Report to Congressional Requesters

United States General Accounting Office 

GAO 

October 2003 STUDENT LOAN 

PROGRAMS 

As Federal Costs of 

Loan Consolidation 

Rise, Other Options 

Should Be Examined 

GAO-04-101 
On average, consolidation loan borrowers, over the 1987 to 2002 period, had 

higher levels of student loan debt, higher incomes, and larger loan 

repayments than did nonconsolidation borrowers. For example, the average 

student loan debt among consolidation borrowers prior to consolidating 

their loans was about $22,000 versus about $10,000 for nonconsolidation 

borrowers. As a group, they defaulted less often on their consolidation loans 

than borrowers who did not consolidate their loans. 

Recent trends in interest rates and consolidation loan volumes have affected 

consolidations in the Department of Education’s (Education) two major 

student loan programs—the Federal Family Education Loan Program 

(FFELP) and the William D. Ford Federal Direct Loan Program (FDLP)—in 

different ways, but in the aggregate, estimated subsidy and administration 

costs have increased. Subsidy costs for FFELP consolidation loans grew 

from $1.3 billion for loans made in fiscal year 2002 to nearly $3 billion for 

loans made in fiscal year 2003. Lower interest rates available to borrowers in 

fiscal year 2003 increased these costs because FFELP consolidation loans 

carry a government-guaranteed rate of return to lenders that is projected to 

be higher than the fixed interest rate consolidation loan borrowers pay. 

Higher loan volumes also added to the estimated subsidy costs. Interest 

rates and loan volume also affected costs for FDLP consolidation loans, but 

in a different way. Because the interest rate the government charges 

borrowers has been somewhat greater than the interest rate that Education 

pays to finance its lending, consolidation loans have generated a net gain for 

the government in recent years. Lower rates paid by borrowers and reduced 

loan volume from recent record highs, however, reduced the net gain to 

$286 million for loans made in fiscal year 2003, down from $460 million the 

year before. While administration costs are not specifically tracked for either 

loan program, available evidence indicates that these costs have also risen. 

Alternatives to consolidation, such as the ability to make a single repayment 

to cover multiple loans and obtain extended repayment terms, now give 

some borrowers opportunities to simplify and reduce loan repayments, but 

not all borrowers can use them. As a result, consolidation loans may be the 

only option for some borrowers to simplify and reduce repayments. 

Borrowers’ repayment choices—whether to obtain a consolidation loan or 

use other alternatives—have consequences for federal costs. While 

consolidation loans may remain an important tool to help borrowers, overall 

federal costs in providing for consolidation loans may exceed federal savings 

from reduced defaults. An assessment of the advantages of consolidation 

loans for borrowers and the government, taking into account program costs 

and how costs could be distributed among borrowers, lenders, and the 

taxpayers, would be useful for decisionmakers. 

The federal government makes 

consolidation loans available to 

help borrowers manage their 

student loan debt. By combining 

loans into one and extending the 

repayment period, a consolidation 

loan reduces monthly repayments, 

which may lower default risk and, 

thereby, reduce federal costs of 

loan defaults. Consolidation loans 

also allow borrowers to lock in a 

fixed interest rate—an option not 

available for other student loans—

and are available to borrowers 

regardless of financial need. 

GAO was asked to examine 

(1) how consolidation borrowers 

differ from nonconsolidation 

borrowers; (2) how federal costs 

have been affected by recent 

interest rate and loan volume 

changes; and (3) the extent to 

which repayment options—other 

than consolidation—are available 

to help simplify and reduce loan 

repayments. 

GAO recommends that the 

Secretary of Education assess the 

advantages of consolidation loans 

for borrowers and the government 

in light of program costs and 

identify options for reducing 

federal costs. Options could 

include targeting the program to 

borrowers at risk of default and 

extending existing consolidation 

alternatives to more borrowers. 

Education should also consider 

how best to distribute program 

costs among borrowers, lenders 

and the taxpayers. Education 

agreed with our recommendation. 

