FEDERAL STUDENT 

LOANS

Borrower Interest 

Rates Cannot Be Set 

in Advance to 

Precisely and 

Consistently Balance 

Federal Revenues 

and Costs

Report to Congressional Committees

January 2014

GAO-14-234

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-14-234, a report to 

congressional committees.

January 2014

FEDERAL STUDENT LOANS

Borrower Interest Rates Cannot Be Set in Advance to 

Precisely and Consistently Balance Federal Revenues 

and Costs 

What GAO Found

Total Direct Loan administrative costs grew from $314 million to $864 million 

from fiscal years 2007 to 2012, but federal costs per borrower have generally 

remained steady or fallen. The increase in total administrative costs largely 

results from an increase of over 300 percent in the number of Direct Loans 

during that same time period. One key factor contributing to this loan volume 

increase was a law that ended student loan originations under a federally 

guaranteed loan program resulting in new originations being made under the 

Direct Loan program. Loan servicing—which includes activities like counseling 

borrowers on selecting repayment plans, processing payments, and collecting on 

loans in delinquent status—is the largest category of administrative costs, 

comprising 63 percent of total Direct Loan administrative costs in fiscal year 

2012. While total administrative costs have increased, costs per borrower and 

other unit costs have remained steady or declined. For example, the servicing 

cost per borrower has remained roughly $25 over the six-year period we 

examined. However, a number of factors, including a new payment structure for 

loan servicing contracts to reward servicers for keeping more borrowers in 

repayment status, have created some uncertainty about the servicing cost per 

borrower in coming years.

Separate from administrative costs, estimated subsidy costs vary by loan 

cohort—a group of loans made in a single fiscal year—and change over time. 

Based on the Department of Education’s (Education) recent estimates, the 

government would generate subsidy income for the 2007 to 2012 Direct Loan 

cohorts as a group. However, estimates will change, because current subsidy 

cost estimates for these cohorts are based predominantly on assumptions about 

future revenue and costs. Actual subsidy costs will not be known until all cash 

flows have been recorded, generally after loans have been repaid. This may be 

as many as 40 years from when the loans were originally disbursed, because 

many borrowers do not begin repayment until after leaving school, and some 

face economic hardships that extend their payment periods. Subsidy cost 

estimates fluctuate over time due to the incorporation of updated data on actual 

loan performance and the government’s cost of borrowing, as well as revised 

assumptions about future revenue and costs, through the annual reestimate 

process. As a result, there can be wide variations in the estimated subsidy costs 

for a given cohort over time. For example, the 2008 loan cohort was estimated to 

generate $9.09 of subsidy income per $100 of loan disbursements in one year, 

but in the next year that same cohort had an estimated subsidy cost of 24 cents 

per $100 of loan disbursements, a swing of $9.33. Volatility in subsidy cost 

estimates for a given cohort is generally expected to decrease over time as more 

actual loan performance data become available.

Because Direct Loan costs fluctuate with changes in certain variables, borrower 

interest rates cannot be set in advance to balance government revenue with 

costs consistently over the life of the loans. In a simulation of how loan costs 

respond to changes in selected variables, the costs were highly sensitive to 

changes in the government’s cost of borrowing. This, coupled with cost estimates 

regularly updated to reflect loan performance data, means the total costs 

associated with Direct Loans are in flux until updates are recorded through the 

end of the loans’ life cycle, which takes several decades. Therefore, the

View GAO-14-234. For more information, 

contact Melissa Emrey-Arras at (617) 788-

0534 or emreyarrasm@gao.gov.

Why GAO Did This Study

Federal student loans issued under the 

Direct Loan program play a key role in 

ensuring access to higher education for 

millions of students. The costs of the 

program to the government include 

administrative costs like loan servicing. 

They also include subsidy costs, which 

are the estimated long-term costs to the 

government of providing loans, such as 

the government’s cost of borrowing and 

defaults on loans. Some have questioned 

whether borrower interest rates can be 

more precisely set to cover these costs 

without generating excess federal 

income. The Bipartisan Student Loan 

Certainty Act of 2013 required GAO to 

provide information on issues related to 

the cost of federal student loans. 

This report addresses (1) how the costs 

of administering the Direct Loan program 

have varied in recent years, (2) how 

estimated subsidy costs have varied in 

recent years, and (3) how changes in 

different variables influence the overall 

cost of the program and the borrower 

interest rate needed to cover those costs. 

GAO reviewed Direct Loan administrative 

cost data and analyzed subsidy cost data 

from Education for fiscal years 2007 

through 2012, which are presented in 

nominal dollars throughout the report. In 

addition, GAO worked with Education to 

illustrate how changes in variables such

as government borrowing costs could 

affect Direct Loan subsidy costs. GAO 

also examined whether borrower rates 

could be set so the government could 

cover Direct Loan costs without 

generating excess revenue (known as a 

breakeven analysis). GAO reviewed 

relevant federal laws, guidance, and 

reports; and interviewed Education and 

other agency officials. 

GAO does not make recommendations in 

this report. The Department of Education

agreed with our findings.
Highlights of GAO-14-234 (Continued) 

United States Government Accountability Office

borrower interest rates that would generate revenue to 

exactly cover total loan costs—known as breaking even—

would change over time. To determine whether or not a 

set of conditions that would break even for one cohort 

would also break even for another cohort under different 

circumstances, GAO used data forecasted for future years 

to experiment with certain aspects of the borrower interest 

rate for two separate cohort years.

• GAO selected cohort years 2014 and 2019 

because economic conditions may be different 

several years apart. 

 

• For these cohorts, the following three aspects of 

the borrower interest rate were altered: the index 

(the base market rate that student loan interest 

rates are pegged to), the mark-up rate (the 

percentage-point increase over the base rate that 

students are charged), and the differences in the 

mark-up rates among loan types, including 

undergraduate, graduate student, and parent 

loans. 

• GAO looked at how these changes to the borrower 

rates would affect total government costs, taking 

into account both administrative and subsidy 

costs. 

• Changing the index and mark-up rates helped 

achieve a breakeven point based on current cost 

estimates for the 2014 cohort; however, cost 

estimates for this cohort will change as updated 

data become available over the life of the loans. 

• When GAO applied the same index and mark-up 

rates that temporarily resulted in a breakeven point 

for the 2014 cohort to the 2019 cohort, it resulted 

in a net cost to the government. 

• The difference in outcome for these two cohorts is 

because Direct Loan costs are sensitive to 

variables, such as government borrowing costs,

that are projected to look very different for 2019 

than they did for 2014. 

• As illustrated in the simulation, the borrower 

interest rates that are needed to cover costs at 

one point in time may not be effective at another 

point in time and cannot be precisely determined 

in advance to enable the government to break 

even consistently. 

Available information on Direct Loan costs illustrates the 

difficulties of accurately predicting what these program 

costs will be, and how much borrowers should ultimately 

be charged to achieve a particular outcome. Specifically, 

fluctuations in the actual and expected costs of the student 

loan program over time make it challenging to target a 

particular borrower interest rate that would consistently 

break even. Making frequent changes to the borrower 

interest rate could help program costs more closely match 

revenues in the short term, but it could confuse potential 

borrowers and complicate efforts to make the program 

transparent to students. 
Page i GAO-14-234 Federal Student Loans

Letter 1 

Background 3

Total Direct Loan Administrative Costs Grew from $314 Million to 

$864 Million in Recent Years, but Costs per Borrower Have 

Generally Remained Steady or Fallen 11

Estimated Subsidy Costs Differ across Loan Cohorts and 

Fluctuate over Time 18

Because Direct Loan Costs Are Sensitive to Certain Variables, 

Borrower Interest Rates Cannot Be Set in Advance to 

Consistently Balance Government Revenue with Costs 26

Concluding Observations 31

Agency Comments and Our Evaluation 32

Appendix I Objectives, Scope, and Methodology 34

Appendix II Technical Appendix 40

Appendix III Comments from the Department of Education 45

Appendix IV GAO Contacts and Staff Acknowledgments 47

Tables

Table 1: Interest Rates on Direct Loans 5

Table 2: Selected Direct Loan Administrative Costs and Subsidy 

Elements 6

Table 3: Key Differences in CBO and Education Subsidy Cost 

Calculations under the Federal Credit Reform Act 10

Table 4: Selected Student Aid Administration Unit Costs, Fiscal 

Years 2007 to 2012 16

Table 5: Direct Loan Subsidy Cost Components 19

Table 6. Sensitivity Factors of Variables under Favorable and 

Less-Favorable Scenarios 28

Table 7: Variable Rates Used in Sensitivity Scenarios 37

Table 8: Scenarios for Breakeven Analysis 39

Contents
Page ii GAO-14-234 Federal Student Loans

Table 9: Data for Figure 1, Direct Loan Full Administrative Costs 

by Category, Fiscal Year 2007- Fiscal Year 2012 (dollars 

in millions) 40

Table 10: Data for Figure 2, Number of Outstanding Direct Loans 

by Loan Type (in millions) and Direct Loan Full 

Administrative Costs, Fiscal Year 2007 - Fiscal Year 2012 40

Table 11: Data for Figure 3, Current Subsidy Rates Broken out by 

Cost Component, Direct Loans 2007-2012 41

Table 12. Data for Figure 4, Comparison of Borrower and 

Discount Rates, 2007-2012 41

Table 13: Data for Figure 5, Original and Reestimated Subsidy 

Rates, Direct Loans, 2007-2012 Cohorts 42

Table 14: Cost Effects of Variables in “Less Favorable” Scenario 42

Table 15: Cost Effects of Variables in the “Favorable” Scenario 43

Table 16: Loan Parameters to Break Even for 2014 Have Different 

Effects for 2019 44

Figures

Figure 1: Total Direct Loan Program Administrative Costs by 

Category, Fiscal Year 2007 to Fiscal Year 2012 12

Figure 2: Number of Outstanding Direct Loans by Loan Type and 

Direct Loan Program Administrative Costs, Fiscal Year 

2007 to Fiscal Year 2012 14

Figure 3: Current Subsidy Rates Broken out by Cost Component, 

Direct Loans, 2007-2012 20

Figure 4: Comparison of Borrower Interest Rates and Government 

Cost of Borrowing, 2007-2012 22

Figure 5: Original and Reestimated Subsidy Rates, Direct Loans, 

2007-2012 Cohorts 24

Figure 6. Loan Parameters to Break Even in 2014 Could Have 

Different Effects in 2019 31

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Page 1 GAO-14-234 Federal Student Loans

441 G St. N.W.

Washington, DC 20548

January 31, 2014

The Honorable Tom Harkin

Chairman

The Honorable Lamar Alexander

Ranking Member

Committee on Health, Education, Labor, and Pensions

United States Senate

The Honorable John Kline 

Chairman

The Honorable George Miller

Ranking Member

Committee on Education and the Workforce

House of Representatives

Federal student loans play a key role in ensuring access to 

postsecondary education for millions of students each year. In the 2012-

2013 award year, the U.S. Department of Education (Education) reported 

disbursing more than $94 billion in student loans to nearly 17 million 

student borrowers and their parents under the William D. Ford Federal 

Direct Loan (Direct Loan) Program.1 In recent years, the interest rates 

that borrowers paid on these loans were set at levels fixed through 

statute. However, interest rates on certain Direct Loans were set to 

double in July of 2013, contributing to concerns about the burden of rising 

student loan debt on borrowers.2

 

1 These loans are issued under Title IV of the Higher Education Act, as amended. 

In response, Congress enacted the 

Bipartisan Student Loan Certainty Act of 2013, which tied borrower 

interest rates on Direct Loans issued on or after July 1 to the interest rate 

on the 10-year Treasury note. Borrower interest rates are now equal to 

the 10-year Treasury note rate plus a mark-up that depends on the 

borrower and loan type. There are also caps on borrower interest rates, 

which protect borrowers when interest rates are high. However, questions 

2 Under the College Cost Reduction and Access Act, interest rates on certain Direct Loans 

to undergraduate students were lowered incrementally from 6.8 percent to 3.4 percent; 

however, these rate cuts were not made permanent. Pub. L. No. 110-84, § 201, 121 Stat. 

