

result, the budget cost associated with a loan guarantee was not recorded 

until a default occurred, which may have been many years after the 

guarantee was made. Further, direct loans appeared to cost the same as 

grants because the total amount of a loan was recorded as a cost when 

the loan was made and loan repayments were not recorded until the year 

received. Under FCRA, the budget records the federal government’s 

estimated net long-term cost—referred to as the subsidy cost—in the year 

the direct loan or loan guarantee is made. Agencies generally update—or 

reestimate—these subsidy costs annually to reflect both actual loan 

performance and changes in expected future loan performance, which 

could be based on economic changes.

For the past several years, concerns have been raised by experts both in 

and out of the federal government that subsidy costs may be 

underestimated under FCRA procedures. Some of these experts have 

suggested that FCRA be modified to include an approach—referred to as 

the fair value approach in this report—that would account for certain 

 

1

Pub. L. No. 101-508, § 13201(a), 104 Stat. 1388, 1388-609 (Nov. 5, 1990), classified, as 

amended, at 2 U.S.C. §§ 661-661f.

Letter
market risk not currently considered in FCRA subsidy cost estimates.

Page 2 GAO-16-41 Credit Subsidy Cost Estimates

2

Specifically, taxpayers as investors with diversified portfolios would still 

demand compensation, or a premium, for bearing the risk that the 

macroeconomy—the national or global economy—may falter. This risk—

referred to as aggregate risk (a portion of overall market risk)—arises 

from the possibility of significant economic downturns, when even a welldiversified portfolio of financial investments will decrease in value. The 

fair value approach would increase initial subsidy cost estimates for direct 

loan and loan guarantee programs because of the added market risk. As 

a result, because of the higher estimated initial subsidy cost, less federal 

credit would be available, assuming the same level of spending was 

provided for in the budget. Other experts, both in and out of the federal 

government, did not agree that the fair value approach would be 

beneficial in estimating credit subsidy costs for the budget.

Since the 2008 financial crisis, the amount of federal credit outstanding, 

consisting of direct loans and loan guarantees, has nearly doubled from 

$1.5 trillion at the end of fiscal year 2008 to $2.9 trillion at the end of fiscal 

year 2014. In light of this growing portfolio of outstanding direct loans and 

loan guarantees, as well as concerns about underestimates of subsidy 

costs and the suggestions to modify FCRA, you asked us to review 

issues related to the budgetary treatment of the cost of federal credit 

programs. Our objectives were to determine (1) the extent to which trends 

exist in the size and direction of subsidy cost reestimates across, or 

within, federal credit programs and, based on this analysis of reestimates, 

what factors, if any, help explain any significant trends in reestimates and 

(2) the implications of using subsidy cost estimates developed under the 

fair value approach in the budget and whether we believe such concepts 

should be incorporated into subsidy cost estimates for the budget.3 Also at 

your request, we will issue a follow-up report addressing the factors agencies 

should consider when developing subsidy cost estimates and to what extent 

selected agencies are using those factors.

 

2Market risk is the potential for loss resulting from movements in market prices, including interest 

rates, commodity and stock prices, and foreign exchange rates. 

3

For purposes of this report, “budget” includes the development and consideration of the 

President’s Budget; congressional budget resolutions, allocations, and appropriations; and 

compliance with budget controls.
To analyze trends in subsidy cost reestimates, we used direct loan and 

loan guarantee reestimate data for fiscal years 2001 through 2014, which 

are reported in the fiscal years 2003 through 2016 President’s Budgets as 

presented in the Federal Credit Supplement.

Page 3 GAO-16-41 Credit Subsidy Cost Estimates

4 We categorized these 

programs by seven loan purposes (e.g., housing or education) and by the type of 

budget spending. We examined reestimate trends by agency, program, purpose, 

cohort fiscal year (the fiscal year of obligation for direct loans or 

commitment for loan guarantees), and the type of budget spending 

(discretionary or mandatory).5 We focused on identifying trends in lifetime 

reestimate amounts,6annual reestimate amounts,7 and a comparison of original 

subsidy rates to reestimated subsidy rates. We encountered some 

limitations with the data reported in the President’s Budgets, which we 

individually evaluated based on professional judgment. For each data 

limitation, we adjusted the data, identified alternative data calculation 

methods when available, or determined that the data were reliable for our 

purposes. Our conclusions about possible trends were based on our 

professional judgment in assessing the data and not based on a statistical 

analysis.8 To evaluate implications of using subsidy cost estimates developed 

under the fair value approach for the budget, we reviewed literature related to 

FCRA, the purpose and uses of the federal budget, and the fair value approach. 

 

4The Federal Credit Supplement is supplementary material issued along with the federal budget. It 

provides summary information about federal direct loan and loan guarantee programs 

subject to FCRA. It includes information related to estimated (1) original subsidy rates, 

obligations, commitments, and average loan sizes for future cohorts; (2) certain loan terms 

and assumptions underlying original subsidy rates; and (3) annual and lifetime 

reestimates, as well as loan disbursements to date for existing cohorts. (A cohort refers to 

the fiscal year of obligation for direct loans or commitment for loan guarantees.)

5

Funding for discretionary spending programs is provided in appropriations acts. Mandatory 

programs are those programs whose funding is provided for in laws other than 

appropriations acts. In general, mandatory credit programs are entitlement programs for 

which the amount of funding depends on eligibility and benefits rules contained in law.

6The term lifetime reestimate refers to total reestimates reported for a cohort of loans since 

inception of the cohort. Lifetime reestimates are presented by program, agency, or type of direct 

loan or loan guarantee program for cohorts over a given period of time. For example, if an 

agency recorded annual reestimates of $100, $50, and $20 over a 3-year period for a 

cohort, the lifetime reestimate would be $170 ($100 + $50 + $20).

7The term annual reestimates refers to reestimates of a cohort of loans or a group of 

cohorts for a given fiscal year. 

8We did not use statistical analysis to estimate trends because, in our professional judgment, the 

quantity of data (e.g., number of years and number of programs) was insufficient to provide a 

credible statistical result.
We also conducted semistructured interviews with 30 individuals with 

expertise in one or more of the following: FCRA; financial economics; and 

federal budgeting, auditing, and accounting. See appendix I for additional 

details on our scope and methodology.

We conducted this performance audit from June 2014 to January 2016 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

Federal credit programs provide assistance to borrowers through two 

principal methods: direct loans and loan guarantees. Direct loans are a 

disbursement of funds by the government to a nonfederal borrower under 

a contract that requires the repayment of such funds with or without 

interest. Loan guarantees are any guarantees, insurance, or other 

pledges with respect to the payment of all or a part of the principal or 

interest on any debt obligation of a nonfederal borrower to a nonfederal 

lender.

Page 4 GAO-16-41 Credit Subsidy Cost Estimates

9 As shown in figure 1, since the 2008 financial crisis, the amount of 

federal direct loans and loan guarantees outstanding has nearly doubled 

from $1.5 trillion at the end of fiscal year 2008 to $2.9 trillion at the end of 

fiscal year 2014.10

 

9Loan guarantees do not include the insurance of deposits, shares, or other withdrawable accounts 

in financial institutions. Further, the credit and insurance activities of the Federal Deposit 

Insurance Corporation, National Credit Union Administration, Pension Benefit Guarantee 

Corporation, National Flood Insurance Program, National Insurance Development Fund, 

Crop Insurance, and Tennessee Valley Authority are statutorily exempted from FCRA and 

are therefore not considered “credit programs” for budgetary purposes. 2. U.S.C. § 

661e(a). 

10The amount for direct loans is the total face value outstanding and for loan guarantees is the 

principal amount outstanding of the underlying loans that are guaranteed by the federal 

government.

Background
Figure 1: Federal Direct Loans and Loan Guarantees Outstanding, 2001-2014

Page 5 GAO-16-41 Credit Subsidy Cost Estimates

As of September 30, 2014, 21 federal agencies reported that they had 

direct loans or loan guarantees outstanding. As shown in figure 2, the 

Department of Education (Education) (largely through its direct student 

loan program) and the Department of Housing and Urban Development 

(HUD) (largely through its single-family mortgage guarantee program) 

held the largest share of federal direct loans and loan guarantees 

outstanding, respectively.
Figure 2: Agencies with the Highest Direct Loans and Loan Guarantees Outstanding as of Fiscal Year 2014 and Types of 

Page 6 GAO-16-41 Credit Subsidy Cost Estimates

Credit Programs
Prior to the enactment of FCRA, credit programs—like most other federal 

programs—were recorded in budgetary accounts on a cash basis (the 

expected amount of cash paid out minus the cash received in a given 

year). Because a loan guarantee does not require a cash outlay at the 

time the guarantee is issued, guarantees initially appeared to be of no 

cost to the federal budget; conversely, because the entire amount of a 

direct loan is disbursed and recognized as a budget cost when the loan is 

made, the cost of direct loans was recorded the same as grants in the 

federal budget. Both were inaccurate and provided policymakers with 

distorted information for comparing credit programs to noncredit programs 

and to each other. This created a bias in favor of loan guarantees over 

direct loans because loan guarantees appeared to be less expensive than 

direct loans regardless of the actual lifetime cost to the government.

FCRA was enacted with the intent of improving the accuracy of the cost 

of federal credit programs reported in the budget by requiring agencies to 

measure the government’s net long-term cost of federal credit programs 

to permit better cost comparisons both among credit programs and 

between credit and noncredit programs. The policies enacted under 

FCRA, sometimes referred to simply as credit reform, recognized that the 

actual cost of a direct loan or loan guarantee was not captured by its cash 

flows in any one year, but rather is the net present value—worth in terms 

of money paid immediately—of its cash flows over the life of the loan.

Page 7 GAO-16-41 Credit Subsidy Cost Estimates

11

Therefore, FCRA specified an approach using estimates of expected cash flows, 

including future loan repayments and defaults as elements of the cost to be 

recorded in the budget.

FCRA requires agencies to estimate the cost to the government of 

extending or guaranteeing credit. This cost, referred to as subsidy cost,

equals the net present value of estimated cash flows from the 

government minus estimated cash flows to the government over the life of 

the loan and excluding administrative costs. This approach puts direct 

loans and loan guarantees on an equal footing in terms of cost in the 

federal budget and permits the costs of credit programs to be compared 

with each other and with the costs of noncredit programs. Figure 3 

 

11The present value of a stream of future returns or costs is its worth in terms of money paid 

immediately. In calculating present value under FCRA, prevailing interest rates on Treasury 

securities provide the basis for converting future amounts into their “money now” 

equivalents.

The Federal Credit Reform 

Act of 1990

Subsidy Cost Estimates 

and Reestimates
illustrates the types of cash flows that affect the subsidy cost for direct 

loans and loan guarantees. If the present value of estimated cash 

outflows exceeds cash inflows, there is a subsidy cost. If the present 

value of estimated cash inflows exceeds cash outflows, there is a 

negative subsidy cost, referred to as subsidy income.

Figure 3: Calculation of Subsidy Costs for Direct Loans and Loan Guarantees

Page 8 GAO-16-41 Credit Subsidy Cost Estimates
To calculate subsidy costs, agencies begin by estimating the expected 

cash outflows and inflows over the life of the loans for each cohort of 

direct loans obligated or loan guarantees committed in the cohort year.

Page 9 GAO-16-41 Credit Subsidy Cost Estimates

12

Agencies use historical information and various assumptions, including the 

probabilities of default, borrower prepayments, or recoveries, and the projected 

timing of these events, to make informed predictions about expected future cash 

flows. These expected cash flows are then discounted to the point of loan 

disbursement to determine the net present value. A credit subsidy rate—

the cost per dollar of credit assistance—is then determined by dividing the 

subsidy cost by direct loan obligations or loan guarantee commitments 

estimated to be made in that year.

The subsidy cost represents the net present value cost of making or 

guaranteeing new loans and is included in the President’s Budget. FCRA 

requires that agencies have budget authority to cover a program’s 

subsidy cost to the government in advance—before new direct loan 

obligations are incurred and new loan guarantee commitments are made.

The subsidy cost of credit programs may be categorized as either 

discretionary or mandatory. Discretionary spending is provided for 

through annual appropriations acts, typically in definite amounts. 

Mandatory spending, however, is provided for in laws other than 

appropriations acts. Often, these mandatory programs are entitlement 

programs wherein the Congress controls spending indirectly by defining 

eligibility and setting payment rules, with indefinite budget authority 

provided by law to pay for the entitlements of all qualifying beneficiaries.

The data used for budgetary subsidy cost estimates are generally

updated—or reestimated—annually after the end of the fiscal year to 

reflect actual loan performance and to incorporate any changes in 

assumptions about future loan performance. Reestimates that increase 

subsidy costs are referred to as upward reestimates (an agency would 

need additional funds), while reestimates that decrease subsidy costs are 

referred to as downward reestimates (an agency would return funds). 

Regardless of whether the credit programs are discretionary or 

mandatory, agencies do not need to request additional appropriations to 

cover upward reestimates because FCRA provides permanent indefinite 

 

12Cohort refers to the fiscal year of obligation for direct loan obligations or loan guarantee 

commitments of a program.
budget authority for this purpose.

Page 10 GAO-16-41 Credit Subsidy Cost Estimates

13 Accordingly, an upward reestimate does 

not use up room under any discretionary spending caps and a downward 

reestimate does not “free up” room under such caps.

FCRA established a special budgetary accounting system to record the 

cash flows and budget information necessary to implement credit reform. 

Direct loans and loan guarantees made on or after October 1, 1991—the 

effective date of credit reform—use program and financing accounts to 

handle credit transactions (see fig. 4).14 The program account is included in 

budget totals, receives appropriations for the subsidy cost of a credit program, 

and records the budget authority and outlays for these costs.15 The 

program account is used to pay the associated subsidy cost to the financing 

account when a direct or guaranteed loan is disbursed. The financing account, 

which is nonbudgetary,16 is used to (1) collect the subsidy cost from the 

program account, (2) borrow from the Department of the Treasury 

(Treasury) to provide financing for loan disbursements, and (3) record the 

cash flows between the government and the borrower or lender 

associated with direct loans or loan guarantees over the life of the loan. 

These cash flows include loan disbursements, default payments to 

lenders, loan repayments, interest payments, recoveries on defaulted 

loans, and fee collections.

 

13Permanent indefinite budget authority is available for obligation and expenditure without 

fiscal year limitation and is not limited to a specified amount or ceiling. 

14A liquidating account was also established to handle credit transactions on a cash basis for direct 

loans and loan guarantees made before the implementation of FCRA. 

15Funding for administrative costs of credit programs varies by program, depending on the 

language of the relevant authorizing statutes and appropriations acts. In some cases, administrative 

costs are provided for as part of appropriations made to the program account, while other 

programs charge their administrative costs to other accounts, such as an agency’s 

general lump-sum appropriation. 

16Transactions from nonbudgetary accounts do not belong in the budget because they do not 

represent net budget authority or outlays, but rather are a means of financing. This 

contrasts with “off-budget,” which refers to activities that are budgetary in nature but are 

required by law to be excluded from budget totals.

Program and Financing 

Accounts under FCRA
Figure 4: Federal Credit Reform Act of 1990 Program and Financing Account Transactions for Direct Loans and Loan 

Page 11 GAO-16-41 Credit Subsidy Cost Estimates

Guarantees

aGeneral Fund accounts in the U.S. Treasury hold all federal money not allocated by law to any other 

fund account.

When calculating the net present value of expected cash flows, FCRA 

requires that discount rates be based on interest rates of marketable U.S. 

Treasury securities with similar maturities as the cash flows being 

discounted. In addition, FCRA requires that the rate of interest charged 

on financing account transactions with Treasury be the same as the final 

discount rate used to calculate the net present value of cash flows when 

Discount Rates under 

FCRA
estimating the subsidy cost of a credit program.

Page 12 GAO-16-41 Credit Subsidy Cost Estimates

17 Figure 5 illustrates how 

the discount rate would affect the value of future loan repayments and the 

subsidy cost for a direct loan.

Figure 5: Effect of Discount Rates on the Value of Loan Repayments and Subsidy Costs for a Direct Loan

Note: This figure illustrates a simplified example of an interest-free loan and assumes that it performs 

as required with no defaults

 

17For loans made or guaranteed in fiscal year 2001 and thereafter, the discount rate is based 

on interest rates on marketable zero-coupon Treasury securities with similar maturities 

from the date of disbursement as the cash flow. For loans made or guaranteed before 

fiscal year 2001, the discount rate is based on a disbursement-weighted average of 

interest rates for marketable Treasury securities with similar maturities as the loans or 

loan guarantees.
The final discount rate for a cohort of direct loans or loan guarantees is 

determined based on interest rates of Treasury securities prevailing 

during the period when the loans are disbursed. Specifically, once a 

cohort of loans is substantially disbursed (at least 90 percent), the final 

discount rate for that cohort is determined, and this rate is used to 

calculate reestimates of subsidy costs and for financing account interest 

calculations. Using the same rate for reestimates and interest on the 

financing account ensures that the financing account will break even over 

time as it uses its collections to repay its Treasury borrowing. As a result, 

the discount rate reflects the federal government’s actual borrowing cost 

and incorporates into the subsidy cost calculation an agency’s cost of 

financing its lending. For loan guarantee programs, which may or may not 

borrow from Treasury, the financing account receives the subsidy cost 

from the program account and holds these funds to serve as a reserve 

against future loan guarantee defaults or other costs. FCRA requires that 

these funds—referred to as uninvested funds—earn interest from 

Treasury at the same rate as the discount rate used to calculate the 

present value when estimating the subsidy cost. The Office of 

Management and Budget (OMB) provides tools for agencies to use to 

discount estimated cash flows and calculate interest on financing account 

balances.