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

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Cornelia Ashby 

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

Highlights of GAO-04-101, a report to 

congressional requesters 

October 2004

STUDENT LOAN PROGRAMS

As Federal Costs of Loan Consolidation 

Rise, Other Options Should Be Examined 
Page i GAO-04-101 Student Loan Programs 

Letter 1

Results in Brief 4

Background 6

Consolidation Borrowers Had More Debt, Higher Incomes, and 

Differed in Other Ways When Compared with Nonconsolidation 

Borrowers 9

Interest Rates and Increased Loan Volumes Have Increased 

Federal Costs 16

Repayment Options Other Than Consolidation Loans That Allow 

Borrowers to Simplify Loan Repayments and Reduce Repayment 

Amounts Exist, but Borrowers’ Use of These Options Is Limited 

by Several Factors 28

Conclusion 35

Recommendation for Executive Action 36

Agency Comments 36

Appendix I Comments from the Department of Education 38 

Appendix II GAO Contacts and Staff Acknowledgments 39 

GAO Contacts 39

Staff Acknowledgments 39

Tables 

Table 1: Annual Income and Annual Student Loan Repayment of 

Consolidation Borrowers Compared with 

Nonconsolidation Borrowers Entering Repayment in 1999 11

Table 2: Number of Lenders of Consolidation Borrowers Compared 

to Nonconsolidation Borrowers Originating Loans, January 

1987 to November 2002 15

Table 3: Interest Rate Spread for FDLP Consolidation Loans 

Originated in Fiscal Years 2002 and 2003 23

Table 4: Description of Borrower Repayment Plans 29

Table 5: Comparison of Repayment Periods for FFELP 

Consolidation and Nonconsolidation Loans, by Repayment 

Plan 30

Table 6: Repayment Periods for FDLP Consolidation and 

Nonconsolidation Loans, by Repayment Plan 31

Contents 
Page ii GAO-04-101 Student Loan Programs 

Table 7: Comparison of Borrowers’ Options under Consolidation 

and Nonconsolidation Loans 32

Figures 

Figure 1: Average Student Loan Debt of Consolidation Loan 

Borrowers Prior to Consolidation Compared with 

Nonconsolidation Borrowers Originating Loans January 

1987 to November 2002 10

Figure 2: Repayment Periods of Consolidation Loans Compared 

with Nonconsolidation Loans Originating from January 

1987 to November 2002 12

Figure 3: Type of School Attended by Consolidation Loan 

Borrowers Compared with Nonconsolidation Borrowers 

Originating Loans, January 1987 to November 2002 13

Figure 4: Percentage of Consolidation Loan Borrowers Who 

Borrowed for Graduate/Professional School Compared 

with Nonconsolidation Borrowers Originating Loans, 

January 1987 to November 2002 14

Figure 5: Average Number of Loans of Consolidation Loan 

Borrowers Compared with Nonconsolidation Borrowers 

Originating Loans, January 1987 to November 2002 15

Figure 6: Percentage of Consolidation Borrowers Who Defaulted 

on Consolidation Loans Compared with Nonconsolidation 

Borrowers Who Defaulted on Loans, January 1987 to 

November 2002 16

Figure 7: Consolidation loan volume increased as borrower interest 

rates fell 18

Figure 8: Illustration of Estimated SAP Paid to Holders of FFELP 

Consolidation Loans Originated in Fiscal Year 2003 20

Figure 9: Illustration of Net Subsidy Costs to the Federal 

Government for Consolidation Loans Made in Fiscal Year 

2002 Using Three Different Sets of Interest Rate 

Assumptions 26
Page iii GAO-04-101 Student Loan Programs 

Abbreviations 

FCRA Federal Credit Reform Act 

FDLP William D. Ford Direct Loan Program 

FFELP Federal Family Education Loan Program 

HEA Higher Education Act 

HEAL Health Educational Assistance Loans 

IRS Internal Revenue Service 

NSLDS National Student Loan Data System 

SAP special allowance payment 

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Page 1 GAO-04-101 Student Loan Programs 

October 31, 2003 

The Honorable John A. Boehner 

Chairman 

Committee on Education and the Workforce 

House of Representatives 

The Honorable Howard P. “Buck” McKeon 

Chairman 

Subcommittee on 21st Century Competitiveness 

Committee on Education and the Workforce 

House of Representatives 

For over 2 decades, the federal government has made consolidation loans 

available to help borrowers cope with large amounts of federal student 

loan debt. Consolidation loans are designed to help borrowers stay current 

on loan payments, thereby reducing the government’s costs of paying for 

defaults. Instead of making concurrent repayments on several loans over a 

period usually limited to 10 years, consolidation loan borrowers can 

combine their loans and extend their repayment periods beyond 10 years, 

thereby reducing monthly repayments. Consolidation loans also allow 

borrowers to lock in a fixed interest rate, unlike most other federal 

student loans, which carry an interest rate that varies from year to year. 