784, 790 (2007). The Moving Ahead for Progress in the 21st Century Act subsequently 

extended these rate cuts, but the cuts expired as of June 30, 2013. Pub. L. No. 112-141, § 

100301, 126 Stat. 405, 979 (2012). 
 

Page 2 GAO-14-234 Federal Student Loans

remain about how much students and their parents should be charged to 

borrow money from the government to finance students’ education. Some 

policy makers and higher education experts maintain that the interest rate 

charged to borrowers should cover—but not exceed—federal program

costs, which comprise administrative and subsidy costs. Administrative 

costs include costs such as processing loan applications and servicing 

existing loans. Subsidy costs represent the estimated long-term cost of 

extending credit over the life of a loan, excluding administrative costs.3

The Bipartisan Student Loan Certainty Act of 2013 required that GAO 

examine a variety of issues related to the cost of federal student loans to 

the federal government.

A 

clear understanding of both administrative costs and subsidy costs is 

necessary to understand the implications of setting borrower interest 

rates to achieve particular policy goals.

4

In conducting this work, we reviewed Education data on Direct Loan 

administrative costs and analyzed Education data on subsidy costs from 

fiscal years 2007 through 2012, the most recent years available.

This report addresses (1) how the costs of 

administering the Direct Loan program have varied in recent years, (2) 

how estimated subsidy costs associated with the Direct Loan program 

have varied in recent years, and (3) how changes in different variables 

influence the overall cost of the Direct Loan program and the borrower 

interest rate needed to cover those costs.

5

 

3 In this report, subsidy cost refers to lifetime subsidy costs, which would include initial 

estimates and any reestimates.

We 

assessed the reliability of Education’s administrative cost data and data 

related to subsidy costs estimates by (1) reviewing existing information 

about the data and the systems that produced them, and (2) interviewing 

agency officials knowledgeable about the data. We determined that the 

data were sufficiently reliable for the purposes of this report. To address 

our first research question, we reviewed Education data on Direct Loan 

administrative costs from fiscal years 2007 through 2012 to evaluate 

trends in costs for recent years. Education officials noted that they 

4 Pub. L. No. 113-28, § 4, 127 Stat. 506, 507. We focus on Direct Loans in this report 

because they represent the large majority of federal student loans currently issued by 

Education.

5 Interest rates were also set in a consistent way during this time period, facilitating 

subsidy cost comparisons.
 

Page 3 GAO-14-234 Federal Student Loans

calculate certain administrative costs for all loan programs, and do not 

track Direct Loan costs separately because doing so has not been 

necessary for management purposes. As Direct Loan administrative 

appropriations make up the large majority of funds appropriated to 

Education’s administrative account, we determined that these data were 

sufficient to illustrate Direct Loan administrative cost trends. For our 

second research question, we analyzed data from Education subsidy cost 

estimates and reestimates for the 2007-2012 Direct Loan cohorts, in 

order to understand trends in cost estimates. For our third research 

question, we worked with Education officials to alter key variables in the 

agency’s subsidy cost estimate to illustrate how changes in certain 

variables, such as risk of default, could affect the overall cost of the Direct 

Loan program. We used reported data from fiscal years 2007 through 

2012 to illustrate a range of possible government costs. See appendix I 

for more detail on these analyses. Throughout the report, cost figures are 

reported in nominal dollars. In addition to our various analyses, we 

interviewed officials at Education and the Congressional Budget Office 

(CBO) regarding key issues related to Direct Loan administrative and 

subsidy costs.6

We conducted this performance audit from August 2013 to January 2014 

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.

We also reviewed relevant federal laws and guidance, as 

well as past GAO reports for the purposes of all of our research 

questions.

Under the Direct Loan program, Education issues three main types of 

loans—Subsidized Stafford, Unsubsidized Stafford, and PLUS Loans.7

 

6 We spoke with CBO because they estimate subsidy costs to identify financial impacts of 

legislation and inform budget projections, among other purposes. Their estimation 

methodology differs from Education’s, and the resulting estimates are not comparable.

7 Education also issues consolidation loans, which allow borrowers to combine multiple 

existing federal student loans into one loan with one resulting monthly payment. 

Consolidation loans may allow borrowers to extend their repayment period to up to 30 

years, thereby lowering the borrower’s monthly payments.

Background
 

Page 4 GAO-14-234 Federal Student Loans

Subsidized Stafford Loans are available only to undergraduate student 

borrowers with demonstrated financial need.8 The government subsidizes 

these loans by not charging borrowers for the interest that accrues while 

they are still in school and during a 6-month grace period after leaving 

school.9 Unsubsidized Stafford Loans are available to both undergraduate 

and graduate student borrowers, irrespective of financial need. Borrowers 

are responsible for paying all interest from disbursement to final payoff of 

the loan. Finally, PLUS Loans are available to graduate students and 

parents of dependent undergraduates, who must pay all interest on these 

loans as well.10

Borrower interest rates on Direct Loans changed with the passage of the 

Bipartisan Student Loan Certainty Act of 2013, which tied rates to the 10-

year Treasury note rate and placed a cap on borrower rates.11

 

8 The amount of student financial need determined for federal student aid purposes is 

generally the difference between a student’s cost of attendance and an estimate of the 

student’s (and his or her family’s, in the case of a dependent student) ability to pay these 

costs—called the expected family contribution. To apply for federal student aid, students 

or families submit a Free Application for Federal Student Aid, which includes information 

on the student’s and/or family’s income, assets, and federal income tax expenses.

These

9 The Consolidated Appropriations Act, 2012 temporarily eliminated the grace period 

interest subsidy for Subsidized Stafford Loans disbursed on or after July 1, 2012 and 

before July 1, 2014. Pub. L. No. 112-74, div. F, tit. III, § 309(d), 125 Stat. 786, 1101. The 

government also does not charge borrowers for interest costs on Subsidized Stafford 

Loans during periods of authorized deferment, during which borrowers can temporarily 

suspend repayment if, for example, they pursue additional higher education, provide 

military service, or experience economic hardships.

10 Subsidy cost estimates take into account the effect of borrowers not paying interest on 

Subsidized Stafford Loans while they are in school, the 6-month grace period, or periods 

of authorized deferment. For Unsubsidized Stafford Loans and PLUS Loans, subsidy cost 

estimates take into account that borrowers pay all interest on these loans. Subsidy costs 

represent anticipated long-term costs to the government of extending credit over the life of 

a loan, and include a number of variables in addition to projected borrower interest 

payments. 

11 Pub. L. No. 113-28, § 2, 127 Stat. 506 (codified at 20 U.S.C. § 1087e(b)). Between July 

1, 2006 and June 30, 2013, borrower interest rates were set at fixed levels not tied to the 

interest rate on Treasury securities. For the 4 award years from July 1, 2008 to June 30, 

2012, the College Cost Reduction and Access Act incrementally lowered the fixed interest 

rates of Subsidized Stafford Loans made to undergraduate students from 6.8 percent to 

3.4 percent. Pub. L. No. 110-84, § 201, 121 Stat. 784, 790 (2007). In addition, the 

Moving Ahead for Progress in the 21st Century Act, extended the 3.4 percent interest rate 

for these loans from July 1, 2012 to June 30, 2013. Pub. L. No. 112-141, § 100301, 126 

Stat. 405, 979 (2012). For Direct Loans issued prior to July 1, 2006, interest rates are 

variable, and are adjusted annually according to the interest rate on the 91-day Treasury 

bill.
 

Page 5 GAO-14-234 Federal Student Loans

rates and caps vary by loan type and borrower characteristics, as seen in 

table 1 below. Undergraduate student borrowers pay the lowest interest 

rate, with graduate student and parent borrowers paying somewhat 

higher rates.

Table 1: Interest Rates on Direct Loans

Loan type (borrower) 

Percent charged 

over the 10-year 

Treasury note rate

Award Year 2013-

2014 borrower 

interest ratea Interest rate 

cap

Subsidized Stafford 

(undergraduate)

2.05% 3.86% 8.25%

Unsubsidized Stafford 

(undergraduate)

2.05% 3.86% 8.25%

Unsubsidized Stafford 

(graduate)

3.6% 5.41% 9.5%

PLUS (graduate or parent) 4.6% 6.41% 10.5%

Source: 20 U.S.C. § 1087e(b) and GAO analysis of interest rate information.

a

An award year is the school year for which federal financial aid is used to fund a borrower’s 

education. The 10-year Treasury note rate for the 2013-2014 award year is 1.81%.

There are a variety of repayment plan options available to eligible student 

loan borrowers. Under the standard repayment plan, borrowers typically 

repay loans over a period of up to 10 years. Key features of other plans 

are extended repayment periods and repayment amounts that are linked 

to borrowers’ income. For instance, under the income-contingent 

repayment plan, repayment amounts are calculated annually based on 

the borrower’s adjusted gross income, family size, and total Direct Loan 

amount. Repayment periods under these plans may be up to 25 years. By 

extending their repayment periods, borrowers may lower their monthly 

payments, but may pay more in interest over time.

The Direct Loan program has two main categories of costs: administrative 

costs and subsidy costs. See table 2 below for selected elements of these 

two types of costs. Some subsidy elements (like government borrowing 

Borrower Rate: The interest rate 

charged to federal student loan recipients.

Types of Direct Loan 

Costs
 

Page 6 GAO-14-234 Federal Student Loans

costs) raise subsidy costs, while others (like borrower principal 

repayments) lower them.12

Table 2: Selected Direct Loan Administrative Costs and Subsidy Elements

Administrative costs Subsidy elements and impact on net costs

Processing loan applications Government borrowing costs 

Originating and disbursing loans Defaulted loansa 

Servicing outstanding loans Loan forgiveness

School oversight and monitoring Borrower principal repayments 

Collecting on defaulted loans Borrower interest payments 

Borrower fees for new loans

Recoveries on defaulted loans

Source: GAO analysis of administrative and subsidy cost categories.

a

For defaulted loans, the government has strong collection powers and tools such as tax refund 

offsets and wage garnishments. Loans are only discharged under limited conditions, such as if a 

borrower dies, becomes totally and permanently disabled, or, in rare circumstances, declares 

bankruptcy. (For loans to be discharged through bankruptcy, a bankruptcy court must find that 

repaying the loans would impose undue hardship. This must be done at an adversary proceeding at 

which creditors may be present to challenge the request.)

The funding for Direct Loan administration is generally discretionary, 

meaning that Congress periodically appropriates the level of funding it 

deems appropriate. The funding for subsidy costs, on the other hand, is 

mandatory, meaning that funds are not appropriated annually. Instead, 

Congress has enacted permanent statutory authority to appropriate 

funding for loans to eligible borrowers.

 

12 Education incurs borrowing costs on funds provided by Treasury to finance its lending 

through the Direct Loan program. These borrowing costs (which we refer to in this report 

as government borrowing costs) are reflected in subsidy cost estimates through the 

discount rate used to determine the present value of expected future cash flows for each

loan cohort. It is based on a collection of interest rates that enable Education to separately 

“discount” each year’s expected cash flows to present value. These interest rates reflect 

the rates on marketable zero-coupon Treasury securities that were issued at the same 

time as loans in the cohort and that mature in the same year as the expected cash flows. 