For several years, the Congressional Budget Office (CBO) and others 

have raised the concern that FCRA subsidy cost estimates recorded in 

the budget underestimate the costs of federal credit programs and do not 

completely reflect the costs imposed on taxpayers. Some have suggested 

revising FCRA to include in the subsidy cost an additional estimated cost 

related to certain market risk. This suggestion has been referred to as the 

fair value approach and centers around the debate that beyond the cash 

flows associated with the direct loan or loan guarantee, which are 

recognized under FCRA, costs are imposed on taxpayers who would, in a 

similarly risky private market transaction, require compensation for 

bearing the aggregate risk associated with making the loan.

Page 13 GAO-16-41 Credit Subsidy Cost Estimates

18 However, it 

is important to note that this cost to the taxpayer does not represent a monetary 

cost to the government as it is not a cash outlay by Treasury. Instead, it can be 

thought of as representing a noncash social cost of federal lending.

 

18See Deborah Lucas and Marvin Phaup, “Reforming Credit Reform,” Public Budgeting & 

Finance (Winter 2008).

Fair Value Approach and 

the Current Basis of the 

Budget
CBO has provided information on fair value estimates to aid 

congressional decision making regarding the value of resources being 

devoted to federal credit programs for several years. In a 2004 report, 

CBO initially laid out the conceptual foundation for the fair value approach 

and subsequently issued several more reports more fully examining the 

implications of using the fair value approach in the decision-making and 

the budget process.

Page 14 GAO-16-41 Credit Subsidy Cost Estimates

19 In a 2014 testimony, CBO compared and contrasted the

use of the fair value approach versus FCRA in informing decisions and in 

budget formulation and execution, laying out advantages and 

disadvantages of each method.20 At present, CBO provides congressional 

budget committees with cost estimates for credit programs using both the fair 

value approach and the FCRA methodology.21

The term fair value in the context of suggested revisions to FCRA subsidy 

costs is similar in concept to its use in private-sector generally accepted 

accounting principles (GAAP) for financial accounting; however, there are 

differences in how the two would be applied.22 The fair value approach 

discussed in this report relates to budgeting for federal credit programs, while the 

term “fair value” under private-sector GAAP applies to the valuation of certain 

assets and liabilities of private-sector entities and is defined as the price 

that would be received to sell an asset or paid to transfer a liability in an 

orderly transaction between market participants. In a general sense, the 

“fair value” label for federal budgeting purposes suggests a parallel 

between federal and private-sector notions of appropriate compensation 

for making loans. The label “fair value” reflects the perspective that this 

compensation—the risk premium—that taxpayers demand can be found 

by observing what they would require to make similarly risky investments 

 

19For example, Congressional Budget Office, Fair-Value Accounting for Federal Credit Programs

(Washington, D.C.: March 2012); Accounting for FHA’s Single-Family Mortgage Insurance 

Program on a Fair-Value Basis (Washington, D.C.: May 2011); and Estimating the Value of 

Subsidies for Federal Loans and Loan Guarantees (Washington, D.C.: August 2004). 

20Congressional Budget Office, Testimony on Estimates of the Cost of the Credit Programs of the 

Export-Import Bank (Washington, D.C.: June 2014).

21CBO regularly reports a variety of cost estimates to the Congress related to both current 

government programs and pending legislation. See, e.g., 2 U.S.C. §§ 602, 653.

22“Generally accepted accounting principles” has a specific meaning for accountants and auditors. 

Private-sector GAAP, established by the Financial Accounting Standards Board, provides 

guidance that businesses follow in preparing their general purpose financial statements, 

which provide users such as investors and creditors with useful information that allows 

them to assess a business’s ongoing financial performance. 
in private financial markets. That view provides the analogue to the 

situation contemplated in private-sector GAAP fair value.

The federal budget has for decades represented a system of cash 

accounts. FCRA, therefore, was designed to put credit programs on the 

same plane as noncredit programs: FCRA reflects only the cost 

associated with estimated cash flows between the government and the 

borrower or lender, such as repayment of principal, payments of interest 

and fees, and claim payments to lenders. All federal programs, including 

those for spending programs or tax provisions whose cash costs appear 

in the budget, also have associated noncash costs and benefits that 

accrue to society at large. However, these noncash costs and benefits 

are not included in the budget. Accordingly, budget decisions demand 

trade-offs beyond just the cash cost; such decisions need to also consider 

noncash costs and benefits. For example, a project supported by federal 

spending could reduce unemployment—while at the same time result in 

detrimental environmental effects. Because the federal budget was not 

envisioned to present a complete picture of the total costs and benefits to 

society of government programs and policies, it should not be used as the 

sole rationale for federal activities. Specifically, OMB guidance in Circular 

No. A-94, Guidelines and Discount Rates for Benefit-Cost Analysis of 

Federal Programs, directs agencies to perform program evaluations, 

including consideration of social costs and not just the costs to the federal 

government. The compensation cost to taxpayers of making risky 

investments, grants, or loans would be a noncash social cost considered 

in performing benefit-cost analysis.

A fuller examination of the fair value approach, including the nature of the 

social, noncash costs and the arguments for and against their inclusion in 

the budget, is presented later in this report.

Page 15 GAO-16-41 Credit Subsidy Cost Estimates
We analyzed direct loan and loan guarantee programs’ annual and 

lifetime reestimates from fiscal years 2001 through 2014

Page 16 GAO-16-41 Credit Subsidy Cost Estimates

23 by cohort, 

program, agency, and purpose to identify any trends.24 We also considered 

whether a program’s funding was discretionary or mandatory. Our analysis 

considered many factors, including magnitude of reestimates, consistency in 

reestimate patterns over time, as well as the number of programs with 

either upward or downward reestimates. Based on our analyses of these 

factors related to reestimate data for the fiscal years 2001 through 2014 

cohorts, we did not identify any overall consistent trends in under- or 

overestimates of subsidy costs across federal credit programs 

government-wide.25 However, there were some programs with significant 

upward or downward reestimates, which could generally be explained by specific 

events. For example, the 2008 financial crisis likely contributed to upward 

annual reestimates for housing, small business, and agriculture loan 

guarantee programs because borrowers’ ability to repay weakened with 

rising unemployment and falling market revenue. Unless otherwise noted, 

the amounts discussed in this section are based on information reported 

by OMB in the President’s Budgets. See appendix II for additional 

detailed reestimate trend information.

Based on our analysis of reestimates for fiscal years 2001 through 2014 

cohorts, we found that through fiscal year 2014, both direct loan and loan 

guarantee programs had net lifetime upward reestimates, meaning that 

original subsidy costs were underestimated. However, in concluding 

about overall trends, we considered many factors, including magnitude of 

reestimates, consistency in reestimate patterns over time, as well as the 

number of programs with either upward or downward reestimates. Based 

on our analyses of these factors related to reestimate data for the fiscal 

years 2001 through 2014 cohorts, we did not identify any overall 

 

23Reestimates are generally prepared at the end of fiscal years. Therefore, our analysis of 

reestimates from fiscal years 2001 through 2014 indicates that we evaluated reestimates prepared 

after the end of those fiscal years. Further, our analysis included the fiscal years 2001 

through 2014 cohorts. 

24Unless otherwise noted, we have excluded the Troubled Asset Relief Program (TARP) from this 

analysis because the size of the TARP lifetime downward reestimate is significantly larger 

than all the reestimates of other credit programs combined, and its inclusion would make 

any trend analysis less meaningful.

25Our conclusions about trends were based on our professional judgment in assessing the data, 

and not based on a statistical analysis.

No Overall Consistent 

Trends Identified in 

Under- or 

Overestimates of 

Subsidy Costs, and 

Various Economic 

and Portfolio 

Changes Caused 

Certain Significant 

Reestimates

No Clear Overall Trends in 

Subsidy Cost Reestimates 

across Federal Credit 

Programs GovernmentWide
consistent trends in under- or overestimates of subsidy costs across 

federal credit programs government-wide.

Reestimates provide information to improve the estimation process and 

yield insights into program performance. For example, upward 

reestimates could indicate that borrowers are delinquent in repaying 

loans, and as a result, loan performance is worse than initially expected.

Reestimates take into account actual loan performance and expected 

changes in future loan performance, which can both vary because of 

portfolio changes (e.g., changes in the credit-worthiness of borrowers) 

and changes in the economy—external events that affect borrower 

behavior. Reestimates of subsidy costs are to be expected as loan 

cohorts age and as the economy deviates from the paths assumed when 

subsidy costs were originally estimated. When estimating or reestimating 

subsidy costs, agencies must respond to changes in their credit program 

portfolios and the economy. While forecasting future loan performance 

can be challenging, the goal is to avoid consistent bias, reflected in either 

recurring upward or downward reestimates. Consistent bias in forecasting 

loan performance would result in subsidy cost estimates that provide 

misleading information about program performance. At the same time, a 

period of recurring overestimates or underestimates does not necessarily 

mean that the original estimates were biased. A particularly challenging 

period for forecasting loan performance was the onset of the 2008 

financial crisis. A key question in evaluating subsidy cost estimates is 

whether agencies were able to foresee deteriorating performance in credit 

program portfolios.

Government-wide, a total of 101 direct loan programs reported 

reestimates for the fiscal years 2001 through 2014 cohorts. As shown in 

table 1, 42 programs had lifetime upward reestimates and 59 programs 

had lifetime downward reestimates. Overall, the reestimates for these 

programs totaled a net lifetime upward reestimate of $3.1 billion, meaning 

that the original subsidy costs of the cohorts obligated during this period 

were underestimated by $3.1 billion, which is less than 1 percent of the 

amount of loans disbursed by the cohorts in our review. Based on data 

reported in the President’s Budget, the estimated lifetime subsidy income, 

meaning negative subsidy cost, of the fiscal years 2001 through 2014 

cohorts of direct loan programs totaled about $91 billion, after considering 

Page 17 GAO-16-41 Credit Subsidy Cost Estimates
the effects of lifetime reestimates.

Page 18 GAO-16-41 Credit Subsidy Cost Estimates

26 Therefore, the net lifetime upward 

reestimate of direct loan programs’ fiscal years 2001 through 2014 cohorts, 

represents about 3 percent of the lifetime subsidy income.

Table 1: Direct Loan Programs Lifetime Upward and Downward Reestimates, 2001-

2014 

Note: Dollars in billions

Programs Reestimates

Lifetime upward reestimates 42 $32.6 

Lifetime downward reestimates 59 (29.5)

Overall net lifetime upward reestimate 101 $3.1 

Source: GAO analysis of President’s Budgets. | GAO-16-41

Further, as shown in figure 6, four direct loan programs accounted for 88 

percent of the lifetime upward reestimate of $32.6 billion, with Education’s 

Direct Student Loan Program accounting for 71 percent.27 Similarly, four 

direct loan programs accounted for 88 percent of the lifetime downward 

reestimates of $29.5 billion, with Treasury’s Government Sponsored Enterprises 

(GSE) Mortgage Backed Securities (MBS) Purchase Program accounting for 55 

percent.28

 

26This was calculated by multiplying the most recently reported original subsidy rate and 

disbursements for a cohort and adding the most recently reported lifetime reestimates for that 

cohort.

27Education’s Direct Student Loan Program provides financing to students or their parents 

to help students obtain postsecondary education. This program is currently the largest 

federal direct loan program with $694 billion outstanding as of September 30, 2014. 

Disbursements were $130 billion and $134 billion during fiscal years 2013 and 2014, 

respectively.

28Treasury established the GSE MBS Purchase Program in response to the 2008 financial crisis to 

provide stability and prevent disruption in the financial markets.
Figure 6: Direct Loan Programs Representing a Significant Percentage of Lifetime Upward and Downward Reestimates, 2001-

Page 19 GAO-16-41 Credit Subsidy Cost Estimates

2014

Government-wide, a total of 76 loan guarantee programs reported 

reestimates for the fiscal years 2001 through 2014 cohorts. As shown in

table 2, 35 loan guarantee programs had lifetime upward reestimates and 

41 programs had lifetime downward reestimates. Overall, the reestimates 

for these programs totaled a net lifetime upward reestimate of $39 billion, 

which is less than 1 percent of the amount of loans guaranteed by the 

cohorts in our review. Based on data reported in the President’s Budget, 

the estimated lifetime subsidy cost of the fiscal years 2001 through 2014 

cohorts of loan guarantee programs totaled about $26 billion, after 

considering the effects of lifetime reestimates.29 Therefore, for the fiscal

 

29This was calculated by multiplying the most recently reported original subsidy rate and 

disbursements for a cohort and adding the most recently reported lifetime reestimates for 

that cohort.
years 2001 through 2014 cohorts, loan guarantee programs initially estimated 

subsidy income of $13 billion.

Table 2: Loan Guarantee Programs Lifetime Upward and Downward Reestimates, 

Page 20 GAO-16-41 Credit Subsidy Cost Estimates

2001-2014 

Note: Dollars in billions

Programs Reestimates

Lifetime upward reestimates 35 $104.5 

Lifetime downward reestimates 41 (65.5)

Overall net lifetime upward reestimate 76 $39.0 

Source: GAO analysis of President’s Budgets. | GAO-16-41

Further, as shown in figure 7, five loan guarantee programs accounted for 

91 percent of the $104.5 billion lifetime upward reestimates, with HUD’s 

Mutual Mortgage Insurance (MMI) Fund accounting for 65 percent.30

Similarly, three loan guarantee programs accounted for 95 percent of the $65.5 

billion lifetime downward reestimates, with Education’s Federal Family 

Education Loan (FFEL) program accounting for 91 percent.31

 

30HUD’s MMI Fund provides insurance to lenders for single-family homeowners and is 

supported by insurance premiums paid by borrowers. This is the largest federal loan 

guarantee program, with $1,169 billion of outstanding guarantees as of September 30, 

2014. New loan guarantees of $240 billion and $135 billion were approved during fiscal 

years 2013 and 2014, respectively. 

31Education’s FFEL program was the loan guarantee complement to the Direct Student Loan 

Program. The Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, § 2201, 

124 Stat. 1029, 1074 (Mar. 30, 2010), terminated Education’s authority to guarantee new 

loans under the FFEL program after June 30, 2010.
Figure 7: Loan Guarantee Programs Representing a Significant Percentage of Lifetime Upward and Downward Reestimates, 

Page 21 GAO-16-41 Credit Subsidy Cost Estimates

2001-2014

In concluding about overall trends, we considered many factors, including 

magnitude of reestimates, consistency in reestimate patterns over time, 

and the number of programs with either upward or downward 

reestimates. Based on our analyses of these factors related to reestimate 

data for the fiscal years 2001 through 2014 cohorts, we did not identify 

any overall consistent trends in under- or overestimates of subsidy costs 

across federal credit programs government-wide. Specifically, although 

both direct loan and loan guarantee programs government-wide had 

overall lifetime upward reestimates for the cohorts over the 14-year period 

of our analysis, the reestimates fluctuated significantly from year to year. 

For example, as shown in figure 8, from fiscal years 2006 through 2014, 

direct loan programs recorded overall net upward reestimates for 4 years 

and overall net downward reestimates for 5 years. Also during this period, 

loan guarantee programs recorded overall net upward reestimates for 5 
years and overall net downward reestimates for 4 years. The large 

upward reestimates in fiscal year 2012 for loan guarantees and in fiscal 

year 2014 for direct loans were primarily attributed to HUD’s MMI Fund 

and Education’s Direct Student Loan Program, respectively, which are 

discussed later.

Figure 8: Fluctuations in Direct Loan and Loan Guarantee Programs’ Annual Net Reestimates, 2006-2014

Page 22 GAO-16-41 Credit Subsidy Cost Estimates

We also analyzed reestimates over time based on whether programs are 

discretionary or mandatory. Under FCRA, as previously discussed, 

appropriations for initial subsidy costs of discretionary programs are 

typically limited to a definite amount. Mandatory credit programs are 

funded by the operation of their authorizing statutes, typically in indefinite 

amounts. However, both discretionary and mandatory programs 

automatically receive permanent indefinite budget authority for the cost of 

upward reestimates. Thus, agencies with discretionary credit programs 

theoretically could have an incentive to initially underestimate subsidy 

costs so that they could make more loans or loan guarantees within a 

given appropriation level. If this incentive did not exist and absent any 

overriding economic trend, one could expect reestimates to lower the 
original subsidy cost estimates as often as they raise it, and the patterns 

would be similar for discretionary and mandatory programs.

Overall, we did not identify any consistent trends that would indicate 

whether for some discretionary programs there was an effort to benefit 

from initially underestimating subsidy costs. As shown in table 3, 

generally the same proportion of discretionary and mandatory credit 

programs had upward and downward reestimates. The one pattern we 

observed was in relation to the magnitude of loan guarantee reestimates. 

Specifically, regarding the dollar amount of reestimates, about 95 percent 

of the upward reestimates were from discretionary loan guarantee 

programs, while about 93 percent of the downward reestimates were from 

mandatory loan guarantee programs. These trends are primarily driven by 

two programs—upward reestimates for HUD’s discretionary MMI Fund 

and downward reestimates for Education’s mandatory FFEL program. 

The reestimates for these programs, which can generally be explained by 

economic events and portfolio changes, are described in more detail in 

the following section.

Table 3: Discretionary and Mandatory Credit Program Reestimates, 2001-2014 

Page 23 GAO-16-41 Credit Subsidy Cost Estimates

Note: Dollars in billions

Direct loan programs Loan guarantee programs

Category Programs

Percentage

of programs Reestimates Programs

Percentage

of programs Reestimates

Upward 

reestimates

Discretionary 34 34% $7.0 33 43% $99.8

Mandatory 8 8% 25.6 2 3% 4.7 

Downward 

reestimates

Discretionary 43 42% (5.3) 35 46% (4.3)

Mandatory 16 16% (24.2) 6 8% (61.2)

Total n/a 101 n/a $3.1 76 n/a $39.0 

Source: GAO analysis of President’s Budgets. | GAO-16-41

Our analysis of reestimates trend data excluded activity from Treasury’s 

Troubled Asset Relief Program (TARP).32 TARP is an example of a federal 

 

32TARP was authorized by the Emergency Economic Stabilization Act of 2008, which gave the 

Secretary of the Treasury broad and flexible authority to establish TARP to purchase and 

insure mortgages and other troubled assets. Among other things, this permitted the 

Secretary to inject capital into banks and other commercial companies by taking equity 

positions in those entities to help stabilize the financial markets. Pub. L. No. 110-343, div. 