Between fiscal year 2000 and 2002, the number of borrowers consolidating 

their federal student loans nearly doubled to almost 1 million, and the total 

amount—or volume—of loans being consolidated rose even more sharply, 

from $12 billion to over $31 billion. Consolidation loans are available 

under both of the Department of Education’s (Education) two major 

student loan program—the Federal Family Education Loan Program 

(FFELP) and the William D. Ford Direct Loan Program (FDLP)1

—and, in 

fiscal year 2002, accounted for about 44 percent of these programs’ total 

loan volume. 

 1

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

guaranteeing lenders loan repayment and a rate of return that is equal to the average 

3-month commercial paper rate plus 2.64 percent. As of June 30, 2003, that rate of return 

was 3.81 percent for consolidation loans made on or after January 1, 2000. Under FDLP, 

Education uses federal funds to make direct student loans. 

United States General Accounting Office

Washington, DC 20548 
Page 2 GAO-04-101 Student Loan Programs 

The increase in consolidation borrowers and loans has raised 

congressional interest in the cost of the program for the federal 

government. Two main types of federal costs are involved. One is 

“subsidy”—the net present value of cash flows to and from the 

government that result from providing these loans to borrowers.2

 For 

FFELP consolidation loans, cash flows include, for example, fees paid by 

lenders to the government and a special allowance payment by the 

government to lenders to provide them a guaranteed rate of return on the 

student loans they make. For FDLP consolidation loans, cash flows 

include borrowers’ repayment of loan principal and payments of interest 

to Education, and loan disbursements by the government to borrowers. 

The subsidy costs of FDLP consolidation loans are also affected by the 

interest Education must pay to the Department of Treasury (Treasury) to 

finance its lending activities. The second type of cost is administration, 

which includes such items as expenses related to originating and servicing 

direct loans.3

For years, consolidation loans were basically the only alternative available 

to borrowers seeking to reduce the size of their loan repayments. In recent 

years, however, some repayment options, such as graduated, extended, 

and income-based repayment plans, have been added to FFELP and FDLP. 

This change has raised congressional interest in the degree to which these 

options extend payment relief to borrowers without requiring them to 

consolidate their loans, and in the potential advantages and disadvantages 

of the various approaches, both for borrowers and the federal government. 

In light of the upcoming reauthorization of the Higher Education Act 

(HEA) (which authorizes the consolidation programs), you asked us to 

examine several issues concerning consolidation loans. As agreed with 

your office, we focused our work on answering the following key 

questions: 

 2

The Federal Credit Reform Act of 1990 requires Education to estimate these subsidy costs, 

using the net present value of cash flows to do so. Present value is the value today of the 

future stream of benefits and costs, discounted using an appropriate interest rate (generally 

the average annual interest rate for marketable zero-coupon U.S. Treasury securities with 

the same maturity from the date of disbursement as the cash flow being discounted). The 

background section of the report will describe credit reform in more detail. 

3

Under FFELP, a large portion of the administration cost is borne by the private lender. The 

federal government pays many of these costs in its subsidy payment to lenders—more 

specifically, in the 2.64 percent add on paid over and above the 3-month rate on 

commercial paper. 
Page 3 GAO-04-101 Student Loan Programs 

• How do consolidation loan borrowers differ from nonconsolidation loan 

borrowers? 

• How are federal subsidy and administration costs for consolidation loan 

programs affected by recent interest rate and loan volume changes? 

• To what extent do repayment options other than consolidation loans allow 

borrowers to simplify loan repayment and reduce repayment amounts? 

Our work to answer these questions involved a variety of information 

sources, including officials from Education’s Office of Federal Student Aid 

and Budget Service, as well as representatives of FFELP lenders. To 

develop information about student borrowers, we analyzed a sample of 

student loan data from Education’s National Student Loan Data System 

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

borrowers, and other information. The sample was a randomly drawn, 

representative sample that contained records on approximately 4.4 million 

loans held by 1.4 million students or their parents. The sample constituted 

4 percent of the overall NSLDS population of approximately 32 million 

students.4

 To assess the reliability of the NSLDS data, we reviewed existing 

information about the sample and interviewed Education officials in 

Washington, D.C., responsible for performing data accuracy, validity, and 

integrity tests of NSLDS data. In addition, we performed electronic testing 

of key variables in our sample for obvious problems in accuracy and 

completeness. We determined that the NSLDS data were sufficiently 

reliable for this report. Our analysis on borrower characteristics focused 

on borrowers in the sample who originated loans from 1987 (the year 

consolidation loans were made available under the program as it is 

currently structured5

) to November 2002. To develop information about 

the family income of borrowers and their repayment amounts, we 

analyzed data provided by the Internal Revenue Service (IRS) on family 

income and Education on loan repayments for a sample of borrowers who 

 4

Because we used a sample, there is a sampling error associated with estimates obtained 