Because the discount rate is based on a collection of interest rates, it differs from the 

interest rate on the 10-year Treasury note (to which Direct Loan borrower rates are 

“indexed,” or tied). 
 

Page 7 GAO-14-234 Federal Student Loans

The majority of the Direct Loan program’s administrative costs are funded 

by discretionary appropriations to Education’s Student Aid Administration 

account.13 The Student Aid Administration account provides funds to 

administer the Direct Loan program as well as other federal student aid 

programs including the Federal Family Education Loan Program.14

Administrative costs support activities such as educating students and 

families about how to obtain loans; processing loan applications; 

disbursing loans; administering existing guaranteed loans; servicing loan 

accounts; and taking action to prevent fraud, waste, and abuse. Costs to 

manage and collect payments on defaulted loans are also included in 

administrative costs.15

Education uses an activity-based costing model that tracks administrative 

cost by processes, such as application processing or loan servicing. In 

the model, Education calculates the full administrative cost of each 

process by first identifying its direct costs (or costs that can be tied to that 

specific process) and then allocating additional indirect costs, such as 

rent, equipment, and maintenance, to each process based on formulas 

intended to reflect how many indirect resources each process uses. Costs 

that include direct and indirect costs are called full costs. Education uses 

both full and direct costs to generate costs per unit, such as cost per 

application processed or borrower serviced.

As required by the Federal Credit Reform Act of 1990 (FCRA), Education 

estimates loan subsidy costs annually for inclusion in the President’s 

budget.16

 

13 Administrative cost data reported by Education during the period of our review also 

included some mandatory funding, including mandatory budget authority to fund the 

administrative costs of eligible Not-For-Profit loan servicers, which was provided under the 

Student Aid and Fiscal Responsibility Act (SAFRA Act), enacted as part of the Health 

Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, § 2212(b), 124 Stat. 

1029, 1080.

For Direct Loans, subsidy costs represent the estimated long14 Under the Federal Family Education Loan Program, Education guarantees loans that 

were issued by private lenders by committing to cover costs related to loan defaults and 

other write-offs. The SAFRA Act terminated the authority to make or insure new FFEL

loans after June 30, 2010. Id., § 2201, 124 Stat. 1029, 1074. 

15 Payments Education makes to private collection agencies to collect on defaulted loans 

are considered an element of subsidy costs.

16 2 U.S.C. § 661c. 

Direct Loan Administrative 

Costs

Administrative Costs: Loan program 

expenses that are excluded from subsidy cost 

calculations, such as costs related to 

processing loan applications or servicing 

existing loans.

Direct Loan Subsidy Costs
 

Page 8 GAO-14-234 Federal Student Loans

term cost to the government of extending credit over the life of the loan, 

excluding administration costs. Subsidy cost estimates that are recorded 

in a given year are calculated based on the net present value of lifetime 

estimated cash flows to and from the government that result from 

providing these loans to borrowers.17

The Federal Credit Reform Act of 1990 (FCRA) was intended to improve the 

measurement of the budgetary costs of federal credit programs. Prior to the 

implementation of FCRA, credit programs were reported in the budget on a cash basis. 

Thus, loan guarantees appeared to be free in the budget year of the guarantee, while 

direct loans appeared to be as costly as grants. As a result, costs were distorted and 

credit programs could not be compared meaningfully with other non-credit programs and 

with each other. FCRA recognized that the true cost of a loan or guarantee is not captured 

by its cash flows in any one year, but by the net value of its cash flows over the life of the 

loan. This value is known as the “subsidy cost”—that is, the estimated long-term cost to 

the government of a direct loan or loan guarantee, calculated in current dollars, excluding 

administrative costs. Administrative costs remain on a cash basis and are excluded from 

subsidy calculations.

For Direct Loans, cash flows from 

the government include loan disbursements and cash flows to the 

government include repayments of loan principal, interest and fee 

payments, and recoveries on defaulted loans.

Subsidy costs are influenced by a variety of variables, including 

government borrowing costs, the interest rate charged to student loan 

recipients, how quickly those recipients repay their loans, and how many 

ultimately default. A positive subsidy cost estimate indicates that the 

government anticipates a net cost, while a negative subsidy cost estimate 

indicates that the government anticipates generating net subsidy income, 

not counting administrative costs. To determine the overall cost of the 

Direct Loan program, both subsidy and administrative costs must be 

considered. For the government to break even on Direct Loans, net 

subsidy income should be equal to administrative costs.

Education calculates subsidy costs separately for each group of loans 

made in a particular fiscal year—referred to as a loan cohort. To estimate 

subsidy costs, Education has developed a Student Loan Model that 

contains a variety of assumptions. These assumptions are reflected 

through variables such as how quickly borrowers will repay their loans 

(and, thus, how much interest the government will collect), how many 

 

17 The discount rate is used in subsidy cost estimates to determine the present value of 

expected future cash flows for each loan cohort over the life of the loans. The discount 

rate is also generally the rate Education pays Treasury to finance its lending.

Subsidy Cost: The estimated long-term cost 

to the government of providing a loan, 

expressed in current dollars, and excluding 

administrative costs.
 

Page 9 GAO-14-234 Federal Student Loans

borrowers will default, and how successful default collection activities will 

be.

Education annually reestimates subsidy costs for each loan cohort until all 

loans in the cohort have been repaid, which may take decades. 

Reestimates take into account actual loan performance as well as 

changes in assumptions about future performance, such as how many 

borrowers will default, or how many will participate in extended repayment 

plans. Reestimates may result in increases or decreases in subsidy cost 

estimates.

In addition to Education’s subsidy cost estimates, CBO also estimates 

subsidy costs to identify the financial impact of legislation and inform 

budget projections, among other purposes. CBO and Education both 

estimate subsidy costs for the Direct Loan program following the 

requirements of FCRA; however, they use different estimation 

methodologies and assumptions.18 Officials from both organizations 

pointed to a number of key areas where their assumptions differed. See 

table 3 for examples of key differences. Officials cited a number of 

reasons for differences in these particular assumptions, including 

differences in economic forecasts and professional judgment when 

developing forecasting methodologies. Because of such differences, CBO 

and Education’s cost estimates for the program are not comparable.

 

18 While CBO prepares estimates according to FCRA methodology, it will also 

occasionally prepare estimates according to an alternate methodology. Under this 

approach, which it refers to as the “fair value” method, cash flows are discounted using 

market-based discount rates rather than discount rates based on Treasury securities. 

While fair value estimates would initially vary from FCRA estimates, at the end of the life 

of the loan, actual costs would be the same under both methodologies. Additionally, both 

FCRA and fair value estimates fluctuate when variables used to estimate subsidy costs 

change. 

Loan Cohort: A group of loans made in a 

particular fiscal year.
 

Page 10 GAO-14-234 Federal Student Loans

Table 3: Examples of Key Differences in CBO and Education Subsidy Cost Calculations under the Federal Credit Reform Act

Methodological differences Education approach CBO approach

Treatment of consolidation loans Consolidation loans are treated as a payoff of the 

existing loan and a creation of a new loan.

Consolidation loans are treated as a 

repayment option available to borrowers 

under the initial loan, not as a newly

created loan. 

Calculating net present value of 

future cash flows

The interest rate (discount rate) used to calculate 

the net present value of future cash flows for each 

cohort is updated when the loan cohort is 90% 

disbursed, and is locked thereafter.

The interest rates used to calculate the net 

present value of future cash flows for each 

cohort are based on a forecast of interest 

rates for each year of the projection 

period. 

Timing of net present value 

calculations (i.e., discount timing)

The net present value of cash flows is calculated at 

the beginning of each fiscal year.

The net present value of cash flows is 

calculated as of the end of each fiscal 

year. 

Treatment of certain contractor 

payments 

Payments to private collection agencies for default 

collection activities and payments to loan servicers 

when paying off a loan for consolidation are 

included in the subsidy calculations.

These payments are excluded from the 

subsidy calculations.

Borrower interest rates Education and CBO use different models to forecast student loan borrower interest rates.

Source: GAO analysis of information on Education and CBO subsidy cost calculation methodologies.
 

Page 11 GAO-14-234 Federal Student Loans

The Department of Education reported that full administrative costs (i.e. 

costs incorporating both direct and indirect administrative costs) for the 

Direct Loan program increased by $550 million from fiscal year 2007 to 

fiscal year 2012, to total $864 million in fiscal year 2012. These Direct 

Loan administrative costs represent 65 percent of the $1.3 billion19 in new 

budget authority made available to the Student Aid Administration 

account in fiscal year 2012, while administrative costs for other loan, 

grant, and loan guarantee programs and activities made up the 

remainder.20

 

19 According to Education, the department received a total of about $1.320 billion in new 

budget authority for student aid administration in fiscal year 2012. About $1.043 billion of 

this amount was made available by the Consolidated Appropriations Act, 2012, with the 

remainder coming from mandatory appropriations. Pub. L. No. 112-74, 125 Stat. 786, 

1097 (2011); id., § 527, 125 Stat. 786, 1115; 20 U.S.C. § 1087h. 

Loan servicing, which includes activities related to 

processing loan payments and maintaining borrower information, is the 

largest category of reported administrative costs, comprising 63 percent 

of total administrative costs in fiscal year 2012. Figure 1 below shows 

20 Other programs with administrative costs funded through the Student Aid 

Administration account include the: (1) Federal Family Education Loan Program, (2) Pell 

Grant Program, (3) Teacher Education Assistance for College and Higher Education 

Grants Program (TEACH), (4) Campus-based programs (Perkins Loan Program, 

Supplemental Educational Opportunity Grants Program, and Work-Study Program), (5) 

Leveraging Educational Assistance Partnerships Program/Special Leveraging Educational 

Assistance Partnerships Program (LEAP/SLEAP), (6) National Science and Mathematics 

Access to Retain Talent Grant Program (SMART), and (7) Academic Competitiveness 

Grants Program (ACG).

Total Direct Loan 

Administrative Costs 

Grew from $314 

Million to $864 Million 

in Recent Years, but 

Costs per Borrower 

Have Generally 

Remained Steady or 

Fallen

Total Direct Loan 

Administrative Costs Grew 

by $550 Million from Fiscal 

Years 2007 to 2012, 

Largely Driven by an 

Increase in the Number of 

Direct Loans

Direct Costs: Costs that can be tied to a 

specific output, such as loan application 

processing or loan servicing.
 

Page 12 GAO-14-234 Federal Student Loans

total Direct Loan Program costs by category from fiscal year 2007 to fiscal 

year 2012.

Figure 1: Total Direct Loan Program Administrative Costs by Category, Fiscal Year 

2007 to Fiscal Year 2012

Note: See appendix II for supporting data. All administrative costs are full costs generated by 

Education’s Activity Based Costing model for the Direct Loan program.

Total Direct Loan administrative costs reported by the Department of 

Education rose from $314 million to $864 million—a 175 percent 

increase—from fiscal year 2007 to fiscal year 2012. Loan servicing costs 

showed the greatest dollar increase at over $300 million (152 percent) 

during that time period. Although other categories—application 

processing, school oversight and monitoring, and originations and 

disbursements—showed smaller dollar increases, the percentage growth 

of these categories ranged from about 270 percent to about 440 percent.

Indirect Costs: Costs not tied to one 

specific output, including rent, equipment, 

and building maintenance.