A, 122 Stat 3765 (Oct. 3, 2008), classified in part, as amended, at 12 U.S.C. §§ 5201-

5261.
program that implemented a budgeting process similar to the fair value approach. 

TARP was required by law to estimate the budgetary cost of purchases and 

guarantees of troubled assets in accordance with FCRA, except that such 

costs were required to be calculated by adjusting the discount rate for 

market risk. These cost estimates were reestimated annually, at fiscal 

year-end, to reflect revised assumptions for market risk, asset 

performance, and other key variables and economic factors. Interest 

earned or paid on financing account transactions with Treasury was 

based on FCRA discount rates (not adjusted for market risk). As a result, 

as program funds were repaid, reestimates reflected reduced costs 

because of improvements in the economy and also because the noncash 

cost that was considered in the market-risk-adjusted discount rates was 

not reflected in the actual federal cash flows. Overall, TARP has had 

lifetime downward reestimates of nearly $177 billion through fiscal year 

2014. If the FCRA methodology had been used to initially estimate the 

subsidy cost of TARP, the lifetime downward reestimate would have been 

significantly less—meaning that the overestimate of initial subsidy costs 

would have been less. As of September 30, 2014, TARP has reported an 

estimated lifetime subsidy cost of $54.6 million for its direct loan, 

investment, and guarantee programs.

We identified a few programs with significant upward or downward 

lifetime reestimates for the fiscal years 2001 through 2014 cohorts, which 

could generally be explained by portfolio or economic changes, as well as 

revisions in estimation methodologies.

We analyzed estimates of fiscal years 2001 through 2014 cohorts based 

on the purposes of the programs. Specifically, the types of direct loan 

programs with the largest lifetime reestimates were in the education, 

international, and other categories, and the types of loan guarantee 

programs with the largest lifetime reestimates were in the housing, 

education, and small business and agriculture categories. (See fig. 9.) 

These reestimates could generally be explained by specific events 

affecting a few large programs.

Page 24 GAO-16-41 Credit Subsidy Cost Estimates

Significant Upward and 

Downward Reestimates 

Could Generally Be 

Explained by Specific 

Events Affecting a Few 

Large Credit Programs
Figure 9: Primary Drivers of the Largest Overall Upward and Downward Lifetime Reestimates for Direct Loans and Loan 

Page 25 GAO-16-41 Credit Subsidy Cost Estimates

Guarantees by Purpose of Program, 2001-2014

The education-related category had the largest lifetime upward reestimate 

for direct loans and the biggest swings in annual reestimates.33 For 

example, in fiscal year 2010, this category had a net downward reestimate of 

$11.4 billion and, in fiscal year 2014, a net upward reestimate of $18.7 

billion, primarily driven by Education’s Direct Student Loan Program. The 

reported estimated lifetime subsidy income for the Direct Student Loan 

Program’s fiscal years 2001 through 2014 cohorts of direct loans totaled 

about $73.3 billion, after considering a lifetime upward reestimate of 

about $23.1 billion. The primary cost driver of the Direct Student Loan 

Program is the difference between borrowers’ interest rates on their loans 

and Education’s cost of borrowing to finance its lending, represented by 

the discount rate in the subsidy cost calculation. Consistent with the 

process to develop the President’s Budget, Education prepares its initial 

subsidy cost estimates in advance of knowing the actual borrower interest 

rates on its lending and interest rates to finance its lending. Further, 

 

33The “education-related” direct loan category includes programs operated by the Department of 

Education, as well as a program operated by the Department of Veterans Affairs that 

provides financing to veterans with service-connected disabilities to obtain vocational 

rehabilitation. 

Education-Related Direct Loan 

Programs
interest rate changes are impossible to predict with certainty. As a result, 

changes in interest rates, which are outside the control of Education, can 

have a significant effect on subsidy cost reestimates for the program.

According to Education, this program experienced generally upward 

reestimates over the years mainly driven by discount rate changes; 

revised assumptions related to income-driven repayment plans

Page 26 GAO-16-41 Credit Subsidy Cost Estimates

34 and 

public service loan forgiveness;35 and rising borrower default rates.36 After fiscal 

year 2014, the Direct Student Loan Program reported an upward reestimate of 

$21.0 billion, which, according to Education officials, was primarily related to 

newly implemented income-driven repayment plans for borrowers.37 This 

reestimate had a significant effect not only on the reestimates in the education 

category but also on direct loan program reestimates government-wide. The size 

of the Direct Student Loan Program also contributes to the magnitude of its 

reestimates. For example, for the fiscal years 2001 through 2014 cohorts, 

Education has reported loan disbursements totaling about $825 billion. 

With this loan volume, a 1 percentage point change in the subsidy rate for 

all cohorts would result in an $8.25 billion reestimate. In comparison, a 1 

 

34Under the Direct Student Loan Program, if borrowers’ outstanding federal student loan debt 

is higher than their annual income or if it represents a significant portion of their annual 

income, borrowers may want to repay their federal student loans under one of the incomedriven repayment plans available to borrowers, which are designed to make student loan 

debt more manageable by reducing the monthly payment amount. 

35Under the Public Service Loan Forgiveness program, certain borrowers employed full-time by 

certain public service organizations may have their remaining balances of Federal Direct 

Student Loans forgiven after making 120 qualifying payments while in public service 

employment. Qualifying payments must be made after October 1, 2007, under a qualifying 

repayment plan; the first forgiveness of loan balances won’t be granted until October 1, 

2017. Borrowers may request that Education certify their employment and loans in 

advance for eligibility purposes.

36However, in September 2015, Education released its updated 3-year default rate for the fiscal 

year 2012 cohort. The cohort default rate for the fiscal year 2012 cohort is based on the 

number of students who entered repayment in fiscal year 2012 and defaulted on or before 

the end of fiscal year 2015 (a 3-year window) divided by the number of students who 

entered repayment in fiscal year 2012. Based on these data for the fiscal year 2012 

cohort, the 3-year default rate has decreased since the fiscal year 2010 cohort. 

37Education officials told us that the reestimates it reported after fiscal year 2014 (included in the 

2016 President’s Budget) included an error. The reestimate should have been an upward 

reestimate of $19 billion. If this error had been identified and corrected prior to the 

preparation of the President’s Budget, the lifetime reestimate for the fiscal years 2001 

through 2014 cohorts of direct loan programs would have been an underestimate, or a 

lifetime upward reestimate, of $1.1 billion rather than $3.1 billion. 
percentage point change in the subsidy rate of a loan program with less 

loan volume would have a smaller reestimate amount.

The lifetime upward reestimates for the international category were 

primarily driven by the Export-Import Bank’s (Ex-Im) Direct Loan 

Program. The reported estimated lifetime subsidy cost for the fiscal years 

2001 through 2014 cohorts of Ex-Im’s Direct Loan Program totaled about 

$1.1 billion, after considering a lifetime upward reestimate of $2.8 billion.

Page 27 GAO-16-41 Credit Subsidy Cost Estimates

38

Ex-Im reported that upward reestimates were due to estimation modeling changes 

made in fiscal year 2012. Specifically, Ex-Im uses a loss estimation model to 

estimate subsidy costs. The model calculated loss rates based on 

historical data, including default and loss history of prior loan transactions, 

as well as variables that can be used to predict defaults and losses, such 

as transaction amount and length, obligor type, product type, and risk 

rating. According to Ex-Im, in 2012, it added qualitative factors (e.g.,

minimum loss rate; global economic risk; and region, industry, and aircraft 

portfolio obligor concentration risk) to account for specific risks associated 

with the agency’s current portfolio. Ex-Im added qualitative factors to the 

estimation methodology to better and more accurately measure default 

risk. When Ex-Im added qualitative factors, there was also an increase in 

direct loan exposure because of the financial crisis, which magnified the 

impact of the qualitative factors. Ex-Im’s direct loan exposure increased 

from $4.5 billion in 2008 to 

$32.7 billion in 2014.

The downward reestimates in the direct loan other category were 

primarily driven by Treasury’s GSE MBS Purchase Program. The 

reported lifetime subsidy income of this program totaled about 

$21.8 billion, after considering a lifetime downward reestimate of 

$16.1 billion. Under this program, Treasury purchased $226 billion of 

GSE MBS from the secondary market from September 2008 through 

December 2009. As a result of scheduled principal repayments, the 

portfolio declined to $136 billion as of March 2011, when Treasury began 

the orderly disposition of the remaining MBS portfolio. Treasury 

completed the orderly disposition of this portfolio in March 2012. 

Following the principal repayments and sales, significant downward 

reestimates were recorded in fiscal years 2009 and 2011. These 

 

38Ex-Im’s Direct Loan Program provides financing for international buyers of U.S. goods and 

services.

International Direct Loan 

Programs

Other Direct Loan Programs
downward reestimates were the result of higher-than-projected proceeds 

from MBS repayments and sales because of improving market conditions 

following the 2008 financial crisis.

The housing category had the largest lifetime upward reestimates for loan 

guarantee programs and experienced significant annual upward 

reestimates from fiscal years 2008 through 2012, ranging from $8.5 billion 

to $28.1 billion during this period. These reestimates were primarily driven 

by HUD’s MMI Fund. The reported estimated lifetime subsidy cost for the 

fiscal years 2001 through 2014 cohorts of MMI loan guarantees totaled 

about $18.7 billion, after considering a lifetime upward reestimate of 

$75.3 billion.

Page 28 GAO-16-41 Credit Subsidy Cost Estimates

39 A variety of economic, portfolio, and market changes 

contributed to upward reestimates for MMI’s forward mortgages, which 

accounted for $68.2 billion of the MMI Fund’s lifetime upward reestimate. 

Chief among these changes affecting the cost were downward 

adjustments to long-term housing price and interest rate assumptions 

stemming from the mortgage and financial crises in the late 2000s. 

Housing prices are an important variable in estimating the MMI Fund’s 

subsidy costs because of their influence on the probability of mortgage 

default and the severity of losses in the event of default.40 However, longterm housing price forecasts are inherently uncertain. In addition, the budget 

process requires these assumptions to be made more than a year in advance. 

HUD officials told us that the assumptions used to make the original credit 

subsidy estimates were more optimistic than the revised assumptions 

used to make the reestimates, which contributed to upward reestimates. 

Another key reason for the MMI Fund’s upward reestimates was a 

downward adjustment in mortgage interest rate assumptions. Mortgage 

interest rates are an important variable in estimating the fund’s subsidy 

 

39The MMI Fund insures both single-family forward and reverse mortgages. With forward 

mortgages, the borrower’s monthly loan payments to the lender add to the borrower’s home equity 

and decrease the loan balance. Reverse mortgages permit persons 62 years and older to convert 

their home equity into cash advances. With reverse mortgages, the borrower receives 

payments from the lender. The lender adds the principal and interest to the loan balance, 

reducing the homeowner’s equity. In this report, we focus on MMI-insured single-family 

forward mortgages.

40For example, falling house prices reduce home equity. In general, lower levels of home equity as 

a percentage of home value are associated with relatively poorer loan performance because 

homeowners with negative equity may find it difficult to sell or refinance the property to 

avoid foreclosure. They may also have incentives to stop making mortgage payments to 

minimize their financial losses.

Housing Loan Guarantee 

Programs
costs because of their influence on both mortgage prepayments and 

defaults.

Page 29 GAO-16-41 Credit Subsidy Cost Estimates

41

A number of portfolio and mortgage market developments associated with 

higher-than-expected losses also contributed to the MMI Fund’s upward 

reestimates. For example, growth in the proportion of MMI-insured 

mortgages with seller-funded down-payment assistance and competition 

from private mortgage institutions in the low down-payment mortgage 

market contributed to upward reestimates that began in the early 2000s. 

MMI-insured loans with seller-funded down-payment assistance grew 

from about 6 percent of the MMI Fund’s business in 2000 to about 30 

percent in the mid-2000s. Unlike other key mortgage industry participants, 

HUD allowed borrowers to obtain down-payment assistance from 

nonprofits that operated programs supported partly by financial 

contributions and service fees from participating property sellers. The 

seller-funded down-payment assistance loans performed worse than 

comparable loans with down-payment assistance from other sources or 

with no assistance, possibly because these homebuyers had less equity 

in the transactions and thus may have been more likely to default. For 

example, the MMI Fund cost estimates reflected an estimated subsidy 

rate of positive 6.35 percent for seller-funded down-payment assistance 

loans, compared with negative 0.01 percent for non-seller-funded downpayment assistance.

Similar to Education’s Direct Student Loan Program, the size of the MMI 

Fund also contributes to the magnitude of its reestimates. Because the 

amount of loan guarantees provided is so large, a minor change in the 

subsidy rate during the reestimate process can result in a significant 

reestimate in terms of dollars. For example, for the fiscal years 2001 

through 2014 cohorts, HUD has reported loan guarantees totaling about 

$2.2 trillion under the forward mortgage issuance program. With this 

 

41For example, declining mortgage rates cause early mortgage terminations because of 

borrower refinancing. The refinancings can be expected to reduce the MMI Fund’s 

expected premium income (thereby increasing estimated subsidy costs) in part because 

not all borrowers refinance into new MMI-insured mortgages. Additionally, borrowers who 

do not refinance (and are therefore paying interest rates higher than current market rates) 

have greater incentive to default because the present values of their mortgages are higher 

than their outstanding mortgage balances. As a result, the MMI Fund’s projected losses 

for these borrowers can be expected to increase, resulting in higher estimated subsidy 

costs. 
volume of loan guarantees, a 1 percentage point change in the subsidy 

rate for all cohorts would result in a $22 billion reestimate.

The education-related category had the largest lifetime downward 

reestimates for loan guarantee programs, driven by Education’s FFEL 

program.

Page 30 GAO-16-41 Credit Subsidy Cost Estimates

42 The reported estimated lifetime subsidy income of the FFEL 

program totaled about $8.4 billion for the cohorts since fiscal year 2001, after 

considering the effects of lifetime downward reestimates of 

$59.6 billion. The significant downward reestimates were attributable to 

many factors; chief among them were interest rate changes. 

Programmatic changes, such as Education’s ability to purchase 

outstanding guaranteed loans from lenders,43 were reflected as 

modifications under FCRA.44 In addition, the program was terminated by 

statute in 2010, prohibiting new loan guarantees after June of that year.

The small business and agriculture loan guarantee category had lifetime 

upward reestimates of $7.4 billion, which were primarily driven by 

reestimates from the Small Business Administration’s (SBA) 7(a) Loan 

Guarantee and 504 Certified Development Company Loan Guarantee 

Programs.45 The reported estimated lifetime subsidy cost for the fiscal years 

2001 through 2014 cohorts of 7(a) Loan Guarantee and 504 Certified 

Development Company Loan Guarantee Programs’ loan guarantees 

totaled about $5.0 billion and $3.9 billion, after the effect of lifetime 

upward reestimates of $4.1 billion and $3.8 billion, respectively. These 

 

42The “education-related” loan guarantee category includes a program operated by the Department 

of Education, as well as a program initiated by the Department of Health and Human 

Services that provided financing for medical students.

43The Ensuring Continued Access to Student Loans Act of 2008, Pub. L. No. 110-227, § 7 (May 7, 

2008), classified as amended at 20 U.S.C. § 1087i-1, authorized the Secretary of Education to 

purchase or enter into forward commitments to purchase outstanding FFEL program loans 

from private lenders. This authority was to expire on July 1, 2009; however, a 2008 

amendment to the statute extended this authority through July 1, 2010.

44A modification is a government action that (1) differs from actions assumed in the baseline 

estimate of cash flows and (2) changes the estimated cost of an outstanding direct loan (or direct 

loan obligation) or an outstanding loan guarantee (or loan guarantee commitment). Any cost 

associated with a modification is budgeted for separately from a reestimate. 

45SBA’s 7(a) Loan Guarantee Program is SBA’s most common loan guarantee program; it 

provides financial help for businesses, and its special requirements of eligibility are based on 

specific aspects of each business and its principals. The 504 Loan Guarantee Program 

provides financial help to business applicants meeting certain eligibility requirements, and 

loan funds are to be used for major fixed assets, such as equipment or real estate.

Education-Related Loan 

Guarantee Programs

Small Business and Agriculture 

Loan Guarantee Programs
programs experienced higher-than-normal reestimates for fiscal years 

2009 and 2010. SBA reported that the cause of these reestimates was 

the downturn in the economy and an unprecedented continuing period of 

high unemployment, which increased default claim payments and the 

uncertain effects these events would have on future default claim 

payments. In addition, SBA reported that worse-than-expected 

performance in loans originated during fiscal years 2005 through 2008 

also contributed to the upward reestimates.

To further analyze reestimates, we evaluated annual reestimates for 

direct loan and loan guarantee programs from fiscal years 2006 to 2014 

to determine whether the 2008 financial crisis had an effect on 

reestimates.

Page 31 GAO-16-41 Credit Subsidy Cost Estimates

46 We found that the negative economic outlook caused by the 

economic downturn during the 2008 financial crisis likely increased the projected 

cost of housing, small business, and agriculture loan guarantee programs, as 

evidenced by upward reestimates during the financial crisis. For fiscal 

years 2008 through 2012, the housing loan guarantee programs’ annual 

net upward reestimates ranged from 

$8.5 billion to $28.1 billion, while the small business and agriculture 

related loan guarantee programs’ annual net upward reestimates ranged 

from $1.0 billion to $4.3 billion. These reestimates for both categories of 

programs were substantially larger than the reestimates before and after 

this period. In addition, rising default rates associated with Education’s 

Direct Student Loan Program could likely also be, in part, attributed to the 

financial crisis. However, this program had upward reestimates before 

and after the financial crisis. (See fig. 10.)