from them. For a 95 percent confidence interval, all percentage estimates reported have 

sampling errors of plus or minus 1 percentage point or less. All reported estimates other 

than percentages have sampling errors not exceeding plus or minus 5 percent of the value 

of those estimates. 

5

The current loan consolidation provisions were enacted by the Consolidated Omnibus 

Budget Reconciliation Act of 1985 (Pub. L . No. 99-272) and later revised by the Higher 

Education Amendments of 1986 (Pub. L. No. 99-498). The Student Loan Marketing 

Association (Sallie Mae) had previously been authorized to make consolidation loans. 
Page 4 GAO-04-101 Student Loan Programs 

entered repayment in 1999. Our analysis of federal costs of consolidation 

loans is also based in part on interviews with Education officials in 

Washington, D.C., and a review of relevant analyses prepared by 

Education. We reviewed the HEA and related Education regulations and 

other published information to identify the repayment options available to 

student loan borrowers. We conducted our work from July 2002 through 

August 2003 in accordance with generally accepted government auditing 

standards. 

On average, consolidation loan borrowers, during the 1987 to 2002 time 

period, had higher levels of student loan debt, higher incomes, and larger 

loan repayments than did nonconsolidation loan borrowers. The average 

level of student loan debt among consolidation loan borrowers, prior to 

consolidating their loans, was about $22,000 versus about $10,000 for 

borrowers who did not consolidate their loans. Consolidation loan 

borrowers were less likely than nonconsolidation loan borrowers to have 

attended a proprietary (for profit) school and were more likely to have 

borrowed while attending graduate/professional school. Most 

consolidation loans had repayment periods that were longer than 10 years. 

In addition, consolidation loan borrowers, on average, had twice as many 

student loans as did nonconsolidation borrowers, and two-thirds of 

consolidation loan borrowers had loans from more than one lender, 

compared with about one-third of nonconsolidation loan borrowers. 

Overall, once they had consolidated their loans, borrowers with 

consolidation loans defaulted less often than borrowers who did not 

consolidate their loans. 

Recent trends in interest rates and consolidation loan volumes have 

affected the FFELP and FDLP consolidation loan programs in different 

ways, but in the aggregate, estimated subsidy and administration costs 

have increased. For FFELP consolidation loans, subsidy costs grew from 

$1.3 billion for loans made in fiscal year 2002 to nearly $3 billion for loans 

made in fiscal year 2003. Lower interest rates available to borrowers in 

fiscal year 2003 increased these costs because FFELP consolidation loans 

carry a government-guaranteed rate of return to lenders, that is projected 

to be higher than the fixed interest rate paid by consolidation loan 

borrowers. When the interest rate paid by borrowers does not provide the 

full guaranteed rate to lenders, the federal government must pay lenders 

the difference. Higher loan volumes in the FFELP program also added to 

the estimated subsidy costs. FDLP consolidation loans are made by the 

government and thus carry no interest rate guarantee to lenders, but 

changing interest rates and loan volumes affected costs in this program as 

Results in Brief 
Page 5 GAO-04-101 Student Loan Programs 

well. In both fiscal years 2002 and 2003, there was no net subsidy cost to 

the government because the interest rate paid by borrowers who 

consolidated their loans was greater than the interest rate Education must 

pay to Treasury to finance its lending. However, the drop in interest rates 

that occurred in fiscal year 2003, among other things, reduced the 

government’s estimated net gain to $286 million for loans made in fiscal 

year 2003, down from $460 million for loans made the year before. A 

decrease in loan volume from recent record highs also contributed to the 

reduced gain. Administration costs are not specifically tracked for either 

consolidation loan program, but available evidence indicates that these 

costs have risen, primarily reflecting increased loan volumes. 