Full Costs: Total resources used to 

produce an output, including both direct and 

indirect costs.
 

Page 13 GAO-14-234 Federal Student Loans

Only default collections, including the management and collection of 

defaulted loans and assistance to defaulted borrowers, stayed generally 

flat in total dollars.21

Education officials stated that total administrative costs are largely driven 

by loan volume and the number of borrowers and, therefore, costs have 

increased as the number of Direct Loans has increased.22

 

21 The default collections category does not include payments Education makes to private 

collection agencies, which are included in the subsidy cost calculation. 

The reported 

number of outstanding Direct Loans increased over 300 percent, from 19 

million to over 88 million, from fiscal year 2007 through fiscal year 2012.

As shown in figure 2 below, the largest loan volume increases were in 

Subsidized and Unsubsidized Stafford loans.

22 Borrowers may be eligible to take out multiple loans, resulting in differences between 

the number of borrowers and number of loans. 
 

Page 14 GAO-14-234 Federal Student Loans

Figure 2: Number of Outstanding Direct Loans by Loan Type and Direct Loan 

Program Administrative Costs, Fiscal Year 2007 to Fiscal Year 2012

Note: See appendix II for supporting data. All administrative costs are full costs, i.e. include direct and 

indirect costs. Cost data were generated by Education’s Activity Based Costing model for the Direct 

Loan program.

Several factors contributed to the increase in the number of Direct Loans.

For example, beginning in 2008, changes in the student loan market led 

numerous schools to transition from the Federal Family Education Loan 
 

Page 15 GAO-14-234 Federal Student Loans

program to the Direct Loan program.23 In addition, the Student Aid and 

Fiscal Responsibility Act terminated the authority to make or insure new 

loans under the Federal Family Education Loan program after June 30, 

2010, with subsequent federal student loans originated under the Direct 

Loan program. Education officials also stated that the economic downturn 

in 2008 coincided with an increase in student loan volume as individuals 

returned to school.

While total reported administrative costs increased from fiscal year 2007 

to fiscal year 2012, cost per borrower and other unit cost measures 

remained stable or fell. Unit costs are a measure Education uses to track 

costs such as cost per loan origination, cost per borrower serviced, and 

cost per application processed.24 See table 4 for a description of these 

unit cost measures.25 According to Education officials, increased loan 

volume resulted in a decrease in many unit costs. For example, total loan 

servicing costs for all programs supported by the Student Aid 

Administration account increased from fiscal year 2007 to fiscal year 

2012; however, the number of borrowers serviced for these programs 

also increased from 9.7 million in fiscal year 2008 to 29.7 million in fiscal 

2012. As a result, the annual servicing cost per borrower decreased 

slightly during that time, remaining at roughly $25 per borrower. While the 

overall flat or downward trend persisted over most of the years we 

studied, Education reported a slight increase in unit costs from fiscal year 

2011 to 2012, attributable to such changes as lower volumes of 

applications and originations.

 

23 The subprime mortgage crisis and the collapse of auction rate securities made it more 

difficult for lenders participating in the Federal Family Education Loan program to obtain 

capital to make loans. As a result, some lenders decided not to originate new federal 

student loans in the 2008 school year, and numerous schools transitioned to the Direct 

Loan program.

24 We report full unit costs to include indirect costs and to provide a comparison to the full 

overall administrative costs.

25 While some available unit cost data is specific to the Direct Loan program, other 

relevant unit cost measures reflect costs for all programs supported by the Student Aid 

Administration account, not solely Direct Loans. In these cases, separate unit cost data 

were not available for the Direct Loan program. Education officials reported that 

calculating unit costs specific to the Direct Loan program was unnecessary for 

management purposes.

Costs per Borrower and 

Other Unit Costs Have 

Generally Remained 

Stable or Fallen
 

Page 16 GAO-14-234 Federal Student Loans

Table 4: Selected Student Aid Administration Unit Costs, Fiscal Years 2007 to 2012 

Unit cost category FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Free Application for Federal Student Aid processinga

Cost of application processing per application $7.14 $6.94 $5.14 $6.03 $6.11 $6.19 

Direct Loan originations 

Cost of loan origination per loan b b $9.20 $6.33 $4.99 $6.11 

Direct Loan consolidation originations

Cost of loan origination per loan $130.51 $123.81 $69.94 $69.51 $51.91 $60.67 

Direct Loan PLUS originations

Cost of loan origination per loan b b $9.62 $6.29 $4.51 $5.48 

Loan servicinga

Cost of loan servicing activities per borrower $25.64 $26.37 $27.10 $26.43 $24.20 $25.09 

Default collectionsa

Cost of default collections per default dollar collected $0.18 $0.17 $0.17 $0.12 $0.12 $0.13 

Oversight and monitoring of schoolsa

Cost of oversight activities per school monitored b $10,052 $6,369 $9,671 $10,313 $10,694 

Source: Department of Education data.

Notes: All administrative costs are full costs. FY refers to fiscal year.

a

This measure includes cost data from the Direct Loan program, along with other programs supported 

by the Student Aid Administration account.

b

Data not available for this year.

Recent changes in loan servicing contracts, combined with other factors, 

have increased uncertainty about what servicing costs per borrower will 

be in coming years. Prior to 2009, all loans were serviced under a single 

contract, referred to as the Common Services for Borrowers (CSB) 

contract. Under the CSB contract, Education paid servicers based on loan 

volume, paying a smaller fee per borrower as the number of borrowers 

serviced increased. In order to accommodate increasing loan volume, 

Education began to contract with additional loan servicers in 2009.26

 

26 In its Fiscal Year 2014 Budget Request, Education reported that it contracts with 16 

servicers to perform a range of functions, including processing payments. These 

servicers are contracted through the Common Services for Borrowers contract, the Title IV 

Additional Servicers contracts, and the Not-For-Profit Servicer contracts. Education 

entered into the Title IV Additional Servicers contracts in 2009, and Direct Loans were first 

assigned to these servicers in 2010. In 2011, Education also began contracting with the 

Not-For-Profit servicers.

 The 

new contracts use a different pricing structure to encourage servicers to 
 

Page 17 GAO-14-234 Federal Student Loans

keep more borrowers in a repayment status.

27 For example, under one 

such contract, the servicers receive the highest rate for borrowers who 

are in-grace, in current repayment, or delinquent for 30 days or less, and 

the lowest rate for borrowers who have been delinquent for 270 days or 

more. Education officials stated that under the new contracts, they may

pay more per borrower but may also keep more borrowers in 

repayment.28 Education also recently reported that the large portfolio of 

Direct Loans originated after the move away from the Federal Family 

Education Loan Program is in the process of maturing from the cheaper 

“in-school” servicing cost status to the more expensive “in-repayment” 

servicing cost status. As a result of these changing circumstances—a 

new servicing payment structure, new servicers collectively managing an 

increasing volume of loans, and the maturing of the Direct Loan 

portfolio—whether future servicing costs per borrower will increase or 

decrease is uncertain, according to Education officials.

 

27 According to Education officials, the Title IV Additional Servicers contract also meets 

Education’s aim to increase competition among servicers by increasing the number of 

contractors. Education reports the relevant borrower status groupings as follows: inschool, in-grace/current repayment, deferment/forbearance, and delinquency. In-school 

status indicates the borrower is enrolled at least half-time and loan payments are 

postponed. In-grace refers to a grace period, usually 6 months for Direct Loans, after a 

borrower leaves school or drops below half-time enrollment when no loan payments are 

due. Deferment and forbearance statuses both entail a postponement of loan payments 

under certain circumstances. Delinquency status indicates that borrowers’ accounts have 

become past due on payment. In general, default occurs when a borrower reaches 270 

days of delinquency.

28 While loans in repayment have a higher administrative cost, loans that remain in 

repayment status and avoid delinquency or default also reduce the subsidy cost of the 

program to the government. 
 

Page 18 GAO-14-234 Federal Student Loans

The subsidy costs or income generated from Direct Loans varied between 

the 2007 to 2012 loan cohort years (a cohort being a group of loans made 

in a particular fiscal year). For example, based on Education’s most 

recent subsidy cost estimates, the 2008 loan cohort is currently estimated 

to result in the highest subsidy cost to the government, with a subsidy 

cost of about $44.4 million. In contrast, the 2012 loan cohort is estimated 

to generate the most subsidy income—about $23.6 billion—for the 

government.29

As of the end of fiscal year 2013, it is estimated that the government will 

generate about $66 billion in subsidy income from the 2007 to 2012 loan 

cohorts as a group.

(See table 5 for subsidy cost components and examples of 

what they include.)

30 However, current estimates for this group of loan 

cohorts are based predominantly on forecasted cash flow data derived 

from assumptions about future loan performance.31

 

29 Estimates of the subsidy cost in dollars were derived using Education cash flow data 

from the Office of Management and Budget (OMB) credit subsidy calculator. These data 

include information through the end of fiscal year 2013. The credit subsidy calculator is the 

discounting tool issued by OMB for agencies to calculate credit subsidy costs for direct 

loans. Subsidy rates and reestimates must be calculated with the credit subsidy calculator.

As more information 

on actual cash flows for these loans becomes available, subsidy cost 

estimates will change. As a result, it is unclear whether these loan cohorts 

will ultimately generate subsidy income, as currently estimated, or 

whether they will result in subsidy costs to the government. This will not 

be known with certainty until all cash flows have been recorded after 

30 A total of $454 billion in loans was disbursed for the 2007-2012 cohorts. 

31 Cost estimates will change because only a few years of actual data are currently 

available for the 2007 to 2012 cohorts. Subsidy costs are estimated based on forecasted 

cash flows for each loan cohort. Forecasted data are based on assumptions about future 

economic conditions and loan performance, such as the likelihood of borrowers defaulting 

on their loan. These assumptions about future conditions are based in part on historic 

data. Cash flows are estimated over the full life of the loan cohort, and Education reestimates subsidy costs every fiscal year based on actual loan performance and changes 

to assumptions about future performance. 

Estimated Subsidy 

Costs Differ across 

Loan Cohorts and 

Fluctuate over Time

Subsidy Costs Vary by 

Loan Cohort, and Current 

Estimates Show the 

Government is Expected 

to Generate Subsidy 

Income from Recent 

Cohorts

Reestimate: Annual recalculation of estimated 

lifetime loan subsidy costs for each cohort, 

incorporating updated information on actual loan 

performance and revised assumptions about 

future cash flows.
 

Page 19 GAO-14-234 Federal Student Loans

loans have been repaid or discharged—which may be as many as 40 

years from when the loans were originally disbursed.32

Table 5: Direct Loan Subsidy Cost Components

Subsidy cost component Example(s) of what is included:

Financing • Government borrowing costs

• Borrower scheduled interest payments

Fees • Cash flows from fees paid by borrowers for new loans

Defaults (net of recoveries) • Missed payments due to defaults or delinquency. 

Recoveries on defaults or delinquencies net of

payments made to private collection agencies for 

recovering on defaulted payments

All other costs • Prepayments and loan consolidations— when 

borrowers consolidate their loans and have a different 

payment schedule from their previous loan 

agreementa 

• Loan forgiveness

• Death, disability, and bankruptcy dischargesb

Source: GAO analysis of U.S. Department of Education data.