 

46We started this trend analysis with fiscal year 2006 to include a few years prior to the 2008 

financial crisis. 

Reestimates during the 

Financial Crisis
Figure 10: 2008 Direct Loan and Loan Guarantee Programs’ Reestimates during the Financial Crisis, 2006-2014

Page 32 GAO-16-41 Credit Subsidy Cost Estimates
The fair value approach to estimate subsidy costs, supported by some 

experts we interviewed, would add market risk to what is recognized 

under FCRA. While credit program subsidy cost estimates under the fair 

value approach may provide useful information to decision makers for 

evaluating the costs against the benefits of credit programs, the additional 

market risk recognized under the fair value approach does not reflect 

additional cash costs beyond those recognized by FCRA. The 

introduction of market risk into credit program subsidy costs under the fair 

value approach would be inconsistent with long-standing federal

budgeting practices and presents several implementation issues. More 

specifically, the fair value approach would (1) add noncash costs into the 

budgeting process, which is based on cash costs; (2) be inconsistent with 

the budget treatment of similarly risky programs; (3) lack transparency 

with respect to inclusion of a noncash cost in budget totals; (4) involve 

significant implementation issues; and (5) be complicated by comparisons 

to GAAP fair value. Further, as discussed in the prior section, we did not

identify consistent trends in overall under- or overestimates of subsidy 

costs across federal credit programs government-wide. Consequently, we 

do not support the fair value approach to estimate subsidy costs for the 

budget and believe the current FCRA methodology is more appropriate,

as it represents the best estimate of the direct cost to the government and 

is consistent with current budgetary practices .Other experts we 

interviewed, as well as OMB, opposed the fair value approach.

The fair value approach to estimate credit program costs may be useful 

for evaluating the costs against the benefits of credit programs in that it 

accounts for market risks beyond those already recognized under FCRA. 

CBO and others have reported that subsidy cost estimates prepared 

under FCRA requirements do not completely reflect the costs imposed on 

taxpayers by federal credit programs, thus prompting proposals to modify 

FCRA subsidy cost estimates based on the fair value approach. More 

specifically, proposals calling for the adoption of the fair value approach 

are motivated by the idea that the social costs to taxpayers of making 

loans should be recognized. The social cost of making a loan includes not 

only the estimated cash cost to the government for making the loan and 

for providing for the possibility of default—both of which are currently 

recognized under FCRA requirements—but also the noncash cost to 

taxpayers for bearing the risk associated with the loan—which is not 

currently recognized under FCRA requirements. Because such social 

costs are not currently being accounted for, proponents of the fair value 

approach asserted that budget decisions may be distorted by an incentive 

to overly rely on risky credit programs as a policy tool because credit 

Page 33 GAO-16-41 Credit Subsidy Cost Estimates

Fair Value Subsidy 

Cost Estimates May 

Be Useful, but They 

Are Not Consistent 

with Long-standing 

Federal Budgeting 

Practices, Involve 

Significant 

Implementation 

Challenges, and 

Should Not Be 

Recognized in Budget 

Costs

Fiscal Year 2014 Subsidy Costs

For fiscal year 2014, the estimated subsidy 

cost for new loans and guarantees across all 

credit programs was an estimated subsidy 

income of $35.7 billion. This represented 

about .01 percent of estimated federal outlays 

and receipts for the year.

Source: GAO analysis of fiscal year 2016 President’s Budget.

| GAO-16-41

Fair Value Approach Cost 

Estimates May Be Useful 

to Decision Makers for 

Evaluating the Costs 

against the Benefits of 

Credit Programs
programs look relatively less expensive than other forms of federal 

assistance (e.g., grants).

Proponents of the fair value approach have generally viewed the 

government as a pass-through to a collection of taxpayers who bear the 

cost of risk, recognizing that the government must ultimately either reduce 

spending or turn to taxation to recoup the cost of a defaulted loan. In this 

sense, taxpayers could be considered as analogous to investors in a 

private corporation who must contribute more resources if the corporation 

experiences losses. In private financial markets, taxpayers as investors 

with diversified portfolios would still demand compensation for bearing the 

risk that the macroeconomy—the national or global economy as a 

whole—may falter. As shown in figure 11, this risk—referred to as 

aggregate risk (which represents a portion of overall market risk)—arises 

from the possibility of significant economic downturns, when even a welldiversified portfolio of financial investments will experience a reduction in 

value. In such bad economic times, loan payments are likely to fall just 

when returns are worth most to investors. Compensation for taking on this 

aggregate risk—the aggregate risk premium—is over and above that 

demanded to account for the time value of money (i.e., the notion that a 

dollar today is worth more than a dollar in the future because it can earn 

interest). The fair value approach is based on the premise that the 

subsidy cost of credit programs should include this aggregate risk 

premium due to taxpayers, even if it is not a cash cost to Treasury.

Page 34 GAO-16-41 Credit Subsidy Cost Estimates

Aggregate Risk Premium

In private financial markets, taxpayers as 

investors with diversified portfolios would still 

demand compensation for bearing the risk 

that the macroeconomy—the national or 

global economy as a whole—may falter. This 

risk—referred to as aggregate risk (which 

represents a portion of overall market risk)—

arises from the possibility of significant 

economic downturns, when even a welldiversified portfolio of financial investments 

will experience a reduction in value.

Source: GAO. | GAO-16-41
Figure 11: Aggregate Risk

Page 35 GAO-16-41 Credit Subsidy Cost Estimates

While proponents of the fair value approach suggested several methods 

to estimate the cost of credit programs under the fair value approach, we 

are focusing on the most commonly discussed method for use in federal 

budgeting, which calls for adjusting the discount rate to account for the 

aggregate risk premium.47 Some proponents of the fair value approach 

also viewed adjusting the discount rate as the most straightforward 

method to derive fair value approach measurements. Under this method 

 

47The adjustment to the discount rate can be gleaned from market data on the spreads on 

securities of comparable risk and maturity. Two other methods suggested to estimate 

subsidy costs under the fair value approach are (1) market prices of similar products 

offered by private companies adjusted to account for borrower and product differences 

and (2) an options pricing model, which is a type of model that many private-sector entities 

use to evaluate guarantees.
to implement the fair value approach, the difference between FCRA and 

fair value approach subsidy cost estimates arises from the choice of 

discount rates. The estimates of expected cash flows associated with the 

loan program, including repayments, interest, or the net amount lost 

through defaults or other loan performance, are the same in both 

approaches. However, the difference in discount rates means that those 

expected cash flows will have different present values under the fair value 

approach and FCRA.

To incorporate the cost of bearing this aggregate risk into budget costs for 

loans, the fair value approach adds an aggregate risk premium to the 

discount rate used in FCRA calculations, which is determined based on 

interest rates on Treasury securities. The Treasury rate is considered to 

be default-free because investors are protected against default by the 

government’s ability to cover its debts by raising tax revenue or by cutting 

other federal spending.

Page 36 GAO-16-41 Credit Subsidy Cost Estimates

48 Adding the aggregate risk premium to the discount 

rate incorporates a noncash social cost into the subsidy cost estimate. When the 

expected future cash flows (i.e., payments of interest and repayments of 

principal) associated with the loan are discounted using a discount rate 

above the Treasury rate, the resulting present value of these future 

payments to the government is lower than it would be if discounting were 

done using the Treasury rate. A lower present value for these future 

payments to the government translates into a higher subsidy cost to the 

government when the loan is made.49 As shown in figure 12, the aggregate 

risk premium is one factor that may explain differences between market 

interest rates and Treasury interest rates. The debate over the fair value 

approach rests on whether the cost associated with aggregate risk should 

be considered in the subsidy cost of credit programs for the budget of the 

federal government.

 

48Treasury securities are also often called riskless. However, investors are exposed to interest rate 

risk when they purchase Treasury securities. 

49Applying the fair value approach to a loan guarantee program also results in a higher 

estimated cost to the government. For loan guarantees, the effect of a higher aggregate 

risk is to increase the cost to the government of future guarantee default payments above 

their estimated value using default-free or “riskless” Treasury rates. The aggregate risk 

increases the value of the guarantee because guarantee payments are most likely to be 

made when the economy is depressed and resources are scarce. Mathematically, to 

approximate this higher cost requires the use of discount rates that are effectively lower 

than default-free Treasury rates.
Figure 12: Differences between Market and Treasury Interest Rates

Page 37 GAO-16-41 Credit Subsidy Cost Estimates

The budget, as presented under FCRA, does not recognize an aggregate 

risk premium, and the cost of the government making loans is lower than 

it would be under the fair value approach. Some proponents of the fair 

value approach have stated that the disconnect of subsidy cost estimates 

under FCRA from market valuation is at odds with the presentation of 

other costs in the budget that do reflect values in private market 

transactions (e.g., purchase of office supplies or wages paid). Market 

prices are key benchmarks in assessing the costs to society of using its 

resources in one project versus another. In this context, the budget under 

FCRA does not reflect the social costs of making loans, which fair value 

approach proponents believed should be considered in making budget 

decisions that require trade-offs in the presence of a federal budget 

constraint.

The social benefits and costs of extending credit is an important 

consideration in decision making about funding levels. As stated in OMB 

Circular No. A-94, federal programs should be evaluated based on 
comprehensive estimates of the expected benefits and costs to society 

and not just the monetary benefits and costs to the government. 

Therefore, for credit programs, both cash costs to the government and 

social costs imposed on taxpayers could be weighed against benefits to 

borrowers and to the public at large. These social costs would include the 

cost of bearing risk that the government has transferred to taxpayers, 

represented by the aggregate risk premium. OMB Circular No. A-129, 

Policies for Federal Credit Programs and Non-Tax Receivables, requires 

agencies to provide benefit-cost analyses as part of biennial program 

reviews. These reviews are also intended to take account of changes in 

program risks and costs. In this context, the fair value approach 

aggregate risk premium could be classified as a cost imposed by a 

program and included in total societal costs along with the cash costs to 

the government. It is in this setting that several proponents of FCRA 

believed, and we concur, that the fair value approach would be most 

appropriately considered by decision makers, rather than in budget 

estimates.

Reflecting a different concern, some proponents of the fair value 

approach to budgeting for federal credit programs, cited as motivation the 

perceived over-reliance on federal credit as a policy tool and the desire to 

correct any bias toward underestimated costs under FCRA. Consistent 

with this view, some proponents of the fair value approach generally 

supported the approach for initial subsidy cost estimates that are used by 

congressional decision makers to determine loan levels to approve. After 

loan levels are approved, these proponents of the fair value approach 

generally expressed no preferences for the methodology used to 

determine subsidy cost estimates for existing credit program portfolios. 

The effects of the 2008 financial crisis on parts of the federal credit 

portfolio demonstrated the sensitivity of loan performance to conditions in 

the macroeconomy. Subsidy cost estimates of loan guarantee programs 

related to housing and small business and agriculture, in particular, had 

not anticipated the possibility of large losses associated with the crisis in 

the mortgage market and extreme weakness in market demand for goods 

and services experienced during the 2008 financial crisis. Repayment of 

student loans also declined significantly during this period. Some 

proponents of the fair value approach told us that adopting the fair value 

approach would help address concerns about the over-reliance on federal 

credit programs by raising the subsidy cost of credit programs, likely 

Page 38 GAO-16-41 Credit Subsidy Cost Estimates
resulting in fewer loans being made.

Page 39 GAO-16-41 Credit Subsidy Cost Estimates

50 Also, according to some proponents of 

the fair value approach, raising the cost of credit programs would weigh against 

any bias in underestimating costs. In contrast, proponents of the FCRA 

methodology stated that to the extent that agencies were underestimating 

subsidy costs under FCRA, this would be more appropriately addressed 

through improvements in the subsidy estimation process rather than 

application of the fair value approach.

Going forward, there are some reasons to expect that agencies’ 

estimates of expected loan losses will better reflect the possibility of a rise 

in defaults in a macroeconomic downturn. Typically, agencies project 

future losses based on historical experience. Before the 2008 financial 

crisis, program experience generally did not include the effect of a 

significant economic downturn. Therefore, expected loss projections 

made prior to 2008 would have likely underestimated the actual losses. 

Now, the depressing effects of the 2008 financial crisis across the 

government’s credit portfolio are included in each program’s historical 

data. Although agencies can project individual loan programs’ expected 

losses with the downturn included in historical data, the possibility of 

extreme losses occurring simultaneously across loan programs would not 

be reflected in the loss estimates of any one program.51 For that, the 

government would have to evaluate performance across its entire credit portfolio, 

trying to assess the potential size of total losses in a bad economy. However, our 

analysis of credit program reestimates over the course of the 2008 

financial crisis revealed that only parts of the portfolio experienced 

significant increases in reestimates, implying some degree of 

diversification against the risk of aggregate losses. While performance of 

 

50Under the fair value approach, while credit programs would have higher initial subsidy rates, this

may not affect the amount of loans that are made by programs with indefinite budget 

authority, such as Education’s Direct Student Loan Program, because, under such 

programs, loans are made based on the eligibility of applicants and not budgetary 

spending limits.

51Considering that the federal government’s entire portfolio comprises many different types 

of loans (e.g., housing, disaster, and alternative energy), overall losses will be higher the 

more loans of each type default. Some loan types experience losses under similar 

circumstances, for example, mortgage and small business loans default during recession, 

which would likely raise overall losses during a downturn. However, disaster or alternative 

energy loan performance is not likely related to a recession, and if these loan types do not 

experience defaults in downturns, then the government’s overall losses would be limited to 

those that do. Projections of losses for a given loan type consider only that type’s default 

history and not the possibility that other loan types might perform similarly.
parts of the federal credit portfolio does track with financial market 

outcomes, performance of others, such as disaster loans, may not.

While fair value approach estimates may provide useful information for 

evaluating the costs against the benefits of credit programs, the additional 

market risk recognized under that approach do not reflect additional 

estimated cash costs beyond those recognized by FCRA. The concept of 

the fair value approach to recognize the aggregate risk premium due to 

taxpayers beyond the FCRA-reflected risks (based on expected cash 

outlays) evolved from the consideration of investor behavior in private 

financial markets. Subsidy cost estimates prepared under the fair value 

approach would be inconsistent with long-standing budgeting practices 

and involve significant implementation challenges. More specifically, the 

fair value approach would

· add noncash social costs into the budget process, which is primarily 

based on cash costs to Treasury;

· result in inconsistency with the budgetary treatment of similarly risky 

programs;

· result in less transparency and cause verification issues related to 

noncash costs in budget totals;

· involve significant implementation issues; and

· be complicated by comparisons between the fair value approach and 

private-sector GAAP fair value.

Because of these issues, we do not support the fair value approach to 

estimate credit program subsidy costs for the budget and believe that the 

current FCRA methodology is more appropriate for this purpose. In 

addition, OMB has reported that it opposes the fair value approach 

because it would make the budgeting process less transparent and less 

accurate.

Page 40 GAO-16-41 Credit Subsidy Cost Estimates

52

Deployment of the fair value approach in the federal budget would 

provide a perspective on the cost of aggregate risk that is not currently 

represented in the budget for any type of federal program and would add 

noncash costs to primarily cash totals found in budget accounts. As 

previously discussed, the fair value approach would add the 

 

52Office of Management and Budget, Statement from OMB Spokesman Steve Posner on H.R. 1871

and H.R. 1872 (Apr. 7, 2014). 

Fair Value Approach 

Subsidy Cost Estimates 

Are Not Consistent with 

Long-standing Federal 

Budgeting Practices, 

Involve Significant 

Implementation 

Challenges, and Should 

Not Be Included in the 

Budget

Noncash Social Cost versus 

Cash Budget Cost to Treasury
compensation cost to taxpayers of bearing aggregate risk to the FCRA 

subsidy cost estimate, thereby explicitly introducing noncash social costs 

into what is fundamentally a cash budgeting system. Proponents of both 

the fair value approach and FCRA recognized the aggregate risk 

premium as representing a social cost reflecting the ultimate transfer of 

the risk of making loans from the government to taxpayers. However, 

these social costs do not represent a cash cost to the federal government 

and would not be recognized under FCRA estimates because no money 

is disbursed or received by Treasury as a result of the different cost 

calculation and its inclusion in budget figures. As shown in figure 13, the 

initial subsidy cost would be higher under the fair value approach. As the 

loan is repaid in the future, the agency would reestimate the subsidy cost, 

creating a difference in the timing of the subsidy cost recognition 

compared to that under the FCRA methodology. If the loan performed as 

expected, the resulting reestimates under the fair value approach would 

be downward, in essence amortizing the aggregate risk premium initially 

estimated. In contrast, under the FCRA methodology, if the loan 

performed as expected, there would be no reestimate. If the loan 

performed worse than expected, under both the fair value approach and 

FCRA, the agency would update the estimated cash flows and record a 

reestimate. However, the resulting final lifetime subsidy cost under the fair 

value approach or FCRA would be the same, after completing 

reestimates, because the cash flows to and from the government are the 

same. The cash flows between the government and the borrower are not 

affected by the different discount rates used under the fair value approach 

or FCRA.

Page 41 GAO-16-41 Credit Subsidy Cost Estimates
Figure 13: Fair Value Costs versus Cash Cost over Time

Page 42 GAO-16-41 Credit Subsidy Cost Estimates

Note: This figure illustrates a simplified example of an interest-free loan and assumes that it performs 

as required with no defaults.

aNet cash flows are lower than actual returns because of financing costs associated with providing a 

loan to a borrower.
The concepts that currently underlie the federal budget date to the 1967 

Report of the President’s Commission on Budget Concepts.