Note: The subsidy cost estimates are calculated and presented in the federal credit supplement, 

broken out into four components: financing costs, fees, defaults (net of recoveries), and “all other” 

costs. The federal credit supplement is part of the President’s Budget and provides summary 

information on Federal direct loan programs subject to FCRA, including information on subsidy cost 

estimates.

a

At the time of consolidation, Education treats the existing loans as paid off early and the newlyconsolidated loan takes on the characteristics of its new cohort.

b

Loans are only discharged under limited conditions, such as if a borrower dies, becomes totally and 

permanently disabled, or, in rare circumstances, declares bankruptcy. (For loans to be discharged 

through bankruptcy, a bankruptcy court must find that repaying the loans would impose undue 

hardship. This must be done at an adversary proceeding at which creditors may be present to 

challenge the request.)

As seen in figure 3 below, overall subsidy rates—subsidy costs as a 

percentage of loan disbursements—are generally estimated to decrease 

across the 2007 to 2012 loan cohorts. Moreover, later loan cohorts in this 

range are estimated to generate more subsidy income than the earlier 

 

32 According to Education, most borrowers do not enter repayment until several years 

after a loan is originated. Periods of deferment, delinquency, and default can further 

extend the loan repayment period. Because the Direct Loan program began originating 

loans in 1994 and a loan cohort’s life cycle can last up to 40 years, there are currently no 

Direct Loan cohorts for which actual lifetime costs are available. 
 

Page 20 GAO-14-234 Federal Student Loans

loan cohorts, as indicated by the increasingly negative subsidy rates.33

Figure 3: Current Subsidy Rates Broken out by Cost Component, Direct Loans, 

2007-2012

Our analysis of how the various components of subsidy costs differ 

across cohorts shows that, relative to the financing costs, the defaults, 

fees, and all other costs of the subsidy rate were relatively stable across 

the 2007 to 2012 loan cohorts. For example, these costs were estimated 

to vary between 1 to 2.4 percentage points across cohorts, while the 

financing costs were estimated to vary almost 19 percentage points 

across cohorts.

Note: This figure shows the most recent reestimated subsidy rates for the 2007 to 2012 cohorts 

broken out by the four cost components used by Education for budget estimates (financing costs, 

fees, defaults (net of recoveries), and all other costs). See appendix II for underlying data.

As seen in figure 3, the financing component of the subsidy cost is 

estimated to generally decrease across cohorts. Financing costs are 

related to the interest payments borrowers make on Direct Loans and the 

 

33 Positive subsidy cost estimates indicate that the government anticipates a cost, while 

negative subsidy estimates indicate that the government anticipates generating subsidy 

income.
 

Page 21 GAO-14-234 Federal Student Loans

government’s cost of borrowing to finance its lending. Past GAO work has 

found that the difference, or “spread,” between the borrower interest rate 

and government’s cost of borrowing was a key factor in determining 

whether there is a positive or negative subsidy for Direct Loans.34

The spread between the borrower interest rate and the government’s cost 

of borrowing varies by loan type, because different borrower rates are 

established by law for subsidized Stafford, unsubsidized Stafford, and 

PLUS loans. Figure 4 compares borrowers’ rates for the various Direct 

Loan types, including the average borrower rate weighted by loan type (or 

“weighted average”), with the government cost of borrowing. Specifically, 

as seen in figure 4, Direct Loan borrower rates decreased for subsidized 

Stafford loans as a result of statutory changes made during this time 

period.

As the 

spread increases, so does the difference between the interest payments 

Education receives from borrowers and the interest payments Education 

makes to Treasury.

35

 

34 GAO-01-197. 

35 For the four award years from July 1, 2008 to June 30, 2012, the College Cost 

Reduction and Access Act incrementally lowered the fixed interest rates of subsidized 

Stafford loans made to undergraduate students from 6.8 percent to 3.4 percent. Pub. L. 

No. 110-84, § 201, 121 Stat. 784, 790 (2007). In addition, the Moving Ahead for Progress 

in the 21st Century Act, extended the 3.4 percent interest rate for subsidized Stafford loans 

made to undergraduate students from July 1, 2012 to June 30, 2013. Pub. L. No. 112-

141, § 100301, 126 Stat. 405, 979 (2012). 
 

Page 22 GAO-14-234 Federal Student Loans

Figure 4: Comparison of Borrower Interest Rates and Government Cost of 

Borrowing, 2007-2012

Note: The weighted average represents the average borrower interest rate, weighted by volume for 

each loan type. Data are provided by loan cohort year. See appendix II for underlying data.

The spread between the government’s cost of borrowing and the 

weighted average borrower rate (across all Direct Loan types) increased 

between 2007 and 2009, when it peaked. During this time, the 

government’s cost of borrowing fell more sharply than borrower interest 

rates. In instances where the borrower rate is greater than the 

government borrowing costs, as is the case between 2007 and 2012, 

Education would be expected to receive more in interest payments from 

borrowers than what it pays in interest to Treasury, increasing the 

likelihood that revenues will exceed costs for the loan.

Education’s estimates of lifetime loan subsidy costs have varied over time 

based on updated information recognized during the reestimate process. 

Through the reestimate process, subsidy cost estimates are updated for 

each loan cohort to account for information on actual loan performance 

Subsidy Cost Estimates 

Fluctuate over Time Due 

to Regularly-Updated Data
 

Page 23 GAO-14-234 Federal Student Loans

and the government’s cost of borrowing.36

Reestimate Process 

Most cohorts from 2007 to 

2012 have experienced both downward and upward adjustments to the 

estimated subsidy costs over time due to these reestimates. Each year, 

the estimated lifetime subsidy cost for a cohort will change to reflect the 

most recent reestimate information. See textbox for more information on 

the reestimate process.

Reestimates reflect changes related to both interest rate assumptions and non-interest rate 

assumptions as actual cash flows are recorded after loans are disbursed. For example, reestimates 

show the difference between the estimated government borrowing costs (discount rate) when the 

original subsidy rate is calculated, and the final government borrowing costs that are determined 

when a loan cohort is substantially disbursed. 

• OMB guidance states that government borrowing costs are updated through reestimates 

when a cohort is at least 90 percent disbursed. Because of the timing of disbursement for 

Direct Loans, two different fiscal years of interest rate data feed into the final government 

borrowing costs used for the reestimates. For example, actual data on the final government 

borrowing costs for the 2007 loan cohort would be available in fiscal year 2009.

• Once the government borrowing costs have been determined, the rate is set for the life of 

the cohort. 

Reestimates also reflect differences in actual versus estimated loan performance. For example, when 

data get updated on the number of loans that were cancelled due to death, the information is included 

in technical reestimates. The effects of changes in this variable on the overall cost estimate vary

depending on how the mortality rate changes from year to year. Changes in other variables such as 

default rates and borrower participation in loan repayment plans also affect assumptions used for cost 

estimates. 

As shown in figure 5, there can be wide variations in the reestimated 

subsidy rates and, consequently, the estimated subsidy costs, for the 

same cohort over time. For example, the 2008 loan cohort was estimated 

to generate as much as $9.09 in subsidy income per $100 of loan 

disbursements based on the reestimate information published in the fiscal 

year 2011 President’s budget. However, in the estimates published in the 

fiscal year 2012 President’s budget, the same loan cohort was expected 

to generate a small cost of 24 cents per $100 dollars of loan 

disbursements, based on updated information. This represents a swing of 

$9.33 per $100 of loan disbursements. Similarly, the original subsidy rate 

estimate for the 2009 loan cohort indicated that the government would 

generate a subsidy income of almost $15 per $100 of loan 

disbursements. However, the revised estimate published in the fiscal year 

 

36 Loan performance refers to certain assumptions Education uses when estimating loan 

subsidy costs. These assumptions include information on default rates, borrower 

participation in different types of repayment plans, and volume by loan type, among 

others. 
 

Page 24 GAO-14-234 Federal Student Loans

2011 President’s budget indicated that the subsidy income the 

government was expected to generate dropped by about 74 percent, to 

$4 per $100 of loan disbursements. Figure 5 shows the original subsidy 

rate and subsequent reestimated subsidy rates for the 2007 to 2012 loan 

cohorts over time.

Figure 5: Original and Reestimated Subsidy Rates, Direct Loans, 2007-2012 Cohorts

Note: The original subsidy rate is represented by the first data point in each series and is recorded in 

the fiscal year that loans were obligated for each cohort. Subsequent data points represent the 

reestimated subsidy rate published in the President’s budget in the corresponding fiscal year. Faded 

lines indicate fiscal years for which the updated estimate was not yet completed because the loan 
 

Page 25 GAO-14-234 Federal Student Loans

cohort is not yet substantially disbursed at the time the budget for that fiscal year was prepared. 

Negative subsidy rates represent instances where the government is estimated to generate subsidy 

income. See appendix II for underlying data.

Volatility in subsidy cost estimates for a given cohort is generally 

expected to decrease over time. An Education official explained that 

estimates for loan cohorts experience more volatility in early reestimates 

because less actual data, as opposed to forecasted data, are available to 

inform the estimates. As more actual data become available for a cohort, 

Education expects to see smaller changes in the reestimates over time. 

For example:

• Earlier cohorts with more actual data to inform the reestimate have 

become less volatile: The estimates for the 2007 and 2008 cohorts 

initially showed large downward adjustments in the reestimated 

subsidy rates. In general, these cohorts currently are estimated to 

have a subsidy rate close to zero, and the reestimated subsidy rates 

have not varied much in the most recent reestimate years.

• Later cohorts with less actual data to inform the reestimate are 

currently more volatile: The 2009 through 2011 cohorts exhibit the 

most volatility over the years for which reestimates are available, in 

that recent reestimated subsidy rates for these cohorts have exhibited 

larger changes than the 2007 and 2008 cohorts.
 

Page 26 GAO-14-234 Federal Student Loans

Direct Loan costs fluctuate according to changes in certain variables, with 

varying levels of sensitivity.37 In particular, Direct Loan costs are sensitive 

to changes in the government’s cost of borrowing, which changes for 

each cohort of loans depending on economic conditions and the 

characteristics of the cohort.38

We simulated how changes in different variables could affect the overall 

costs of the Direct Loan program by altering four key variables: 

government borrowing costs,

This, coupled with regularly-updated 

information on loan performance that results in fluctuations in the cost 

estimates themselves, means that total Direct Loan costs cannot be 

known with certainty until actual data are available at the end of the loans’ 

life cycle—a process which takes decades. To illustrate this, we 

conducted analyses that provide practical examples of how costs change 

in response to certain variables.

39

 

37Throughout this section, Direct Loan costs refer to both administrative and subsidy 

costs, though it is the subsidy cost portion of those costs that fluctuates according to the 

variables we tested. We used a flat administrative cost rate for each set of variables we 

tested. See appendix I for more details on the analyses presented in this section. 

percentage of subsidized Stafford loans, 

percentage of income-contingent repayment plans, and percentage of 

38 Sensitivity refers to how estimated costs respond to adjustments in variables that may 

affect those costs. 

39 Specifically, we tested the discount rate, which represents the cost of Education 

borrowing funds from Treasury to finance the Direct Loan program. 

Because Direct Loan 

Costs Are Sensitive to 

Certain Variables, 

Borrower Interest 

Rates Cannot Be Set 

in Advance to 

Consistently Balance 

Government Revenue 

with Costs

Direct Loan Costs Are 

More Sensitive to 

Changes in Government 

Borrowing Costs than to 

Other Selected Variables
 

Page 27 GAO-14-234 Federal Student Loans

loans that Education considers to be at high risk of default.40 We tested 

these variables under favorable and less-favorable conditions, from the 

perspective of government costs.41 Specifically, favorable conditions 

would likely reduce government costs, while less favorable conditions 

would increase costs to the government. By comparing the percent 

change in costs to the percent change in the variable, we determined how 

sensitive the costs were to each variable.42

Of the variables we selected, Direct Loan costs were most sensitive to 

changes in the government’s cost of borrowing in both the favorable and 

less favorable scenarios, as shown by the sensitivity factors in table 6. 

For example, in the favorable scenario, a 1 percent increase in the 

government’s cost of borrowing was associated with a 19.7 percent 

increase in subsidy costs. In contrast, costs were less sensitive to the 

loan risk category, percentage of subsidized Stafford loans, and 

percentage of income-contingent repayment plans in both the favorable 

and less-favorable cases. For example, in the favorable scenario, a 1 

percent decrease in income-contingent loans was associated with a 2.9 

percent decrease in costs. We found that, in both the favorable and less 

favorable scenarios, subsidy costs were not very sensitive to changes in 

income-contingent repayment plans.

We refer to this ratio as the 

sensitivity factor (see table 6). In the table, the sensitivity factor shows the 

percent change in costs that would be associated with a one-percent 

change in the indicated variable.

 

40 We selected these factors because Education officials identified the discount rate, 

percentage of subsidized Stafford loans, and percentage of risk category as major factors 

that affect subsidy costs, while participation in income-contingent repayment plans is likely 

to shift over time (which has the potential to affect costs). For more information on our 

methodology for this sensitivity analysis, please see appendix I.

41 We used historical data points from 2007-2012 for each factor to ensure the scenarios 

were realistic. 

42 The change in Direct Loan costs is a comparison to the baseline for a 2014 cohort 

breakeven scenario. See appendix I for more detail. 
 

Page 28 GAO-14-234 Federal Student Loans

Table 6. Sensitivity Factors of Variables under Favorable and Less-Favorable 

Scenarios

Variable

Sensitivity factor in 

favorable scenario

Sensitivity factor in lessfavorable scenario

Percentage of Subsidized 

Stafford Loans

N/A 3.0

Percentage of Income 

Contingent Repayment 

Plans

2.9 1.3

Government borrowing 

costs (discount rate)

19.7 17.2

Proportion of loan risk group -13.0 (Increased 

percentage of lowest risk 

category)

0.4 (Increased percentage of 

highest risk category)

Source: GAO analysis of U.S. Department of Education data.

Note: There is no cost change associated with the percentage of subsidized Stafford loans in the 

favorable scenario because the 2014 baseline values represented the lowest percentage of these 

loans. The percentage of Income Contingent Repayment Plans is weighted on the volume for 

subsidized and unsubsidized Stafford loans, which includes graduate PLUS loans. Parent PLUS 

loans are not eligible for income-contingent repayment plans. In instances where the sensitivity factor 

is negative, an increase in the variable is associated with a decrease in costs.

Because Direct Loan costs are particularly sensitive to the government’s 

cost of borrowing, total costs associated with the program will vary 

accordingly. Further, since government borrowing costs change, the 

eventual spread between those costs and the borrower interest rate will 

not be known until the cohort is almost fully disbursed. As a result, the 

interest income from borrowers may or may not offset the government’s 

cost of borrowing at any given point in time.

Since the total costs associated with Direct Loans, including 

administrative and subsidy costs, are in flux until actual data are recorded 

through the end of the loans’ life cycle, the point at which the government 

covers loan costs without generating additional revenue—known as the 

breakeven point—may also change throughout the life cycle of the loans 

until actual information is available. As a result, borrower interest rates 

that are needed to cover Direct Loan costs at one time may not cover 

costs at another time. If the borrower rates are set to offset the expected 

government costs according to initial estimates, because costs fluctuate, 

it is likely that the cohort will not ultimately break even over the life of the 

loans. For example, if costs are overestimated, borrower rates will be set 

too high and the Direct Loans will generate net income to the 

government. Likewise, if costs are underestimated, borrower rates will be 

Borrower Interest Rates 

Cannot Be Set in Advance 

to Consistently Balance 

Government Revenue with 

Direct Loan Costs
 

Page 29 GAO-14-234 Federal Student Loans

set too low and the Direct Loans will generate net costs to the 

government.

To determine whether or not the conditions that would break even for one 

cohort would also break even for another cohort under different 

circumstances, we experimented with certain aspects of the borrower 

interest rate for two separate cohort years. 43

We identified two potential pathways to temporarily break even for the 

2014 cohort over the life of the loans, though these are only effective 

using currently available cost estimates, which will change over time.

Specifically, we altered the 

index (the base market rate that student loan interest rates are pegged 

to), the mark-up rate (the percentage-point increase over the base rate 

that students are charged), and the differences in the mark-up rates 

among loan types. We looked at how these changes to the borrower rates 

would affect total Direct Loan costs, taking into account both 

administrative and subsidy costs.

• Using the 10-year Treasury Note as the index for all Direct Loan 

borrowers without any additional mark-up—which means there would 

be no differences in the interest rate borrowers pay for different loan 

types—the government could approximately break even for the 2014 

cohort. See Figure 6 below. In this case, setting a flat interest rate for 

borrowers of all Direct Loan types is a notable divergence from 

current law, which provides lower interest rates to eligible 

undergraduates than to graduate students and parents. While there is 

no mark-up above the 10-year Treasury Note in this scenario, the 

government is still able to cover its estimated administrative and 

subsidy costs because borrower interest rates (in this case, the index) 

are higher than the government’s cost of borrowing.

• Using the 5-year Treasury Note as the index instead of the 10-year 

Treasury Note,44

 

43 See appendix I for an explanation of our methodology for the breakeven scenarios. 

there can be slight differences in the interest rates 

borrowers pay for different loan types (unlike in the previous scenario 

where rates were the same for all loan types), but in order to 

approximately break even, the differences in the mark-up for each 

loan type would need to be reduced by one half of the current rates 

44 The 5-year Treasury Note rate is generally estimated to be lower than the 10-year 

Treasury Note rate.

Index: The base market rate to which student 

loan interest rates are pegged.

Mark-up rate: The percentage-point increase 

over the base rate that students are charged.
 

Page 30 GAO-14-234 Federal Student Loans

set for the 2014 cohort. Additionally, undergraduate Stafford loans,

which typically have the lowest interest rates, would need to be set at 

the same level as the 5-year Treasury Note, with no mark-up.

Importantly, while changing the index and mark-up rates helped achieve a 

temporary breakeven point for the 2014 cohort, the same borrower rate 

scenarios did not yield the same results when applied to the 2019 cohort.

In other words, the breakeven methodologies used for the 2014 cohort 

were not effective for the 2019 cohort. A difference in outcome for these 

two cohorts emerges because Direct Loan costs are sensitive to variables 

that are projected to look very different for 2019 than they did for 2014. 

Specifically, while interest rates for the government’s cost of borrowing 

were unusually low for 2014, they are projected to more than double by 

2019, beginning to approximate pre-recession rates.45

 

45 While the discount rate for 2014 is 2.11% across loans, Education projects it to be 4.5% 

in 2019. Similarly, current OMB estimates for the five and ten-year Treasury Notes show 

that the indices to which student loan rates are pegged will increase substantially by 2019. 

Specifically, the 5-year Treasury Note is projected to increase from 1.66% in 2014 to 

4.41% in 2019, and the 10-year Treasury Note rate is projected to increase from 2.52% in 

2014 to 4.59% in 2019.

This decreases the 

spread between the borrower interest rate and the government’s cost of 

borrowing, and therefore decreases the likelihood that the government 

will generate income on the loans. Indeed, when we changed the index 

and mark-up rates for the 2019 cohort in the same manner that 

approximated a breakeven point for the 2014 cohort, the resulting 

estimates show the government incurring costs that would not be covered 

by revenues from Direct Loans. See figure 6.
 

Page 31 GAO-14-234 Federal Student Loans

Figure 6. Loan Parameters to Break Even in 2014 Could Have Different Effects in 2019

Note: This figure is based on current cost estimates for the 2014 and 2019 loan cohorts, which will 

change. The actual values will ultimately affect whether the government breaks even or whether 

students end up paying more or less than program costs.

While it would appear that borrower interest rates could be reset 

frequently to adjust to the continually-changing spread between the 

government’s cost of borrowing and the borrower interest rate that drives 

costs, the fundamental issue of not having full cost information until the 

end of the loan repayment period means that the breakeven point itself 

cannot be accurately predicted beforehand. Accordingly, in part because 

Direct Loan costs are sensitive to variables that change over time, 

borrower rates cannot be set to reliably enable the program to break even 

over the life of a loan cohort before those variables and cost estimates 

stabilize. 

Given the role federal student loans play in furthering access to 

postsecondary education, the federal government has a stake in 

preventing loan costs from posing an unnecessary burden to borrowers. 

Understanding how Direct Loan costs are estimated and change over 

time—and what factors drive those changes—is instructive for setting 

borrower interest rates. However, available information illustrates the 

difficulties of accurately predicting what these program costs will be, and 

how much borrowers should ultimately be charged to achieve a particular 

Concluding 

Observations
 

Page 32 GAO-14-234 Federal Student Loans

outcome. Specifically, fluctuations in the actual and expected costs of the 

student loan program over time make it impractical to establish a 

particular borrower interest rate that would consistently break even. In 

addition, the policy changes needed to influence the costs of the program 

could conflict with other policy goals. For example, setting a flat interest 

rate for borrowers of all Direct Loan types may help temporarily 

approximate a breakeven point, but it would be a considerable shift from 

current law, which provides a lower interest rate to eligible 

undergraduates. Similarly, making frequent changes to the borrower 

interest rate could help program costs more closely match revenue in the 

short term, but it may confuse potential borrowers and complicate efforts 

to make the program transparent to students. Moreover, it may be difficult 

to anticipate how any future policy changes might affect program costs, 

as shifting economic conditions and cost reestimates continually move 

the breakeven target. Understanding the uncertainties and substantial 

challenges associated with estimating student loan costs may help inform 

Congress as it considers how best to promote access to postsecondary 

education.

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

its comments, reproduced in appendix III, Education agreed with our 

findings. Education also described recent changes to federal student aid 

programs and noted the importance of the Direct Loan program, as well 

as the agency’s focus on promoting greater college affordability and 

access. In addition to these general comments, Education provided us 

with technical comments that we incorporated, as appropriate.

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

relevant congressional committees, and other interested parties. In 

addition, the report is available at no charge on the GAO website at 

http://www.gao.gov. 

Agency Comments 

and Our Evaluation
 

Page 33 GAO-14-234 Federal Student Loans

If you or your staff have any questions about this report, please contact 

me at (617) 788-0534 or emreyarrasm@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 who made key contributions to this 

report are listed in appendix IV.