Page 43 GAO-16-41 Credit Subsidy Cost Estimates

53 The 

commission identified the major purposes of the budget, which included 

processes to propose particular programs to advance policy goals and to 

propose total expenditures and revenues intended to promote stability 

and growth in the macroeconomy. In practice, OMB has observed that the 

budget provides “the means for the President and the Congress to decide 

how much money to spend, what to spend it on, and how to raise the 

money they have decided to spend.” In other words, the budget supports 

decisions about which programs to fund and at what level given the 

presence of an overall budget constraint (in that government spending 

must be supported by tax revenues or debt). Government programs’ fiscal 

effects on the macroeconomy are associated with financial inflows and 

outflows of Treasury.

The inclusion of social costs in the budget would depart from the concept 

of cash expenditures and revenues that currently underlies the budget. 

Some proponents of the fair value approach stated that in practice, the 

budget already includes noncash costs. Specifically, FCRA introduced 

this apparent anomaly by presenting the current and future costs of loan 

making in terms of today’s dollars, meaning their worth today, so that the 

costs may be compared to the outlays made today when the loan is 

disbursed. The subsidy cost of the loan is the budget authority the 

Congress appropriates and is the net present value of outflows and 

inflows from the government over the life of the loan. Putting credit 

program costs in present value terms differs from the current cash basis 

used in other programs’ budget accounts to reflect the time value of 

money. FCRA could be called modified cash budgeting and serves to 

represent the lifetime cost of the loan in today’s dollars. This is consistent 

with the method used to compute the fiscal gap and discounts cash flows 

in and out of Treasury at the default-free Treasury rate of borrowing.54

FCRA does not include in subsidy costs any estimates of costs that do not 

 

53Report of the President’s Commission on Budget Concepts (Washington, D.C.: October 1967). 

The commission was appointed by the President on March 3, 1967. It was formed as a 

bipartisan commission to conduct a thorough and objective review of budget concepts and 

to address long-standing questions about the budget presentation and the treatment of 

individual accounts within the budget. 

54The fiscal gap is the amount of spending reductions or tax increases on average over a 75-year 

period to keep debt held by the public as a share of gross domestic product from exceeding its 

current level.

Excerpts from the Report of the 

President’s Commission on Budget 

Concepts, October 1967

“In deciding whether it is possible to develop a 

unified budget, one must distinguish between 

competing budget concepts, which cause 

confusion, and complementary budget 

concepts, which actually aid in understanding 

the scope and economic impact of the 

Government.”

“The work of the Congress and the executive 

branch should be facilitated by budget 

concepts in which all the different major 

purposes come to focus in a comprehensive 

unified budget, and public understanding of 

the budget and usefulness of budget 

information should be furthered.”

“The budget must serve simultaneously as an 

aid in decisions about both the efficient 

allocation of resources among competing 

claims and economic stabilization and 

growth.”

“The budget totals must be readily useful for 

analysis of the impact of the Federal budget 

on the economy. ...To be able to do this in the 

simplest possible fashion, rules for calculating 

budget receipts and expenditures should lead 

to a measure of surplus and deficit which is 

useful for analyzing the economic impact of 

the budget.”

Source: Report of the President’s Commission on Budget 

Concepts, October 1967. | GAO-16-41
represent cash flows to or from the government and will not eventually be paid to 

or from Treasury.

The adoption of the fair value approach would, all else equal, initially 

increase subsidy cost estimates and the federal budget deficit by 

including the cost of bearing aggregate risk.

Page 44 GAO-16-41 Credit Subsidy Cost Estimates

55 The higher initial estimated 

subsidy cost under the fair value approach would increase the budget authority 

required for a given volume of loans compared to that required under 

FCRA, thereby raising the federal budget deficit through the effect on 

outlays. The federal budget deficit has significance in policy making and 

in analyzing the economy, and experts who opposed the fair value 

approach cautioned against the inclusion in the budget of what they 

termed phantom costs of aggregate risk under the fair value approach. 

Ultimately though, as noted above, net cash outlays under both the fair 

value approach and FCRA are the same, so any upward bias in initial 

subsidy cost estimates introduced by the fair value approach would be 

eliminated through downward reestimates as receipts from loan 

repayments are recognized.

Under the fair value approach, if actual cash flows were as initially 

estimated, there would be an additional amount in the financing account 

that represents the compensation to taxpayers for bearing risk, which is a 

social cost and not a cash cost to Treasury. Social costs do not produce 

fiscal effects insofar as they are not cash receipts or disbursements from 

Treasury. Consequently, to avoid misrepresenting the fiscal effect of 

credit programs on the federal budget deficit, some proponents of the fair 

value approach suggested recording a revenue to offset this noncash 

social cost to clear the additional amount in the financing account and 

correct deficit balances.

Several experts we spoke with disagreed with the fair value approach of 

reflecting social costs or the compensation to taxpayers for bearing risks 

associated with credit programs in subsidy cost estimates for the budget. 

These experts, who favored the current FCRA approach, rejected the 

characterization by some financial economists of the government’s being 

a pass-through to a collection of taxpayers, no different than investors in 

a private corporation. Unlike private corporations, the federal government 

 

55The budget deficit is the amount by which the government’s budget outlays exceed its 

budget receipts for a given period, usually a fiscal year. 
is enduring and can avoid insolvency through exercise of its power to levy 

taxes and can more easily access credit through the Treasury securities 

market. These proponents of FCRA noted that the government has a 

lower cost of borrowing than a private financial institution, and as an 

entity, the government has the ability to more readily collect on loans 

through tax refund offsets and garnishment of wages.

Page 45 GAO-16-41 Credit Subsidy Cost Estimates

56 In addition, some 

federal loans, such as student loans, may not be discharged through 

bankruptcy. Therefore, these experts claimed, the cost of providing a 

credit program is less expensive for the government than the private 

sector. The more fundamental disagreement over the fair value approach 

concerns whether the government’s true cost of capital is represented by 

the “riskless” rate at which it borrows or whether that cost should also 

include compensation to taxpayers for bearing aggregate risk. This 

debate in the financial economics literature about the government’s cost 

of capital dates back several decades and has not been settled.57

If the fair value approach were deployed for the government’s portfolio of 

direct loans and loan guarantees, inconsistency of treatment across 

budgetary accounts would have to be considered. Potential 

inconsistencies arise from (1) the comparability of loan program budget 

totals that include social costs with noncredit program cash costs that do 

not include social costs, (2) the exclusion of social costs associated with 

costs of programs that present risks similar to those of loans, and (3) the 

treatment of the presence of risk and uncertainty in federal activities other 

than loan making. These inconsistencies could distort the decisions the 

budget is intended to support by making loans appear relatively more 

expensive than other programs because of the inclusion of noncash 

social costs.

The federal budget is primarily recorded on a cash and obligations 

basis.58 The inclusion of social cost in the form of the fair value approach risk 

premium raises the relative costs of loans compared to other programs budgeted 

 

56For example, the federal government has the ability to garnish wages without a court order, while 

other creditors must first obtain a court order to garnish wages.

57Kenneth J. Arrow and Robert C. Lind, “Uncertainty and the Evaluation of Public Investment 

Decisions,” American Economic Review, vol. 60, no. 3, (1970).

58An obligation is a definite commitment that creates a legal liability of the government for the 

payment of goods and services ordered or received. Payment can be made immediately 

or in the future.

Inconsistency with the 

Budgetary Treatment of 

Similarly Risky Programs
based on cash. However, many other federal programs impose social costs in 

addition to incurring cash outlays. One example would be the costs of 

environmental damage resulting from federally funded construction 

projects. Such social costs may not be priced in the market as an 

aggregate risk premium might be, but they are real costs to society in 

terms of losses in environmental quality and services. If the fair value 

approach were to be adopted for budgeting credit program costs, 

maintaining consistency in the budget would require recognition of the 

social costs of all federal programs across the board, presenting a 

daunting analytical problem, at a minimum.

The introduction of aggregate risk compensation in the budget would 

create another inconsistency in the budget’s portrayal of the costs of 

uncertain outcomes. Under the fair value approach, an agency would—as 

it does now under FCRA—make an estimate of expected loan 

performance, including repayments, prepayments, defaults, and 

recoveries. The expected cash flows would be associated with average 

losses over the life of the loan cohort, implying equal weight on both lower 

and higher levels of loss. With the fair value approach, the addition of the 

aggregate risk premium implicitly weights the worse outcome more 

heavily by adding a cost associated with the possibility that losses are 

greater than expected. Elsewhere, the budget presents as point estimates 

the expected value of uncertain spending outcomes with the prospects of 

better and worse outcomes equally weighted. For example, the 

President’s Budget includes funding requests for the costs of fighting 

forest fires. That request represents the expected value of the funding 

level required based on the probability of a good outcome (i.e., few fires) 

and a bad outcome (i.e., an active fire season). To the extent that this risk 

cannot be diversified—that is, offset by risk elsewhere in government 

spending—then, as with the fair value approach, a risk premium would be 

added. Weighting bad outcomes more heavily, as with the fair value 

approach, would thus be inconsistent with the treatment of risk and 

uncertainty in all other budget estimates.

Cost estimates prepared under the fair value approach in the budget 

would introduce a number of transparency and verification issues. 

Regarding transparency in the presentation of the budget, it may not be 

obvious that credit program costs included an aggregate risk premium, so 

the lack of comparability with other programs’ cash budgeting would not 

be clear. Moreover, as previously discussed, some proponents of the fair 

value approach believed that the use of fair value would address the 

perceived over-reliance on federal credit and correct for any bias in 

underestimates of costs. However, as also previously discussed, our 

Page 46 GAO-16-41 Credit Subsidy Cost Estimates

Transparency and Verification 

Issues
analysis of reestimates for the fiscal years 2001 through 2014 cohorts of 

direct loans and loan guarantees did not identify any overall consistent 

trends in under- or overestimates of subsidy costs across federal credit 

programs government-wide. Further, some proponents of FCRA asserted 

that any problem with subsidy cost estimates will not be solved by 

revising a budget estimate via the fair value approach but by engaging 

decision makers in discussions about the types and amounts of federal 

credit that should be provided in the budget. For example, one expert 

stated that concerns about credit program losses could be addressed by 

tightening eligibility criteria or reducing appropriations. In addition, 

proponents of FCRA felt that any inaccuracy in estimating subsidy costs 

should more appropriately be tackled by strengthening the data and 

methods agencies use in forecasting expected cash flows.

Using the fair value approach may also mask information about direct 

loan and loan guarantee performance. Under FCRA, the annual 

reestimates may provide useful information to analyze actual loan 

performance and to evaluate the quality of the estimation process as, 

year by year, actual loan performance is recorded and expectations of 

future loan performance are updated. Under the fair value approach, such 

information may not be transparent because the effects of the adjusted 

discount rate would also be included.

Further, under the fair value approach, the accuracy of the estimate of the 

aggregate risk premium is not transparent and verifiable, which is an 

important consideration given its cost-increasing effect. A primary 

challenge in the fair value approach to budgeting is identifying the 

aggregate risk premium applicable to any particular program. If the credit 

program has a close counterpart in private credit markets, referred to as a 

comparable, the difficulty is reduced though not eliminated.

Page 47 GAO-16-41 Credit Subsidy Cost Estimates

59 For example, 

private credit markets could likely provide a proxy for HUD’s MMI Fund. 

However, there is likely not a private market comparable for SBA’s Disaster

 

59Using a private market comparable is a valuation technique in which a recently sold asset is used 

to help determine the value of a similar asset.
Loan Program.

Page 48 GAO-16-41 Credit Subsidy Cost Estimates

60 In the absence of a market comparable, the analytical task 

would be significant and subjective, and in any event, resulting estimates could 

be subject to criticism and controversy that would be hard to resolve.61

Moreover, even when a market comparable exists, the task of extracting the 

aggregate risk premium from the difference between the default-free 

Treasury rate and the observed market rate would still be subjective. This 

complication arises because other kinds of costs and risks that are not 

applicable to government lending may be compensated in the market 

rate, as was illustrated in figure 12. Arriving at a verifiable and auditable 

estimate of the aggregate risk premium for each credit program is 

essential if there is to be confidence in decisions that depend on 

comparing their relative costs.

Some proponents of the fair value approach suggested that TARP 

illustrates successful implementation of the fair value approach. TARP 

was required to use market-risk adjusted discount rates when determining 

subsidy costs for the budget. For investment programs, TARP’s 

valuations were based on market prices of securities for comparable 

institutions and not solely the aggregate risk. In addition, because the 

intention of TARP was to liquidate the assets when economically feasible 

rather than hold them to maturity, the use of market prices was an 

appropriate measure of expected cash proceeds to be received from 

liquidation when the assets were sold. Therefore, TARP’s use of marketrisk adjusted discount rates may not be directly comparable to other credit 

programs. Under FCRA and in accordance with OMB Circular No. A-11, 

Preparation, Submission, and Execution of the Budget, if an agency were 

 

60Under the Disaster Loan Program, SBA provides low-interest disaster loans to businesses of all 

sizes, private nonprofit organizations, homeowners, and renters. SBA disaster loans can be used to 

repair or replace the following items damaged or destroyed in a declared disaster: real estate, 

personal property, machinery and equipment, and inventory and business assets. By law, 

borrower interest rates depend on whether each applicant has credit available elsewhere. 

For applicants unable to obtain credit elsewhere, the interest rate will not exceed 4 

percent. For those who can obtain credit elsewhere, the interest rate will not exceed 8 

percent. Borrower interest rates are determined for each declared disaster. SBA will not 

decline a loan for lack of a particular amount of collateral. 

61In the absence of comparable market prices, analysts must resort to alternative valuation 

methods, such as adjusting the discount rate for risk or applying options pricing. For example, in 

implementing the market-risk adjustment required for TARP, Treasury adjusted the discount 

rate using techniques applied to bank stock valuation and bank reserves. As proponents 

of the fair value approach have pointed out, making such estimates is complicated, 

although they have asserted that the approximations thus obtained are at least closer to 

market valuations than under FCRA, which makes no adjustment for market risk.
to plan to sell loan assets, the cash flows developed to estimate subsidy 

costs would include assumptions related to expected sale proceeds, 

which could be based on market information.

Several experts we spoke with stated that there would be significant 

challenges to implementation of the fair value approach. (See app. III for 

further details on these implementation challenges.) Several experts, 

including proponents of both the fair value approach and FCRA, stated 

that agencies and OMB do not currently have sufficient resources to 

implement the fair value approach for subsidy cost estimates in the 

budget. Some proponents of the fair value approach suggested that 

private-sector expertise could be recruited to address the challenges of 

identifying the appropriate aggregate risk premium for a program. 

However, other experts stated that for programs that lack a market 

comparable, private-sector expertise may or may not be more suited to 

address the challenge of identifying the aggregate risk premium.

Conceptual and practical implementation difficulties would also confront 

agency analysts. For example, a decision would need to be made about 

whether the aggregate risk premium for an existing cohort should be 

updated during the reestimate process. Updating the aggregate risk 

premium could add significant volatility to subsidy cost estimates, making 

it more difficult to understand reasons for reestimates (i.e., poor estimates 

or worse-than-expected performance). However, not updating the 

aggregate risk premium would result in cost estimates based on out-ofdate or noncurrent estimates of risks. Further, to the extent that the 

financial accounting for credit programs continues to be consistent with 

the budgeting for credit programs, not updating the aggregate risk 

premium would be difficult for an agency to support during a financial 

statement audit because the auditor would expect credit program cost 

estimates to be based on current risk information. In addition, because 

fair value approach subsidy cost estimates would include noncash costs 

that would, if actual cash flows were as initially estimated, eventually 

result in downward reestimates, decisions would need to be made on 

whether to recognize these downward reestimates each year or as a onetime adjustment. If the fair value approach were used, decisions would 

also need to be made regarding the interest rate used to calculate interest 

income and expense amounts on financing account balances so that the 

financing account will break even over time as it uses its collections to 

repay its Treasury borrowing.

Other implementation challenges would relate to programs that are 

currently required to set borrower fees or interest rates to produce 

Page 49 GAO-16-41 Credit Subsidy Cost Estimates

Additional Significant 

Implementation Issues
subsidy-neutral cost estimates, such as the Department of Energy’s Loan 

Guarantee Program,

Page 50 GAO-16-41 Credit Subsidy Cost Estimates

62 or even negative-subsidy cost estimates to cover 

administrative costs or to generate reserves, such as HUD’s MMI Fund 

loan guarantee program. Decisions would also be needed related to 

whether any increases to discretionary spending caps would be made if 

the fair value approach were implemented.63 Lastly, because the financial 

accounting for credit programs currently mirrors FCRA and budgetary 

accounting, the Federal Accounting Standards Advisory Board would need to 

determine whether accounting standards would need to be revised for any 

changes made related to the use of the fair value approach for the 

budget.64

Consideration of the fair value approach has been complicated by the 

introduction of financial economics concepts and by the use of the term 

“fair value” in both FCRA and private-sector GAAP contexts. Financial 

economics aims to explain the behavior of private market participants 

when confronted with risk and uncertainty in making investment 

decisions. This requires an understanding of the alternatives available for 

managing risks and of their respective costs. Application of these privatesector concepts to a government setting is an unfamiliar exercise to many 

in the public sector. Further, awareness of the private-sector GAAP 

guidance on the use of fair value for measuring private financial 

 

62The Department of Energy’s (DOE) Loan Guarantee Program was established by Title XVII of 

the Energy Policy Act of 2005 to encourage early commercial use of new or significantly 

improved technologies in energy projects. The act—specifically section 1703—originally 

authorized DOE to guarantee loans for energy projects that (1) use new or significantly 

improved technologies as compared with commercial technologies already in service in 

the United States and (2) avoid, reduce, or sequester emissions of air pollutants or manmade greenhouse gases. For loan guarantees approved under this authority, if no 

appropriation is provided to cover the subsidy cost of the program, DOE must collect 

payments from borrowers to offset the initial credit subsidy costs associated with their 

loan. See Pub. L. No. 109-58, tit. XVII, 119 Stat. 594, 1117 (Aug. 8, 2005), classified as 

amended at 42 U.S.C. §§ 16511-16516.