Melissa Emrey-Arras

Director, Education, Workforce, 

 and Income Security Issues
Appendix I: Objectives, Scope, and 

Methodology

Page 34 GAO-14-234 Federal Student Loans

This report addresses (1) how the costs of administering the Direct Loan 

program have varied in recent years, (2) how estimated subsidy costs 

associated with the Direct Loan program have varied in recent years, and 

(3) how changes in different variables influence the overall cost of the 

Direct Loan program and the borrower interest rate needed to cover those 

costs. To address these objectives, we reviewed relevant federal laws 

and guidance, as well as past GAO reports related to the Direct Loan 

program, administrative costs, and subsidy costs. We interviewed officials 

at Education and the Congressional Budget Office (CBO) regarding key 

issues related to Direct Loan costs. In addition, we reviewed data from 

Education on its Direct Loan administrative costs and analyzed data on 

subsidy costs for fiscal years 2007 to 2012, including data generated from 

Education’s Activity Based Costing (ABC) model and Education’s student 

loan cash flow model. We assessed the reliability of data on Direct Loan 

administrative costs to evaluate trends in costs by interviewing agency 

officials knowledgeable about the data and reviewing documentation on 

the ABC model.1

 

1 Administrative cost data reported by Education include both discretionary and mandatory 

funding, including mandatory budget authority to fund the administrative costs of eligible 

Not-For-Profit loan servicers, as provided under the Student Aid and Fiscal Responsibility 

Act. The servicers are allocated a minimum of 100,000 borrower accounts each, although 

future allocations may vary based on performance. As of February 2013, 11 servicers 

(Missouri Higher Education Loan Authority, ESA/EDFinancial, Cornerstone, Aspire, 

Granite State, Oklahoma Student Loan Authority, EdManage, Vermont Student 

Assistance Corporation, KSA Servicing, EDGEucation Loans, and Council for South 

Texas Economic Progress (COSTEP)) service loans under the new NFP Servicers 

contracts.

In addition to aggregate cost data, Education calculates 

both direct and full unit costs using the ABC model. In order to report 

costs that include indirect costs, we used full unit cost data. Education 

officials noted that, in some cases, these data cannot isolate costs 

specific to the Direct Loan program, from costs related to other Education 

loan programs, because such data have not been necessary for 

management purposes. We determined that the data were sufficiently 

reliable for the limited purposes of this report. We have noted the 

limitations in the report where they were relevant. For subsidy costs, we 

analyzed data on Education subsidy cost estimates and reestimates for 

the 2007 to 2012 Direct Loan cohorts that were reported in the Federal 

Credit Supplement (part of the annual President’s Budget) to understand 

trends in cost estimates and discern key cost drivers. Additionally, we 

analyzed data generated by Education’s student loan cash flow model 

used to estimate subsidy costs (referred to in this report as the Student 

Loan Model) to understand trends in subsidy cost components and cost 

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 35 GAO-14-234 Federal Student Loans

drivers. We assessed the data’s reliability by reviewing relevant 

documentation, comparing information to published data sources, and 

interviewing agency officials knowledgeable about the data. We 

determined that the data were sufficiently reliable for the purposes of this 

report. Our work did not include an assessment of the feasibility of actions 

that could be taken to reduce the impact of fluctuations in Direct Loan 

cost estimates, such as using variable borrower interest rates that change 

over the life of the loans, or the use of borrower rebates to offset any 

subsidy income generated from the loans.

We conducted this performance audit from August 2013 to January 2014 

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.

Education uses the Student Loan Model to estimate future cost and 

revenue cash flows by loan cohort. Data from the Student Loan Model are 

input into OMB’s Credit Subsidy Model which, in accordance with FCRA, 

calculates the net present value of the annual cash flows of a given loan 

cohort, thereby obtaining a measure (subsidy rate) of the costs for each 

loan cohort. According to an Education official, the model uses a set of 

over 20 assumptions, including loan volume, defaults, and discount rates. 

For each assumption, the model contains a table with multiple possible 

values. The National Student Loan Data System (NSLDS), which 

processes and maintains data pertaining to Title IV programs, is a major 

source of the data for the assumptions used in the Student Loan Model. 

Data are pulled from a 4-percent random sample of loans from the 

NSLDS, and the data are calibrated by Education to generate 

assumptions about future behavior. We assessed the reliability of NSLDS 

data by reviewing existing information about the data and the system that 

produced them. We assessed the reliability of the Student Loan Model by 

reviewing model documentation and interviewing knowledgeable agency 

officials about the system. We determined that the data were sufficiently 

reliable for the purposes of this report. Education used the Student Loan 

Model to run various scenarios and generate data for GAO for the 

sensitivity and breakeven analyses described below.

Student Loan Model
Appendix I: Objectives, Scope, and 

Methodology

Page 36 GAO-14-234 Federal Student Loans

We worked with internal experts and Education to develop sensitivity 

scenarios which altered key assumptions in the Student Loan Model to 

illustrate how changes in certain variables could affect the overall cost of 

the Direct Loan program. The four key variables we altered were: (1) 

discount rates, (2) percentage of subsidized Stafford loans, (3) 

percentage of risk category, and (4) percentage of income contingent 

repayment plans. We selected the first three factors because Education 

officials identified them as being among the major factors that affect 

subsidy costs. We selected the percentage of income contingent 

repayment plans because Education identified it as the type of repayment 

plan most likely to face shifts in participation over time, particularly as 

more people become eligible for various income contingent repayment 

plans.

1. Discount rate: This is the collection of interest rates used to calculate 

the present value of cash flows that are estimated over a period of 

years. This rate also represents Education’s cost of borrowing from 

Treasury.

2. Percentage of subsidized Stafford loans: Subsidized Stafford 

Loans are available only to undergraduate student borrowers with 

demonstrated financial need. The government subsidizes these loans 

by not charging student borrowers for the interest that accrues while 

they are still in school and during a 6-month grace period after leaving 

school.

3. Percentage of risk category: These categories were created using 

school type and academic level to determine the potential risk of 

default, which can lead to higher subsidy costs for the loans.

4. Percentage of income contingent repayment plans: This is the 

percentage of loans that are structured to prorate the repayment plan 

based upon the borrower’s income. In the student loan model, there is 

one variable that encompasses all repayment plans based on income. 

These plans may result in increased subsidy costs.

We tested the sensitivity of costs under two types of scenarios:

1. Favorable scenario: This scenario used past variable rates that 

represented more favorable conditions in terms of reducing costs to 

the government. For example, because income contingent repayment 

plans have a higher subsidy rate than other types of repayment plans, 

we used the lowest percentage of income contingent repayment plans 

that existed from 2007-2012 in this scenario.

Sensitivity Analysis
Appendix I: Objectives, Scope, and 

Methodology

Page 37 GAO-14-234 Federal Student Loans

2. Less-favorable scenario: This scenario used past variable rates that 

represented less favorable conditions in terms of increasing cost to 

the government. For example, because a higher discount rate 

increases Education’s cost of borrowing from Treasury, we used the 

highest discount rate that existed from 2007-2012 in this scenario.

See table 7 for the variable rates used in each scenario.

Table 7: Variable Rates Used in Sensitivity Scenarios

Variable

Rate used in favorable 

scenario 

Rate used in less-favorable 

scenario

Percentage of 

Subsidized Stafford 

Loans

25.5% 44.3%

Percentage of Income 

Contingent Repayment 

Plansa

7.6% 10.9%

Discount rate 2.8% 5.0%

Proportion of loan risk 

groupb Increased percentage of loan 

volume included in the lowest 

loan risk category from 44.5% 

to 51.2%

Increased percentage of loan 

volume included in the 

highest loan risk category 

from 6.7% to 51.2%

Source: U.S. Department of Education data.

a

The percentage of Income Contingent Repayment plans is weighted on the volume for subsidized 

and unsubsidized Stafford loans, which includes graduate PLUS loans. Parent PLUS loans are not 

eligible for income-contingent repayment plans.

b

To test the sensitivity of loan risk group, Education officials transferred the loan volume of the highest 

risk group category to the lowest risk category in the favorable scenario. In the less favorable 

scenario, Education transferred the loan volume of the lowest risk group to the highest risk group. 

This maintained the overall loan volume but changed the weighting between more and less risky 

loans.

The scenarios forecast the overall cost of the Direct Loan program for 

each variable alteration using the baseline of the fiscal year 2014 cohort 

breakeven scenario (see below for a description of the breakeven 

scenarios). The baseline scenario forecasted costs for the Direct Loan 

program over the full life of the 2014 cohort, and include cash flow 

projections 40 years into the future. Using this baseline, we altered the 

variable rates to reflect historical values between 2007 and 2014, except 

for the loan risk category, to see how the cost for the loan cohort was 

affected.

We also worked with Education to change specific loan parameters in the 

Student Loan model with the purpose of determining whether the 

government could cover Direct Loan costs without generating additional 

Breakeven Analysis
Appendix I: Objectives, Scope, and 

Methodology

Page 38 GAO-14-234 Federal Student Loans

income under certain conditions. This is referred to as a breakeven 

analysis. The following steps were taken to conduct this analysis:

• First, the baseline subsidy rates for the 2014 cohort of Direct Loans 

were calculated, excluding loan consolidations, using the index and 

mark-up rates and caps as outlined by current law (see Table 8). We 

selected 2014 because it was the next cohort to be disbursed at the 

time of the simulation (September 2013) and allowed us to use 

forecasted data for the hypothetical simulations. The agency provided 

a breakout by loan type (Subsidized Stafford, Unsubsidized Stafford, 

PLUS). An administrative cost rate is included in this analysis.2

• Scenario A: The interest rate mark-up was calculated that would be 

necessary to get the federal subsidy income for the 2014 cohort to 

cover estimated administrative costs (i.e. break even), still excluding 

consolidations.

• This scenario used the interest rate caps for each loan type and 

the 10-year Treasury note for the index, as designated under 

current law.

• Separately, two breakeven analyses were conducted for the 2014 

cohort with altered inputs. In both cases, caps were kept the same as 

provided under current law.

• Scenario B: 5-year Treasury Note with differentials in mark-up 

rates between loan type as designated by the law.

• Scenario C: 5-year Treasury Note with differentials reduced by 

one half from the values designated in the law.

• Scenario D: After finding the breakeven rates for 2014, the same 

treatment of mark-up rates and differentials were applied to the 2019 

cohort using the 10-year Treasury Note, still accounting for 

administrative costs. We selected 2019 to show what the resulting 

costs would be in a future year with different economic conditions (i.e., 

different discount rates).

 

2 Education’s Budget Service allocates administrative costs by cohort, and estimates 

administrative costs over the life of a loan, when needed. These data are not used by 

Budget Service for any program management purposes. The allocation methodology was 

originally developed in 2004. According to Education officials, the methodology for this

estimation has not changed since 2005, with updates to only the loan servicing data in 

2009. In addition, the description of the estimation methodology acknowledges a number 

of data limitations and other methodological challenges that could affect the estimates’ 

accuracy. Officials at Budget Service stated that the estimation process was laborintensive and there was limited interest in and need for further refinement of the allocation 

process.
Appendix I: Objectives, Scope, and 

Methodology

Page 39 GAO-14-234 Federal Student Loans

• Scenario E: The parameters for the 2019 cohort were then changed to 

use the 5-year Treasury Note and reduced the differentials from 

current law by one half (because those differentials helped 

approximate a break even under the 2014 cohort estimate) to 

illustrate how this affects costs.

Below is a summary of the loan parameters used for each breakeven 

scenario. 

Table 8: Scenarios for Breakeven Analysis

2014 

Baseline

2014 

Scenario A

2014 

Scenario B

2014 

Scenario C

2019 

Scenario D

2019 

Scenario E

Index

10-year 

Treasury note 

rate of 2.52%

10-year 

Treasury Note 

Rate of 2.52%

5-year Treasury 

Note Rate of 

1.66%

5-year 

Treasury Note 

Rate of 1.66%

10-year 

Treasury Note 

Rate of 4.59 %

5-year 

Treasury Note 

Rate of 4.41%

Mark-up rate by loan typea 

Subsidized & 

Undergraduate Stafford 2.05% 0 0 0 0 0 

Graduate Stafford 3.60% 0 1.5% 0.78% 0 0.78%

PLUS 4.60% 0 2.5% 1.28% 0 1.28%

Interest rate caps by loan type 

Subsidized & 

Undergraduate Stafford 8.25% 8.25% 8.25% 8.25% 8.25% 8.25%

Graduate Stafford 9.50% 9.50% 9.50% 9.50% 9.50% 9.50%

PLUS 10.50% 10.50% 10.50% 10.50% 10.50% 10.50%

Source: GAO analysis of U.S. Department of Education data.

a

Zero values for the mark-up rate indicate that borrowers of those loan types would have interest 

rates no higher than the index.
Appendix II: Technical Appendix

Page 40 GAO-14-234 Federal Student Loans

Table 9: Data for Figure 1, Direct Loan Full Administrative Costs by Category, Fiscal Year 2007- Fiscal Year 2012 (dollars in 

millions)

Cost category FY07 FY08 FY09 FY10 FY11 FY12 

Change from 

FY07 to FY12

Loan servicing 214.00 255.02 266.24 349.23 458.56 540.23 326.23

Percent change 19.17% 4.40% 31.17% 31.31% 17.81% 152.45%

Originations and disbursements 37.57 40.06 73.16 97.39 134.35 146.63 109.06

Percent change 6.61% 82.66% 33.11% 37.95% 9.14% 290.27%

Default collections 31.80 35.42 35.64 38.11 42.03 34.50 2.69

Percent change 11.36% 0.62% 6.93% 10.31% -17.93% 8.47%

Application processing 17.67 18.61 20.27 63.47 95.63 94.95 77.28

Percent change 5.31% 8.93% 213.11% 50.68% -0.71% 437.36%

School oversight and monitoring 12.48 10.77 8.12 25.53 46.00 47.26 34.78

Percent change -13.68% -24.66% 214.55% 80.15% 2.76% 278.70%

Total 313.52 359.88 403.43 573.72 776.57 863.57 550.05

Source: Department of Education data.

Note: FY = fiscal year.

Table 10: Data for Figure 2, Number of Outstanding Direct Loans by Loan Type (in millions) and Direct Loan Full 

Administrative Costs, Fiscal Year 2007 - Fiscal Year 2012

Loan Type FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

FY 2007-FY 

2012 Change

Subsidized Stafford 

Loans 8.96 10.14 12.34 19.16 29.14 38.30 29.34

Percent change 13% 22% 55% 52% 31% 328%

Unsubsidized Stafford 

Loans 5.71 6.98 9.46 16.43 26.64 36.76 31.06

Percent change 22% 36% 74% 62% 38% 544%

Graduate PLUS loans 0.03 0.08 0.17 0.48 0.97 1.38 1.35

Percent change 124% 121% 187% 101% 43% 3995%

PLUS loans 0.88 1.02 1.26 1.88 2.79 3.54 2.66

Percent change 16% 24% 49% 48% 27% 303%

Consolidation loans 3.88 4.07 4.57 5.24 6.05 8.70 4.82

Percent change 5% 12% 15% 15% 44% 124%

Total 19.46 22.29 27.81 43.19 65.58 88.69 69.23

Administrative costs $313,523,250 $359,875,979 $403,428,430 $573,717,359 $776,572,657 $863,572,668 $550,049,418

Percent change 15% 12% 42% 35% 11% 175%

Source: Department of Education data.

Note: FY = fiscal year.

Appendix II: Technical Appendix
Appendix II: Technical Appendix

Page 41 GAO-14-234 Federal Student Loans

Table 11: Data for Figure 3, Current Subsidy Rates Broken out by Cost Component, 

Direct Loans 2007-2012

Loan cohort

Overall 

subsidy rate

Financing 

costs Defaults Fees

All other 

costs

2007 cohort -0.288 -8.115 2.847 -2.378 7.359

2008 cohort -0.253 -7.453 2.632 -1.980 6.549

2009 cohort -13.722 -23.586 2.813 -1.557 8.608

2010 cohort -13.610 -22.072 1.736 -1.507 8.232

2011 cohort -17.227 -26.404 1.495 -1.249 8.931

2012 cohort -16.420 -24.159 1.191 -1.187 7.7352

Source: U.S. Department of Education credit subsidy calculator output data.

Note: This table shows the most recent reestimated subsidy rates for the 2007 to 2012 cohorts 

broken out by the four cost components used by Education for budget estimates (financing costs, 

fees, defaults (net of recoveries), and all other costs).

Table 12: Data for Figure 4, Comparison of Borrower and Discount Rates, 2007-2012

Borrower rates

Subsidized 

Stafford Unsubsidized PLUS

Weighted 

average

Discount 

rate

2007 6.8 6.8 7.9 7.00 4.96

2008 6.0 6.8 7.9 6.67 4.96

2009 5.6 6.8 7.9 6.54 3.11

2010 4.5 6.8 7.9 6.12 3.28

2011 3.4 6.8 7.9 5.69 2.79

2012 3.4 6.8 7.9 5.90 2.88

Source: Budget of the United States Government, fiscal years 2009-2014 and U.S. Department of Education data

Note: The weighted average represents the average borrower interest rate, weighted by volume for 

each loan type. Data are provided by loan cohort year.
Appendix II: Technical Appendix

Page 42 GAO-14-234 Federal Student Loans

Table 13: Data for Figure 5, Original and Reestimated Subsidy Rates, Direct Loans, 2007-2012 Cohorts

 Reestimated subsidy rates (percentage) published in given Fiscal Year President’s Budget

Direct Loan 

cohort

Original 

Subsidy rate 

(percentage) FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

2007 cohort 1.48 1.37 -4.2 -0.2 0.1 0.23 -0.28

2008 cohort -0.8 -1.04 -9.09 0.24 0.22 -0.23

2009 cohort -14.96 -3.94 -11.85 -12.73 -13.72

2010 cohort -7.66 -15.12 -13.87 -13.6

2011 cohort -13.91 -8.21 -17.22

2012 cohort -16.49 -16.42

Source: Budget of the United States Government, fiscal years 2009-2014.

Notes: This table lists the original subsidy rate for each loan cohort and the reestimated subsidy rates 

that are published in the President’s budget in the corresponding fiscal year. Blank cells indicate fiscal 

years for which the updated estimate was not yet completed because the loan cohort is not yet 

substantially disbursed at the time the budget for that fiscal year was prepared. Negative subsidy 

rates represent instances where the government is estimated to generate subsidy income. FY = fiscal 

year.

Table 14: Cost Effects of Variables in “Less Favorable” Scenario

Variable being altered

Percent change 

in variable rate

Percent change in 

total cost

Sensitivity 

factor 

Percentage of Subsidized 

Stafford Loans 73.8% 221.6% 3.0

Percentage of Income 

Contingent Repayment plansa 38.3% 51.3% 1.3

Discount rate 135.1% 2325.2% 17.2

Percentage in the highest risk 

category 661.1% 247.7% 0.4

Cumulative effect of all 

variable changes N/A 2690.5%b N/A

Source: GAO analysis of U.S. Department of Education Student Loan Model data.

Note: The baseline against which this scenario was compared against was the 2014 breakeven 

scenario with no mark-ups or differentials.

a

The percentage of Income Contingent Repayment Plans is weighted on the volume for subsidized 

and unsubsidized Stafford loans, which includes graduate PLUS loans. Parent PLUS loans are not 

eligible for income-contingent repayment plans.

b

The cumulative effect of all variable changes is calculated by comparing the difference in cost 

between the scenario and the baseline, and dividing that by the baseline costs.

Sensitivity Analysis 

Results
Appendix II: Technical Appendix

Page 43 GAO-14-234 Federal Student Loans

Table 15: Cost Effects of Variables in the “Favorable” Scenario

Variable being altered

Percent change 

in variable Rate

Percent change in 

Total cost

Sensitivity 

factor 

Percentage of 

Subsidized Stafford 

Loansa N/A N/A N/A

Percentage of Income 

Contingent Repayment 

Plansb (3.7%) (10.6%) 2.9

Discount ratec 30.3% 596.5% 19.7

Increasing the 

percentage in the lowest 

risk category 15.1% (196.8%) (13.0)

Cumulative effect of all 

variables N/A 399.7%d N/A

Source: GAO analysis of U.S. Department of Education Student Loan Model data.

Note: The baseline against which this scenario was compared against was the 2014 breakeven 

scenario A, which had no mark-ups or differentials.

a

There is no cost or variable rate change associated with the percentage of subsidized Stafford loans 

in the favorable scenario because the 2014 baseline values represented the lowest percentage of 

these loans.

b

The percentage of Income Contingent Repayment Plans is weighted on the volume for subsidized 

and unsubsidized Stafford loans, which includes graduate PLUS loans. Parent PLUS loans are not 

eligible for income-contingent repayment plans.

c

Discount rates used in this scenario are lower, and thus more favorable to the government, than the 

rates used in the “less favorable” scenario. However, because the discount rate used was higher than 

the 2014 discount rate used in the baseline scenario, this change in the discount rate shows 

increased costs.

d

The cumulative effect of all variable changes is calculated by comparing the difference in cost 

between the scenario and the baseline, and dividing that by the baseline costs.
Appendix II: Technical Appendix

Page 44 GAO-14-234 Federal Student Loans

Table 16: Loan Parameters to Break Even for 2014 Have Different Effects for 2019

2014 

Scenario A

2014 

Scenario C

2019 

Scenario D

2019 

Scenario E

Index

10-year 

Treasury Note 

Rate of 2.52%

5-year 

Treasury Note 

Rate of 1.66%

10-year 

Treasury Note 

Rate of 4.59%

5-year 

Treasury Note 

Rate of 4.41%

Mark-up rate by loan type

Subsidized & Undergraduate Stafford 0 0 0 0 

Graduate Stafford 0 0.78% 0 0.78%

PLUS 0 1.28% 0 1.28%

Resulting borrower interest rates

Subsidized & Undergraduate Stafford 2.52% 1.66% 4.34% 4.21%

Graduate Stafford 2.52% 2.44% 4.43% 5.01%

PLUS 2.52% 2.94% 4.48% 5.54%

Resulting cost ratea -0.81% 0.51% 7.26% 5.36%

Source: U.S. Department of Education data.

Note: In the 2019 scenarios, borrower rates vary and are sometimes lower than the index because of 

the probabilities associated with the caps.

a

GAO considers Direct Loan cost rates under 1% to approximate a breakeven point for the purposes 

of this study.

Results of 2014 and 2019 

Breakeven Analyses
Appendix III: Comments from the Department 

of Education

Page 45 GAO-14-234 Federal Student Loans

Appendix III: Comments from the 

Department of Education
Appendix III: Comments from the Department 

of Education

Page 46 GAO-14-234 Federal Student Loans
Appendix IV: GAO Contacts and Staff 

Acknowledgments 

Page 47 GAO-14-234 Federal Student Loans

Melissa Emrey-Arras, Director, (617) 788-0534 or emreyarrasm@gao.gov

In addition to the contact named above, Kris Nguyen, Assistant Director; 

Marcia Carlsen; Carol Henn; Elizabeth Gregory-Hosler; Amy Moran 

Lowe; Ellen Phelps Ranen; Amrita Sen; Srinidhi Vijaykumar; and 

Rebecca Woiwode made significant contributions to this report.

Also contributing to this report were James Bennett, Deborah Bland,

Jessica Botsford, Dan Concepcion, Holly Dye, Robert Dacey, Gary Engel, 

Cole Haase, Susan J. Irving, John Karikari, Thomas J. McCool, Sheila 

McCoy, Jean McSween, Brittni Milam, Mimi Nguyen, Omari Norman, 

Debra Prescott, and Michelle St. Pierre.

Appendix IV: GAO Contacts and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(131272)
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