63Under the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, federal 

program funds may be sequestered in the event that aggregate discretionary appropriations do not 

conform to previously established spending caps. See 2 U.S.C. § 901-907d.

64The Federal Accounting Standards Advisory Board (FASAB) was established by the Secretary of 

the Treasury, the Director of the Office of Management and Budget, and the Comptroller General 

of the United States to develop accounting standards and principles for the federal 

government. The American Institute of Certified Public Accountants recognized FASAB as 

the board that promulgates GAAP for federal entities. FASAB has nine members, three 

federal (selected by its sponsoring agencies) and six public or nonfederal members.

Comparisons between the Fair 

Value Approach and PrivateSector GAAP Fair Value
institutions’ assets may mistakenly suggest relevance to federal 

budgeting. The label “fair value” as it relates to federal credit program 

subsidy cost proposals reflects the perspective that the risk premium 

taxpayers demand can be found by observing what they would require to 

make similarly risky investments in private financial markets. That view 

provides the analogue to the situation contemplated in private-sector 

GAAP uses of fair value, wherein the valuation of certain assets and 

liabilities of private-sector entities is based on the price that would be 

received to sell an asset or paid to transfer a liability in an orderly 

transaction between market participants. For those who advocate the 

application of private-sector accounting principles to the public sector, 

employing private-sector GAAP in estimating the costs of federal credit 

programs is attractive. However, any parallels between the public and 

private-sector settings are not straightforward. Consequently, the 

suggestion to apply private-sector GAAP to federal budgeting for credit 

programs creates the potential for misrepresentation of the costs of 

government programs.

While the concepts behind the fair value approach and private-sector 

GAAP fair value are similar, there are differences in how the two would be 

applied. First, under private-sector GAAP, fair value is defined as the 

price that would be received to sell an asset or paid to transfer a liability in 

an orderly transaction between market participants. In contrast, because 

private-sector GAAP fair value—which is based on market prices—

includes costs that may not be relevant to the federal government, such 

as liquidity costs,

Page 51 GAO-16-41 Credit Subsidy Cost Estimates

65 the fair value approach extracts aggregate risk from 

overall market risk to recognize the risk applicable to federal credit 

programs in the view of a taxpayer. Consequently, the fair value approach 

does not reflect the price that would be received to sell an asset or paid to 

transfer a liability in an orderly transaction between market participants 

because the aggregate risk premium recognized under the fair value 

approach represents only a portion of the risks and other factors that are 

reflected in market prices.

 

65Liquidity cost represents compensation to investors for holding an asset that may be more 

difficult to sell quickly than Treasury securities of a corresponding maturity. 

Federal Generally Accepted Accounting 

Principles (U.S. GAAP)

U.S. GAAP is established by the Federal 

Accounting Standards Advisory Board 

(FASAB). 

The primary accounting standard for federal 

credit programs is Statement of Federal 

Financial Accounting Standards No. 2, 

Accounting for Direct Loans and Loan 

Guarantees, which became effective in fiscal 

year 1994.

When FASAB established this accounting 

standard, it stated that it recognized the value 

of having financial accounting support the 

budget. It also endorsed the logic underlying 

the Federal Credit Reform Act of 1990 

(FCRA) and recommended that accounting 

standards for credit programs be consistent 

with budgeting under FCRA. 

Source: GAO analysis of U.S. GAAP. | GAO-16-41
Second, under private-sector GAAP, generally loans that a bank holds for 

investment are recorded at amortized cost, net of an impairment 

allowance for estimated credit losses.

Page 52 GAO-16-41 Credit Subsidy Cost Estimates

66 Such loans typically comprise the 

bulk of assets held by banks insured by the Federal Deposit Insurance 

Corporation. However, loans originated with the intent to sell in the 

secondary market to government-sponsored entities and other investors 

are measured at the lower of cost or fair value, unless the institution has 

elected to account for the loans at fair value under the fair value option. 

The private-sector GAAP fair value measurement provides information on

the current value of the asset that is available for sale. In contrast, the fair 

value approach would be applied to all credit programs, regardless of 

whether the government plans to sell assets or hold them to maturity. 

Currently, Treasury is the only federal agency routinely selling some of its 

credit programs’ assets.67 However, under FCRA and in accordance with 

OMB Circular No. A-11, Preparation, Submission, and Execution of the Budget, 

if an agency were to plan to sell loan assets, the cash flows developed to estimate 

subsidy costs would include assumptions related to expected sale proceeds, 

which could be based on market information.

 

66Essentially, amortized cost is outstanding principal adjusted for any charge-offs, deferred 

fees or costs, and unamortized discount or premium. 

67TARP was required by law to estimate the budgetary cost of purchases and guarantees of 

troubled assets in accordance with FCRA, except that such costs were required to be calculated 

by adjusting the discount rate for market risk. In addition, for financial accounting 

purposes, TARP’s investment programs were measured based on private-sector GAAP. 

However, the intention of TARP was to liquidate the assets when economically feasible 

rather than hold them to maturity, and private-sector GAAP fair value was an appropriate 

measure of expected proceeds to be received from liquidation for financial accounting 

purposes. Therefore, TARP’s use of private-sector GAAP fair value is not directly 

comparable to its use for other federal credit programs.

Private-Sector Generally Accepted 

Accounting Principles (GAAP) Fair Value

To increase consistency and comparability in 

GAAP fair value measurements and related 

disclosures, GAAP requires entities to 

disclose fair value information based on a 

hierarchy of inputs used to determine fair 

values. The fair value hierarchy includes three 

levels of inputs:

· The highest priority—or level 1—refers to 

fair values derived from direct market 

prices for the specific asset (e.g., quoted 

prices of common stock).

· Level 2 refers to fair values derived from 

market observable data, other than a 

direct market quote, for a similar asset 

from the same entity.

· Level 3—the lowest priority—refers to fair 

values derived from unobservable inputs, 

which are primarily derived from 

management’s best estimate of how a 

market participant would assess the risk 

inherent in the asset. These unobservable 

inputs are used because there is little to 

no direct market activity.

What percentage of large domestic 

financial institutions’ loan portfolios are 

measured using GAAP fair value?

Financial institution Percentage of loan 

portfolio measured 

at GAAP fair value

JP Morgan Chase 2%

Bank of America 2%

Wells Fargo 2%

Citigroup 1%

U.S. Bancorp 1%

As of the end of 2013, the five largest (based 

on total assets) domestic private-sector 

financial institutions used GAAP fair value for 

approximately 2 percent or less of their loan 

portfolios and these fair values were classified 

as level 2 or level 3.

Source: GAO analysis of private-sector GAAP and financial 

institutions’ financial statements and note disclosures as of 

the end of 2013. | GAO-16-41
GAO believes the current FCRA methodology is more appropriate to 

estimate credit program subsidy costs for the budget. The construction, 

use, and interpretation of the federal budget as a system of primarily cash 

accounts have been the norm for decades. Subsidy cost estimates 

prepared under the fair value approach would not be consistent with 

federal budgeting practices of recognizing expected cash outlays. 

Further, the application of the fair value approach to only credit programs, 

the loss in transparency and in the ability to verify the noncash cost, and 

significant implementation issues argue against change from the FCRA 

approach. In addition, to the extent that agencies were consistently 

underestimating subsidy costs under FCRA, this kind of bias would be 

more appropriately addressed through improvements in the subsidy 

estimation process, rather than application of the fair value approach. 

However, based on our analyses of reestimate data for the fiscal years 

2001 through 2014 cohorts, we did not identify any consistent trends in 

overall under- or overestimates of subsidy costs across federal credit 

programs government-wide. Although the fair value approach may be 

useful to decision makers for evaluating the costs against the benefits of 

federal credit programs in that it accounts for market risks beyond those 

risks already recognized under FCRA, and the provision of this type of 

information is consistent with OMB’s guidance in OMB Circular No. A-129 

requiring biennial reviews of credit programs, it is not appropriate for use 

in estimating credit subsidy costs for the budget.

We provided a draft of this report to CBO and OMB for their review and 

comment. Both CBO and OMB provided technical comments, which we 

have incorporated as appropriate.

As agreed with your office, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to other interested parties. In 

addition, the report will be available at no charge on the GAO website at 

http://www.gao.gov.

Page 53 GAO-16-41 Credit Subsidy Cost Estimates

Concluding 

Observations

Agency Comments
If you or your staff have any questions about this report, please contact 

Cheryl E. Clark at (202) 512-9377 or clarkce@gao.gov, Susan J. Irving at 

(202) 512-6806 or irvings@gao.gov, or Susan Offutt at (202) 512-3763 or 

offutts@gao.gov. Contact points for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. 

GAO staff members who made key contributions to this report are listed 

in appendix IV.

Sincerely yours,

Cheryl E. Clark

Director

Financial Management and Assurance

Susan J. Irving, PhD

Director for Federal Budget Analysis

Strategic Issues

Susan Offutt, PhD

Chief Economist

Applied Research and Methods

Page 54 GAO-16-41 Credit Subsidy Cost Estimates
Appendix I: Objectives, Scope, and 

Methodology

To determine whether there were similarities in the size and direction of 

reestimates across, or within, federal credit programs and, based on this 

analysis of reestimates, to identify factors, if any, that help explain any 

significant trends in reestimates, we examined reestimate data reported 

for all direct loan and loan guarantees by cohort for fiscal years 2001 

through 2014. We chose loan cohorts beginning in fiscal year 2001 to 

ensure that our analysis covered a full business cycle. Reestimate data 

were obtained from the President’s Budgets for fiscal years 2003 through 

2016. Specifically, we used tables 7 and 8 reestimate data from the 

Federal Credit Supplement (FCS) to the Budget of the U.S. Government

for fiscal years 2003 through 2016. The FCS for fiscal year 2003 is the 

first year in which data for the fiscal year 2001 cohorts were reported. 

Because of the 2-year lag between the timing of the loan cohort 

disbursement and the reporting in the FCS, the fiscal year 2014 cohort of 

direct loans and loan guarantees (from the fiscal year 2016 FCS) is the 

most recent cohort in our data.

The reestimate data were in spreadsheets that reproduce the data as 

they appear in the FCS. In spreadsheets, the first column contains five 

different fields: (1) the agency name, (2) the bureau name, (3) the 

program name, (4) the risk category name, and (5) the cohort year. We 

developed a computer algorithm to distinguish among these fields and 

identified the unique agency, bureau, and risk category combination as a 

“program.” We retained this information for each cohort of direct loans 

and loan guarantees.

We reviewed the agency, bureau, and risk category data manually to look 

for inconsistencies such as spelling and formatting differences that could 

affect the number of distinct direct loan and loan guarantee programs 

identified by our computer algorithm. We found that some names were 

reported differently over time. For example, the risk category Farm 

Storage Facility Loan Program reported in the fiscal year 2003 to 2008 

FCSs is the same as the risk category Farm Storage Facility Loans 

reported in the fiscal year 2009 to 2016 FCSs. In another example, the 

Indian Land Acquisition risk category, reported in fiscal year 2003 to 2008

FCSs, was called Indian Tribe Land Acquisition in subsequent years’ 

FCSs. In cases such as these, we standardized the program names to 

facilitate our analysis of credit programs over time. We cleaned the data 

to remove footnotes, standardized the coding of missing values, and 

reformatted numeric values to permit mathematical calculations, as 

appropriate. For example, numbers saved as text characters were 

multiplied by 1 to obtain values that could be added, subtracted, 

multiplied, or divided.

Page 55 GAO-16-41 Credit Subsidy Cost Estimates

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

We supplemented data from the FCS with information on whether 

programs were mandatory or discretionary, which we obtained from 

tables 1 and 2 of the FCS or based on research of the program’s 

budgetary funding type. We also used professional judgment to classify 

the primary purpose of each program as one of seven possible 

categories: (1) education-related; (2) energy, transportation, and 

infrastructure; (3) housing; (4) international; (5) small business and 

agriculture; (6) other; and (7) the Troubled Asset Relief Program (TARP). 

Because TARP was a unique, one-time program implemented in 

extraordinary circumstances, and because the amount of its lifetime 

downward reestimate was so large in comparison to all other credit 

programs, we excluded TARP from our analysis.

From the spreadsheets, we created a single file of cohort-level direct loan 

data and a single file of cohort-level loan guarantee data. These data 

were the basis for our examination of trends in reestimates across 

programs and over time. We examined patterns in direct loan and loan 

guarantee programs by agency, by program, by purpose, by fiscal year 

the direct loan or loan guarantee was approved, and by program funding 

type (mandatory and discretionary). Our analysis focused on lifetime 

reestimate amounts, annual reestimate amounts, and a comparison of 

most recently reported reestimated and original subsidy rates for each 

program. For each year of the FCS, we calculated program-level lifetime 

reestimate amounts as the sum of the lifetime reestimate amounts 

reported for each cohort in the program. We examined the direction of the 

most recent lifetime reestimate amounts by purpose and by agency. We 

identified programs with relatively large lifetime reestimate amounts and 

examined their influence on upward and downward reestimates 

government-wide. For each program, we calculated the annual reestimate 

amount as the annual change in the program-level lifetime reestimate 

amounts. Our conclusions about possible trends were based on our 

professional judgment in assessing the data, and not based on a 

statistical analysis.

Page 56 GAO-16-41 Credit Subsidy Cost Estimates

1

We also examined reestimated subsidy rates for each program relative to 

the most recently reported original subsidy rate. For each FCS, we 

calculated these program-level relative reestimated rates as a weighted 

 

1We did not use statistical analysis to estimate trends because, in our professional judgment, the 

quantity of data (e.g., number of years and number of programs) was insufficient to provide a 

credible statistical result.
Appendix I: Objectives, Scope, and 

Methodology

average of the cohort-level data. In these calculations, differences 

between the reestimated rate and the most recently reported original 

subsidy rate were weighted by the size of each cohort, as measured by 

the cohort’s reported total disbursements to date.

In assessing data reliability, we encountered some data limitations, which 

we individually evaluated based on professional judgment. For each data 

limitation, we adjusted the data, identified alternative data calculation 

methods when available, or determined that the data were reliable for our 

purposes. For example, not all programs reported data in the FCS each 

year. In addition, one program did not report reestimate information by 

cohort. Instead, all reestimates were combined and reported with the 

most recent cohort. We also noted some discrepancies between the 

lifetime reestimate amount reported for each cohort and the running total 

of the annual reestimate amounts that had been reported since the cohort 

of direct loans or loan guarantees was first disbursed.

Page 57 GAO-16-41 Credit Subsidy Cost Estimates

2 These discrepancies 

tended to be less prevalent for later cohort years because of quality controls 

implemented by the Office of Management and Budget (OMB) in fiscal year 

2008.

To evaluate implications of using subsidy cost estimates developed under 

the fair value approach for the budget and to determine whether we 

believe such concepts should be incorporated into subsidy cost estimates 

for the budget, we reviewed literature related to the Federal Credit 

Reform Act of 1990 (FCRA), the budget, and the fair value approach. This 

literature included GAO reports, Congressional Budget Office reports, 

Congressional Research Service reports, OMB guidance and budget 

information, the 1967 Report of the President’s Commission on Budget 

Concepts, legislation, position papers, and academic reports. We 

identified a diverse group of individuals or organizations with expertise in 

FCRA, the fair value approach, financial economics, and federal 

budgeting through our review of relevant reports in these issue areas, 

based on internal discussions with GAO staff familiar with experts in this 

area, and based on recommendations from experts interviewed. We 

considered expert experience, work history, and published work relevant 

to our engagement to help ensure expertise qualifications and to achieve 

a balanced review. We conducted semistructured interviews with 30 

 

2To adjust for this limitation, rather than using the reported annual reestimate amount, we 

calculated the annual reestimate amounts based on differences in the reported lifetime reestimate 

amounts. 
Appendix I: Objectives, Scope, and 

Methodology

experts to achieve a variety of expertise and viewpoints. The views 

expressed by the experts should be interpreted in the context of the 

following qualification. Although we were able to secure the participation 

of a balanced, highly qualified group of individuals, we could not interview 

all of the individuals with expertise in relevant fields because of the need 

to limit the number of interviews conducted.

We conducted this performance audit from June 2014 to January 2016 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

Page 58 GAO-16-41 Credit Subsidy Cost Estimates
Appendix II: Analysis of Reestimates

We analyzed direct loan and loan guarantee programs’ annual and 

lifetime reestimates by cohort, program, and agency purpose from fiscal 

years 2001 through 2014 to identify any trends. We also considered the 

purpose of the credit programs based on the following categories:

(1) education-related; (2) energy, transportation, and infrastructure; 

(3) housing; (4) international; (5) small business and agriculture; and 

(6) other. We excluded the Department of the Treasury’s (Treasury) 

Troubled Asset Relief Program (TARP) from our analysis because TARP 

was a unique, one-time program implemented in extraordinary 

circumstances. Further, the size of TARP downward reestimates dwarfs 

the reestimates of all other credit programs, and its inclusion would make 

any trend analysis less meaningful. The amounts discussed in this 

appendix are based on information reported in the President’s Budgets.

We analyzed the reestimates for fiscal years 2001 through 2014 by 

agency. Table 4 illustrates the agencies with direct loan programs, the 

total loan disbursements from these programs during the period, the 

number of direct loan programs at each agency, the number of programs 

that had either upward or downward lifetime reestimates, and the amount 

of the upward or downward reestimates. For example, the Department of 

Education (Education) had seven direct loan programs, with one program 

comprising lifetime upward reestimates of $23.1 billion and six programs 

comprising lifetime downward reestimates of $7.7 billion. Overall, 

Education’s direct loan programs represented a net lifetime upward 

reestimate of $15.4 billion. In contrast, Treasury had five direct loan 

programs, with two programs comprising lifetime upward reestimates of 

$2.4 billion and three programs comprising lifetime downward reestimates 

of $16.4 billion. Overall, Treasury’s direct loan programs represented a 

net lifetime downward reestimate of $14.0 billion.

Page 59 GAO-16-41 Credit Subsidy Cost Estimates

Appendix II: Analysis of Reestimates

Reestimates by Agency
Appendix II: Analysis of Reestimates

Table 4: Direct Loan Programs’ Lifetime Reestimates by Agency, 2001-2014 

Page 60 GAO-16-41 Credit Subsidy Cost Estimates

Note: Dollars in millions

Agency Programs

Programs 

with lifetime 

upward 

reestimate 

Programs 

with lifetime 

downward 

reestimate 

Loan amounts 

disbursed

Lifetime 

upward 

reestimate 

Lifetime 

downward 

reestimate 

Net lifetime 

reestimate 

Department of 

Education 7 1 6 $940,574 $23,067 $(7,670) $15,397

Export-Import Bank 1 1 0 29,329 2,843 0 2,843

Small Business 

Administration 5 2 3 15,114 1,078 (13) 1,065

International 

programsa

4 4 0 8,859 531 0 531

Department of 

Veterans Affairs 6 4 2 4,545 72 (13) 59

Department of Health 

and Human Services 4 1 3 1,374 44 (9) 35

Overseas Private 

Investment 

Corporation 3 3 0 2,829 20 0 20

Federal 

Communications 

Commission 1 0 1 3 0 (1) (1)

Department of the 

Interior 2 1 1 29 1 (6) (5)

Department of Housing 

and Urban 

Development 1 0 1 83 0 (10) (10)

Department of State 1 0 1 26 0 (15) (15)

Department of 

Commerce 7 2 5 756 5 (43) (38)

Department of 

Transportation 3 2 1 6,910 39 (110) (71)

Department of 

Agriculture 45 16 29 114,008 1,944 (2,020) (76)

Department of 

Homeland Security 2 1 1 1,196 47 (259) (212)

Department of Defense 1 0 1 1,464 0 (245) (245)

Department of Energy 3 2 1 17,444 484 (2,678) (2,194)

Department of the 

Treasuryb5 2 3 244,956 2,401 (16,382) (13,981)

Total 101 42 59 $1,389,499 $32,576 $(29,474) $3,102

Source: GAO analysis of President’s Budgets. | GAO-16-41
Appendix II: Analysis of Reestimates

a

International programs include International Monetary Programs and International Security 

Assistance.

bDepartment of the Treasury excludes the Troubled Asset Relief Program reestimates.

Table 5 summarizes the lifetime reestimates for agencies with loan 

guarantee programs for fiscal years 2001 through 2014. As shown, the 

Department of Housing and Urban Development and Education 

accounted for the largest net lifetime upward and downward reestimates, 

respectively.

Table 5: Loan Guarantee Programs’ Lifetime Reestimates by Agency, 2001-2014 

Page 61 GAO-16-41 Credit Subsidy Cost Estimates

Note: Dollars in millions

Agency Programs

Programs 

with lifetime 

upward 

reestimate 

Programs 

with lifetime 

downward 

reestimate 

Value of loan 

amounts 

guaranteed 

Lifetime 

upward 

reestimate

Lifetime 

downward 

reestimate

Net lifetime 

reestimate 

Department of 

Housing and Urban 

Development 8 4 4 $7,171,143a$85,958 $(2,000) $83,958

Small Business 

Administration 19 10 9 312,263 10,170 (1,025) 9,145

Department of 

Veterans Affairs 2 1 1 860,273 4,795 (105) 4,690

Department of 

Agriculture 21 12 9 235,542 3,162 (1,851) 1,311

U.S. Agency for 

International 

Development 7 3 4 11,360 426 (40) 386

Department of the 

Treasuryb

1 1 0 1,627 22 0 22

Department of 

Energy 1 1 0 3,740 2 0 2

Department of 

Defense 2 1 1 702 14 (16) (2)

Department of the 

Interior 2 0 2 901 0 (21) (21)

Department of 

Transportation 2 1 1 2,503 0 (27) (27)

Department of 

Health and Human 

Servicesc3 0 3 578 0 (40) (40)

Department of 

Commerce 2 0 2 406 0 (102) (102)

Export-Import Bank 1 0 1 166,910 0 (338) (338)
Appendix II: Analysis of Reestimates

Page 62 GAO-16-41 Credit Subsidy Cost Estimates

Agency Programs

Programs 

with lifetime 

upward 

reestimate 

Programs 

with lifetime 

downward 

reestimate 

Value of loan 

amounts 

guaranteed 

Lifetime 

upward 

reestimate

Lifetime 

downward 

reestimate

Net lifetime 

reestimate 

Overseas Private 

Investment 

Corporation 4 1 3 12,684 21 (415) (394)

Department of 

Education 1 0 1 700,143 0 (59,552) (59,552)

Total 76 35 41 $9,480,775 $104,570 $(65,532) $39,038

Source: GAO analysis of President’s Budgets. | GAO-16-41

a

This amount includes the total amount of single- and multifamily loan guarantees issued by the 

Department of Housing and Urban Development (HUD) over the 14-year period. If a loan guaranteed 

under a HUD program is refinanced and the new loan is guaranteed under a HUD program, both 

guaranteed loan amounts would be included in this total. In addition, this amount includes guarantees 

issued by the Government National Mortgage Association (Ginnie Mae). Ginnie Mae guarantees the 

timely payment of principal and interest on securities issued by financial institutions and backed by 

pools of federally insured or guaranteed mortgage loans. Therefore, this amount would include the 

initial value of the security guaranteed by Ginnie Mae, as well as the initial value of the underlying 

federally guaranteed loan.

bDepartment of the Treasury excludes the Troubled Asset Relief Program reestimates.

c

The Health Education Assistance Loan program is listed under the Department of Health and Human 

Services in this table. In 2014, this program was transferred to the Department of Education. The 

value of loan amounts guaranteed under this program was $450 million, and the program had 

$36 million in downward reestimates.

We also analyzed the reestimates for fiscal years 2001 through 2014 

based on the program purpose. Table 6 summarizes direct loan program 

reestimates by purpose. Direct loan programs related to education and 

international lending experienced net lifetime upward reestimates. The 

other category, which represents programs that do not fit in the other 

categories, including Treasury’s Government Sponsored Enterprises 

Mortgage Backed Securities Purchase Program and the Small Business 

Administration’s (SBA) Disaster Loan Program experienced net lifetime 

downward reestimates.

Reestimates by Program 

Purpose
Appendix II: Analysis of Reestimates

Table 6: Lifetime Upward and Downward Reestimates by Type of Direct Loan Program, 2001-2014 

Page 63 GAO-16-41 Credit Subsidy Cost Estimates

Note: Dollars in millions

Type of

direct loan program Programs

Programs 

with lifetime 

upward 

reestimate

Programs 

with lifetime 

downward 

reestimate

Loan amounts 

disbursed

Lifetime 

upward 

reestimate

Lifetime 

downward 

reestimate

Net lifetime 

reestimate

Education-related 8 2 6 $940,607 $23,067 $(7,670) $15,397 

International 9 8 1 41,402 3,393 (89) 3,304

Housing 20 9 11 29,634 478 (398) 80

Small business and 

agriculture 13 1 12 20,264 24 (1,024) (1,000)

Energy, transportation, 

and infrastructure 25 13 12 94,462 2,038 (3,577) (1,539)

Other 26 9 17 263,130 3,576 (16,716) (13,140)

Total 101 42 59 $1,389,499 $32,576 $(29,474) $3,102 

Source: GAO analysis of President’s Budgets. | GAO-16-41

As shown in table 7, loan guarantee programs related to housing and 

small business and agriculture experienced net lifetime upward 

reestimates, while loan guarantee programs related to education 

experienced net lifetime downward reestimates.

Table 7: Lifetime Upward and Downward Reestimates by Type of Loan Guarantee Program, 2001-2014 

Note: Dollars in millions

Type of

loan guarantee 

program Programs

Programs 

with lifetime 

upward 

reestimate

Programs 

with lifetime 

downward 

reestimate

Value of loan 

amounts 

guaranteed

Lifetime 

upward 

reestimate

Lifetime 

downward 

reestimate

Net lifetime 

reestimate

Housing 15 9 6 $8,164,739 $93,580 $(2,121) $91,459 

Small business and 

agriculture 27 11 16 400,131 10,183 (2,826) 7,357

Energy, transportation, 

and infrastructure 14 9 5 21,681 325 (180) 145

Other 6 2 4 2,677 35 (25) 10

International 12 4 8 190,954 447 (792) (345)

Education-related 2 0 2 700,593 0 (59,588) (59,588)

Total 76 35 41 $9,480,775 $104,570 $(65,532) $39,038 

Source: GAO analysis of President’s Budgets. | GAO-16-41
Appendix II: Analysis of Reestimates

We also compared the most recently reported original and reestimated 

subsidy rates for direct loan and loan guarantee programs.

Page 64 GAO-16-41 Credit Subsidy Cost Estimates

1 To calculate 

the difference between the original and reestimated subsidy rates for each 

program, the difference for each cohort of direct loans or loan guarantees was 

weighted based on reported disbursements for direct loans or guaranteed 

loan amounts disbursed for loan guarantees. As shown in figure 14, we 

found that for most of the programs, reestimated subsidy rates were 

within 10 percentage points of the original subsidy rates. For example, if 

the calculated original subsidy rate for a program was 12 percent, with a 

10 percentage point difference, the calculated reestimated subsidy rate 

would fall between 2 percent and 22 percent. However, as indicated in 

figure 14, there were a few programs that had larger differences between 

the most recently reported original and reestimated subsidy rates. For 

example, the Department of Energy’s Advanced Technology Vehicles 

Manufacturing direct loan program reported an overall lifetime downward 

reestimate of $2.7 billion mostly attributable to a significant drop in the 

credit subsidy cost estimate for one loan, as a result of a significantly 

improved credit rating, reducing the original subsidy rate by 41.2 

percentage points, from 45.3 percent to a reestimated rate of 4.1 

percent.2 As another example, SBA’s Small Business Investment Company 

(SBIC) participating securities loan guarantee program reported an overall 

lifetime upward reestimate of 

$1.7 billion, primarily because of reestimates for fiscal years 2009 and 

2010. SBA reported that these reestimates were due to the downturn in 

the economy during the financial crisis that resulted in lower-thanprojected recoveries.3 For SBIC, the calculated original subsidy rate of 0.3 

percent increased to a calculated reestimated rate of 24.7 percent.

 

1We used the most recently reported reestimated rate as it represents the most current 

estimate of the subsidy rate updated for the actual program performance. The difference 

between the most recent reestimated and the most recently published original rates 

indicates how accurate the initial cost estimate is based on the most recently available 

information.

2The Advanced Technology Vehicles Manufacturing loan guarantee program supports the 

development of advanced technology vehicles and associated components in the United States.

3The SBIC participating securities loan guarantee program facilitates the flow of long-term capital 

to America’s small businesses.

Differences between 

Original and Reestimated 

Subsidy Rates
Appendix II: Analysis of Reestimates

Figure 14: Percentage Point Differences between Direct Loan and Loan Guarantee Programs’ Original and Most Recent 

Page 65 GAO-16-41 Credit Subsidy Cost Estimates

Reestimated Subsidy Rates, 2001-2014
Appendix III: Fair Value Approach 

Implementation Considerations

Based on our review of literature and interviews with individuals 

knowledgeable about the Federal Credit Reform Act (FCRA), the federal 

budget, and the fair value approach, we identified a number of issues that 

would need to be considered if the fair value approach were implemented 

for credit program subsidy cost estimates in the federal budget.

The primary task in the fair value approach to budgeting for credit 

programs is identifying the risk premium applicable to any particular 

program. Generally, most proponents of the fair value approach whom we 

interviewed suggested that private market information could be used to 

determine the risk premium. If the type of federal lending has a close 

counterpart in private credit markets, the difficulty of this task is reduced, 

but not eliminated. However, most proponents of the FCRA methodology 

suggested that it would be difficult to find a private market comparable for 

federal credit programs because the federal government tends to 

intervene in either inefficient or nonexistent markets. In the absence of a 

private market comparable, the analytical task of arriving at an 

appropriate aggregate risk premium would be significant and subjective. 

Moreover, even when a market comparable exists, the task of extracting 

the aggregate risk premium from the difference between the default-free 

Treasury interest rate and the observed market rate would be subjective. 

This complication arises because some of the costs and risks that may be 

compensated in the market rate might be significant to an individual 

investor but not relevant to the federal government, such as a more or 

less favorable tax treatment or liquidity. Overall, the experts we 

interviewed could not provide clear insight into how aggregate risk 

premium applicable to the federal government could be extracted from 

the market rate. Arriving at a verifiable and auditable estimate of the 

aggregate risk premium for each credit program is essential if there is to 

be confidence in decisions that depend on comparing their relative costs.

Under FCRA, when calculating subsidy cost estimates, all agencies use 

the same methodology to determine discount rates, which are based on 

interest rates of Treasury securities. Under the fair value approach, 

discount rates would be derived from a market comparable, if available, 

and each agency could use different methodologies to determine the 

aggregate risk premium. Of the experts we interviewed, proponents of the 

FCRA methodology generally believed that because of the addition of the 

risk premium in the fair value approach discount rate, fair value approach 

estimates would be more subjective than FCRA estimates, in part 

because more assumptions would be involved. Some proponents of the 

Page 66 GAO-16-41 Credit Subsidy Cost Estimates

Appendix III: Fair Value Approach 

Implementation Considerations

Determining the Aggregate 

Risk Premium

Subjectivity
Appendix III: Fair Value Approach 

Implementation Considerations

fair value approach, on the other hand, believed that fair value approach 

cost estimates would be as, or less, subjective than FCRA estimates 

because market information would inform the cost estimates. If the fair 

value approach resulted in more subjective estimates, this could create a 

wider variety of estimates, reducing transparency and consistency across 

programs. This inconsistency would be even greater if each agency 

estimating subsidy costs used a different methodology to determine the 

aggregate risk premium applicable to a program. Some experts we 

interviewed suggested, however, that the Office of Management and 

Budget (OMB) or the Department of the Treasury (Treasury) should be 

responsible for developing the fair value approach aggregate risk 

premium to add on to the discount rate for each credit program, which 

could reduce inconsistencies. Other experts suggested that OMB could 

develop guidance for agencies on appropriate methods for determining 

the aggregate risk premium to help ensure consistent and appropriate 

application of the fair value approach across programs.

Most experts we interviewed believed that implementing the fair value 

approach would require additional resources for agencies directly 

involved in making the subsidy cost estimates and for entities overseeing 

the fair value approach estimation process, such as OMB. The types of 

additional resources that would be needed include additional technical 

training for current employees, hiring of new staff, use of private-sector 

experts, and funds to cover additional administrative costs associated 

with development of fair value approach methodologies and estimates. 

Some experts stated that the resources used to implement the fair value 

approach would be better used by agencies to either (1) improve their 

estimates of expected cash flows used in both the FCRA or fair value 

approach subsidy cost estimates or (2) gain a more thorough 

understanding of, and reporting on, the benefits of credit programs.

Under FCRA, the discount rate is locked—meaning that the discount rate 

is determined and cannot be changed—after a cohort of loans is 

substantially disbursed. This helps ensure that the reasons for 

reestimates are limited to changes in estimation methodologies or actual 

loan performance, rather than fluctuations in interest rates, which are 

outside the control of agencies. Based on our interviews, there were 

differing views as to whether the discount rate should be locked or should 

fluctuate under the fair value approach. Under the fair value approach, if 

the discount rate was allowed to fluctuate, reestimates could fluctuate 

significantly year to year based on the market. This volatility in the 

Page 67 GAO-16-41 Credit Subsidy Cost Estimates

Resources

Locking the Discount Rate
Appendix III: Fair Value Approach 

Implementation Considerations

reestimates would be caused by market conditions, which are outside the 

control of agencies. In addition, it would be more difficult to determine 

whether reestimates were due to estimates of expected cash flows that 

differed from actual loan performance or changes in the aggregate risk 

premium. Under the fair value approach, the accuracy of the estimate of 

the aggregate risk premium cannot be objectively assessed. For example, 

under FCRA agencies perform comparisons of estimated and actual loan 

performance to assess the estimation process. Because the aggregate 

risk premium reflects a noncash cost, there is no method that can be 

used to verify the reasonableness of the aggregate risk premium 

estimate. In addition, updating the risk premium increases the 

administrative activities and would require additional resources. 

Conversely, under the fair value approach if the discount rate were locked 

in order to avoid this volatility in the reestimates and to reduce workload 

burdens, then the resulting reestimates would be based on out-of-date 

risk information. The financial accounting for credit programs currently 

mirrors FCRA and budgetary accounting. If the financial accounting were 

to be revised to incorporate any changes to implement fair value 

approach subsidy cost estimates for the budget, then not updating the 

aggregate risk premium would result in cost estimates based on 

noncurrent risks. This would be difficult for an agency to support during a 

financial statement audit because auditors would expect estimates to be 

based on currently available risk information.

As previously discussed, the financial accounting for credit programs is 

consistent with the budgeting for credit programs. Auditing credit program 

balances as part of an agency’s financial statement audit includes 

determining whether direct loans and loan guarantees outstanding are 

properly reported in the agency’s financial statements and footnotes. This 

auditing goal would not change if the fair value approach were adopted 

for financial reporting purposes. One expert noted that with the fair value 

approach, external auditors would need to focus on assessing whether 

agencies have identified an appropriate private market comparable to 

identify the aggregate risk premium, or if the agency claims there was no 

market comparable, the auditor will need to verify the reasonableness of 

that claim. Under the fair value approach, each agency could identify its 

own methodologies to identify a private market comparable and to derive 

the aggregate risk premium to add to the discount rate for a particular 

program. However, the current cash budgeting process allows federal 

credit program officials and auditors to see the outflows and inflows of 

accounts and permits the comparison of actual cash flows to estimated 

cash flows with the goal of verifying the reasonableness of subsidy cost 

Page 68 GAO-16-41 Credit Subsidy Cost Estimates

Auditability
Appendix III: Fair Value Approach 

Implementation Considerations

estimates and improving estimates going forward. With the fair value 

approach, there would be no mechanism to verify the reasonableness of 

the aggregate risk premium because it does not correlate to any cash 

flow of the program. Depending on how well agencies were able to 

(1) find a private-sector comparable, (2) establish methodologies to derive 

the aggregate risk premium, and (3) adequately document their decisionmaking process and resulting aggregate risk premiums, this could create 

financial statement auditability issues for agencies.

Under the fair value approach, the aggregate risk premium included in 

discount rates would be derived from a market comparable, if available. If 

no market comparable is available, this task would be more complicated 

and assumptions would need to be made. Some experts we spoke with 

believed that market information could vary more widely than interest 

rates on Treasury securities, resulting in greater volatility in original 

subsidy estimates year to year. In addition, depending on how the fair 

value approach is implemented during the reestimate process, if the 

aggregate risk premium is updated for annual reestimates, many experts 

we interviewed believed that reestimates would be more volatile from 

year to year. If the fair value approach resulted in more volatile subsidy 

estimates and reestimates, this could lead to greater swings in the deficit 

than are currently experienced under FCRA.

Under the fair value approach, the financing account would include the 

subsidy cost associated with the noncash cost reflected in the aggregate 

risk premium. Therefore, when a loan is fully repaid, and if actual cash 

flows were as initially estimated, there would be an additional amount in 

the financing account that represents a social cost and not a cash cost to 

Treasury. Social costs do not produce fiscal effects insofar as they are 

not cash receipts or disbursements from Treasury. Some proponents of 

the FCRA methodology referred to this as a phantom cost, which could 

cause swings in the federal deficit depending on how the social cost is 

cleared from the financing account. This could (1) occur immediately after 

the loans are disbursed, (2) be amortized over the life of the loan cohort 

through the reestimate process, or (3) be cleared by a closing reestimate 

after the entire loan cohort was repaid. To avoid misrepresenting the 

fiscal effect on the federal deficit, the social cost in the financing account 

would have to be liquidated by means of an offsetting “phantom” receipt 

immediately after the loans are disbursed. If the social cost is amortized 

over the life of a cohort or cleared at the end of the cohort, this would be 

reflected in downward reestimates for programs. Several of the 

Page 69 GAO-16-41 Credit Subsidy Cost Estimates

Volatility

Timing of Recognition of 

the Fair Value Approach 

Downward Reestimate
Appendix III: Fair Value Approach 

Implementation Considerations

proponents of the fair value approach whom we interviewed were 

indifferent as to when this downward reestimate took place as it would be 

outside the congressional decision-making process.

Under FCRA, the discount rate is also used as the interest rate to 

calculate interest income and expense on financing account balances so 

that the financing account will break even over time as it uses its 

collections to repay its Treasury borrowing. Under the fair value 

approach, the financing account interest rate could continue to be based 

on the FCRA-defined discount rate based on interest rates on Treasury 

securities, as was done with Troubled Asset Relief Program, or it could be 

based on discount rates including the aggregate risk premium. If the 

financing account interest rate is based on the FCRA discount rate, then 

recording the annual interest income and expense on the financing 

account helps to amortize the additional amount in the financing account 

that represents the noncash social cost. If the interest rate includes the 

aggregate risk premium, this would in essence monetize the social cost 

but would result in interest payments between agencies and Treasury to 

be based on rates not tied to Treasury borrowing costs. Based on our 

interviews, most experts did not have a conclusive answer or did not 

provide an answer as to what the financing account interest rate should 

be under the fair value approach. Many proponents of the fair value 

approach did not have an opinion on which rate should be used because 

the financing account transactions are outside the congressional 

decision-making process.

Some federal credit programs, such as the Department of Energy’s Loan 

Guarantee Program, have statutory mandates to charge borrowers fees 

at a level that will result in an initial subsidy cost of zero. Other programs, 

such as the Department of Housing and Urban Development’s Mutual 

Mortgage Insurance Fund loan guarantee program, have statutory 

mandates to charge fees at a level to help establish reserves for 

unexpected future losses. For programs with these types of requirements, 

agencies estimate expected loan performance cash flows and then 

determine fees that are necessary to generate the required subsidy rate. 

Under the fair value approach, while the expected loan performance cash 

flows would be the same, because the discount rate includes the 

aggregate risk premium, the cost appears higher. As a result, agencies 

would need to charge borrowers higher fees to cover the initially 

estimated noncash social costs of a program. However, these noncash 

social costs would then be offset, or cleared, during the reestimate 

Page 70 GAO-16-41 Credit Subsidy Cost Estimates

Financing Account Interest 

Rate

Programs with Specific 

Subsidy Rate 

Requirements
Appendix III: Fair Value Approach 

Implementation Considerations

process, meaning that borrowers would be charged more than is needed 

to cover the initially estimated cash costs of the program. These higher 

fees could affect borrower demand for the credit program. The experts we 

interviewed stated that this was a congressional decision on how fees 

should be charged. The experts also believed that borrower fees should 

not be returned if the estimated cost of a program turned out to be lower 

than originally estimated in part because of the administrative burden and 

the fact that if costs were underestimated, the government would not 

request more fees from borrowers.

Recent concurrent budget resolutions have included spending cap limits 

on discretionary spending, which are enforceable during the 

congressional budget process. One expert pointed out that when FCRA 

was implemented, there was an adjustment to the spending caps then in 

place to reflect this “change in concept.” If the fair value approach were 

implemented and were considered a “change in concept,” the Budget 

Control Act of 2011 provided that the President’s budget could include 

adjustments to discretionary spending limits, subject to consultation with 

the Senate and House, to reflect this conceptual change.

Page 71 GAO-16-41 Credit Subsidy Cost Estimates

1 Because of the 

expected higher costs under the fair value approach, some experts 

speculated that these caps would likely be raised.

The Federal Accounting Standards Advisory Board (FASAB)2established 

the primary accounting standard for federal credit programs, Statement of 

Federal Financial Accounting Standards No. 2, Accounting for Direct 

Loans and Loan Guarantees, which became effective in fiscal year 1994. 

When this standard was issued, FASAB stated that it recognized the 

value of having financial accounting support the budget. It also endorsed 

the logic underlying FCRA and recommended that accounting standards 

for credit be consistent with budgeting under FCRA. FASAB also stated 

that as more experience is gained, some modifications in budgetary 

requirements may be needed and that so long as the modifications are 

 

1

Pub. L. No. 112-25, § 101 (Aug. 2, 2011) (amending the Balanced Budget and Emergency Deficit 

Control Act of 1985, Pub. L. No. 99-187, § 251(b)(1) (Dec. 12, 1985)), classified as 

amended at 2 U.S.C. § 901(b)(1).

2

FASAB was created by OMB, Treasury, and GAO to develop accounting standards for the federal 

government. These accounting standards are considered generally accepted accounting 

principles for federal entities.

Spending Caps

Consistency between 

Federal Budget and 

Financial Accounting 

Standards
Appendix III: Fair Value Approach 

Implementation Considerations

made on a credit reform basis and do not materially affect the basic 

recognition and measurement principles embodied in the accounting 

standards, it intended that accounting practices for direct loans and loan 

guarantees should change as needed to remain consistent with the 

budget. If the fair value approach were implemented for the budget, 

FASAB would need to determine if that approach is consistent with the 

basic recognition and measurement principles embodied in the 

accounting standards. Having the accounting standards for credit 

programs mirror the budgeting for credit programs means that the 

financial statement audit can help provide assurance that the agencies’ 

budgeted amounts are reasonable.

Page 72 GAO-16-41 Credit Subsidy Cost Estimates
Appendix IV: GAO Contacts and Staff 

Acknowledgments

Cheryl E. Clark, (202) 512-9377 or clarkce@gao.gov

Susan J. Irving, (202) 512-6806 or irvings@gao.gov

Susan Offutt, (202) 512-3763 or offutts@gao.gov

In addition to the contacts named above, Marcia Carlsen (Assistant 

Director), Carol Henn (Assistant Director), Ardith Spence (Assistant 

Director), Maria Belaval, Mark Cheung, David Chrisinger, Oliver Culley, 

Robert Dacey, Francine DelVecchio, Melissa Emrey-Arras, Natasha 

Guerra, Cole Haase, Debra Hoffman, Wilfred Holloway, Karen JarzynkaHernandez, Jason Kelly, Jason Kirwan, Dragan Matic, Rebecca Perkins, 

Michael Reed, Oliver Richard, Mathew Scirè, Monasha Thompson, Frank 

Todisco, Matthew Ward, and Steven Westley made key contributions to 

this report.

Page 73 GAO-16-41 Credit Subsidy Cost Estimates

Appendix IV: GAO Contacts and Staff 

Acknowledgments

GAO Contacts

Staff 

Acknowledgments
Appendix V: Accessible Data

Data Table for Highlights Figure: Fluctuations in Direct Loan and Loan Guarantee 

Page 74 GAO-16-41 Credit Subsidy Cost Estimates

Programs’ Annual Net Reestimates, 2006-2014Figure 1: Federal Direct Loans and 

Loan Guarantees Outstanding, 2001-2014

Direct Loans Loan Guarantees

2006 2464 -3004

2007 -11 3966

2008 131 4122

2009 -7377 7653

2010 -9076 -1917

2011 -3291 -3596

2012 -9157 20175

2013 6352 2575

2014 20294 -1709

Data Table for Figure 1: Federal Direct Loans and Loan Guarantees Outstanding, 

2001-2014

Note: Dollars in billions

Direct Loans Loan Guarantees Total

2001 244 904 1148

2002 249 936 1185

2003 251 898 1149

2004 266 936 1202

2005 258 938 1196

2006 261 939 1200

2007 270 950 1220

2008 308 1149 1457

2009 561 1451 2012

2010 713 1628 2341

2011 777 1732 2509

2012 860 1805 2665

2013 985 1834 2819

2014 1106 1827 2933

Appendix V: Accessible Data

Data Tables
Appendix V: Accessible Data

Data Table for Figure 6: Direct Loan Programs Representing a Significant 

Page 75 GAO-16-41 Credit Subsidy Cost Estimates

Percentage of Lifetime Upward and Downward Reestimates, 2001-2014

Category Percentage

Dollars (in 

billion)

Upward Re-estimates Direct Loan Student Program 70.8 23.1

Direct Loans 8.7 2.8

Government Sponsored 

Enterprises

4.8 1.6

Disaster Loans 3.3 1.1

38 Remaining Programs 12.4 4.0

Downward ReestimatesGSE MBS Purchases 54.5 16.1

Federal Family Education Loan 17.4 5.1

Advanced Technology Vehicles 

Manufacturing

9.1 2.7

Federal Family Education Loan 6.9 2.0

55 Remaining Programs 12.1 3.6

Data Table for Figure 7: Loan Guarantee Programs Representing a Significant 

Percentage of Lifetime Upward and Downward Reestimates, 2001-2014

Category Percentage

Dollars (in 

billion)

Upward Re-estimates Mutual Mortgage Insurance 

Fund

65.2 68.2

General and Special Risk 

Insurance

10.1 10.5

Mutual Mortgage Insurance –

Reverse Mortgages

6.8 7.1

Housing Guaranteed Loans 4.6 4.8

7(a) Loan Guarantee Program 3.9 4.1

30 Remaining Programs 9.4 9.8

Downward Re-estimates Federal Family Education Loan 

Program

90.9 59.6

Mortgage Backed Securities 

Guarantees

3.0 2.0

Export Credit Guarantee 

Program (GSM-102)

1.3 0.9

38 Remaining Programs 4.8 3.0
Appendix V: Accessible Data

Data Table for Figure 8: Fluctuations in Direct Loan and Loan Guarantee Programs’ 

Page 76 GAO-16-41 Credit Subsidy Cost Estimates

Annual Net Reestimates, 2006-2014

Direct Loans (in millions) Loan Guarantees (in millions)

2006 2464 -3004

2007 -11 3966

2008 131 4122

2009 -7377 7653

2010 -9076 -1917

2011 -3291 -3596

2012 -9157 20175

2013 6352 2575

2014 20294 -1709

Data Table for Figure 10: 2008 Direct Loan and Loan Guarantee Programs’ Reestimates during the Financial Crisis, 2006-2014

Category 2006 2007 2008 2009 2010 2011 2012 2013 2014

Direct loans Education 2416.1 651.4 815.8 238.4 -

11431.2

4238.3 -7661.5 4585.4 18681.6

Other 274.6 -103.5 157.1 -8233.0 2501.5 -7712.4 -505.2 9.8 299.6

Energy, Transportation, 

Infrastructure; Housing; 

International; and Small 

Business and Agriculture

-226.7 -558.5 -842.3 617.2 -146.4 182.7 -990.2 1756.3 1312.8

Loan 

Guarantees

Education -

3100.2

125.7 -

14027.6

-8219.5 -

16788.7

-

13401.9

-8804.5 313.6 -1577.4

Housing 613.5 3548.3 16879.9 10659.0 10896.0 8531.6 28120.1 3189.1 2011.5

Small Business and 

Agriculture

-349.4 -423.9 1021.1 4328.1 4281.9 1688.4 -584.8 -640.6 -1715.0

Energy, Transportation, 

Infrastructure; International; 

and Other

-167.8 715.5 249 885.3 -306 -414.3 1443.7 -286.7 -428.3

Data Table for Figure 14: Percentage Point Differences between Direct Loan and 

Loan Guarantee Programs’ Original and Most Recent Reestimated Subsidy Rates, 

2001-2014

Percentage Difference between original estimate 

and reestimate

Loan 

Guarantees

Direct 

Loans

-47.5 to -49.99 1 0
Appendix V: Accessible Data

Page 77 GAO-16-41 Credit Subsidy Cost Estimates

Percentage Difference between original estimate 

and reestimate

Loan 

Guarantees

Direct 

Loans

-45.0 to -47.49 0 1

-42.5 to -44.99 0 0

-40.0 to -42.49 0 1

-37.5 to -39.99 0 0

-35.0 to -37.49 1 1

-32.5 to -34.99 0 1

-30.0 to -32.49 1 0

-27.5 to -29.99 0 1

-25.0 to -27.49 0 0

-22.5 to -24.99 1 1

-20 to -22.49 0 1

-17.5 to -19.99 0 2

-15.0 to -17.49 0 5

-12.5 -14.99 1 2

-10.0 to -12.49 0 2

-7.5 to -9.99 3 6

-5.0 to -7.49 4 16

-2.5 to -4.99 9 14

-2.49 to 2.49 41 28

2.5 to 4.99 3 4

5.0 to 7.49 4 6

7.5 to 9.99 1 5

10.0 to 12.49 1 1

12.5 to 14.99 2 1

15.0 to 17.49 0 0

17.5 to 19.99 0 0

20 to 22.49 1 1

22.5 to 24.99 0 1

25.0 to 27.49 0 0

27.5 to 29.99 0 0

30.0 to 32.49 0 0

32.5 to 34.99 0 0

35.0 to 37.49 0 0

40.0 to 42.49 0 0

42.5 to 44.99 0 0

45.0 to 47.49 0 0
Appendix V: Accessible Data

Page 78 GAO-16-41 Credit Subsidy Cost Estimates

Percentage Difference between original estimate 

and reestimate

Loan 

Guarantees

Direct 

Loans

47.5 to 49.99 0 0

50.0 to 52.49 0 0

52.5 to 54.99 0 0

55.0 to 57.49 1 0
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May 22, 2014.

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May 1, 2014.

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Rehabilitation. GAO-14-256. Washington, D.C.: March 6, 2014.

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Federal Student Loans: Borrower Interest Rates Cannot Be Set in 

Advance to Precisely and Consistently Balance Federal Revenues and 

Costs. GAO-14-234. Washington, D.C.: January 31, 2014.

FHA Mortgage Insurance: Applicability of Industry Requirements Is 

Limited, but Certain Features Could Enhance Oversight. GAO-13-722. 

Washington, D.C.: September 9, 2013.

COMPETES Reauthorization Act: Federal Loan Guarantees for 

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Department of Energy: Status of Loan Programs. GAO-13-331R. 

Washington, D.C.: March 15, 2013.

Department of Energy: Advanced Technology Vehicle Loan Program 

Implementation Is Under Way, but Enhanced Technical Oversight and 

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Page 79 GAO-16-41 Credit Subsidy Cost Estimates

Related GAO Products
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July 13, 2007.

Mortgage Financing: FHA’s $7 Billion Reestimate Reflects Higher Claims 

and Changing Loan and Performance Estimates. GAO-05-875. 

Washington, D.C.: September 2, 2005.

SBA Disaster Loan Program: Accounting Anomalies Resolved but 

Additional Steps Would Improve Long-Term Reliability of Cost Estimates. 

GAO-05-409. Washington, D.C.: April 14, 2005.

Mortgage Financing: Actions Needed to Help FHA Manage Risks from 

New Mortgage Loan Products. GAO-05-194. Washington, D.C.: 

February 11, 2005.

Export-Import Bank: OMB’s Method for Estimating Bank’s Loss Rates 

Involves Challenges and Lacks Transparency. GAO-04-531. Washington, 

D.C.: September 30, 2004.

Small Business Administration: Model for 7(a) Program Subsidy Had 

Reasonable Equations, but Inadequate Documentation Hampered 

External Reviews. GAO-04-9. Washington, D.C.: March 31, 2004.

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.

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

Other Options Should Be Examined. GAO-04-101. Washington, D.C.: 

October 31, 2003.

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Page 80 GAO-16-41 Credit Subsidy Cost Estimates
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2001.

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2001.

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Small Business Loan Guarantee Program. GAO/GGD-00-158.

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1998.

Budget Issues: Budgetary Treatment of Federal Credit Programs. 

GAO/AFMD-89-42. Washington, D.C.: April 10, 1989.

Page 81 GAO-16-41 Credit Subsidy Cost Estimates (191043)
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