Repayment options, other than consolidation loans, that allow borrowers 

to simplify loan repayment and reduce repayment amounts—such as the 

ability to make a single repayment to cover multiple loans and obtain 

extended repayment terms—are now available to some borrowers under 

both FFELP and FDLP, but these alternatives are not available to all 

borrowers. If borrowers have multiple loans from a single lender, they can 

make one monthly payment to cover all their loans. Many borrowers can 

also adjust the amount of their monthly payments so that they make 

smaller monthly payments at the start of repayment and larger monthly 

payments during later repayment periods for each of their individual loans. 

Moreover, borrowers with relatively large loan balances can extend their 

repayment periods beyond a 10-year term, which results in smaller 

monthly payments. While these alternatives to consolidation have been 

added, borrowers must meet certain criteria to be able to use them. For 

example, the ability to make a single payment is limited to borrowers 

whose loans are currently with a single lender, and the ability to extend 

repayment periods is, in some cases, limited to borrowers whose total loan 

balances are above certain limits. For borrowers who cannot use these 

options, consolidation loans remain the only vehicle under FFELP and 

FDLP by which they may combine multiple repayments into one and 

reduce the amount of their monthly repayments. Consolidation loans also 

allow borrowers to lock in a fixed interest rate for the life of the loan—an 

option not available to nonconsolidation loan borrowers in either 

program. The ability to lock in a low interest rate for the life of the loan is 

one factor that could motivate some borrowers to choose consolidation 

over other options. Borrowers’ repayment choices, including whether to 

obtain a consolidation loan or use other repayment alternatives, have 

consequences for federal costs. While consolidation loans may remain an 

important tool to help borrowers, overall federal costs in providing for 

consolidation loans may exceed federal savings from reduced defaults. 
Page 6 GAO-04-101 Student Loan Programs 

In this report, we recommend that the Secretary of Education assess the 

advantages of consolidation loans for borrowers and the government in 

light of program costs and identify options for reducing federal costs. 

We provided Education with a copy of our draft report for review and 

comment. In written comments on our draft report, Education agreed with 

our reported findings and recommendations. Education’s written 

comments appear in appendix I. Education also provided technical 

comments, which we incorporated where appropriate. 

Congress created consolidation loans under Title IV of the HEA to help 

borrowers combine and reduce monthly repayments so as to help 

decrease federal loan default costs. Consolidation loans are available 

under Education’s two major student loan programs—the FFELP and 

FDLP. Under FFELP, private lenders make loans to students with 

Education guaranteeing the lenders loan repayment and a rate of return on 

the loans they make. Under FDLP, the federal government makes loans to 

students using federal funds. 

In addition to consolidation loans, a number of other types of loans are 

available under FFELP and FDLP, including subsidized Stafford, 

unsubsidized Stafford, and PLUS loans. Both subsidized and unsubsidized 

Stafford loans are variable rate loans that are available to undergraduate 

and graduate students. The interest rates borrowers pay on these loans 

adjust annually, based on a statutorily established market-indexed rate 

setting formula, and may not exceed 8.25 percent. To qualify for a 

subsidized Stafford loan, a student must establish financial need. Students 

can qualify for unsubsidized Stafford loans regardless of financial need. 

The federal government pays the interest on behalf of subsidized loan 

borrowers while the student is in school. Unsubsidized loan borrowers are 

responsible for all interest costs. PLUS loans are variable rate loans that 

are available to parents of dependent undergraduate students. The interest 

rates on these loans adjust annually, based on a statutorily established 

market-indexed rate setting formula, and may not exceed 9 percent. 

Parents can qualify for PLUS loans regardless of financial need. 

Consolidation loans differ from Stafford and PLUS loans in that they 

enable borrowers who have multiple loans—possibly from different 

Background 

FFELP and FDLP Offer 

Several Types of Loans 
Page 7 GAO-04-101 Student Loan Programs 

lenders, different guarantors,6 and even from different loan programs—to 

combine their loans into a single loan and make one monthly payment. 

Consolidation loans are new originations that, in general, do not 

contribute to increases in outstanding loan balances because they 

refinance already existing loans.7

 By obtaining a consolidation loan, 

borrowers can lower their monthly payments by extending the repayment 

period longer than the maximum 10 years generally available on Stafford 

and PLUS loans. Consolidation loans also provide borrowers with the 

opportunity to lock in a fixed interest rate on their student loans, based on 

the weighted average of the interest rates in effect on the loans being 

consolidated rounded up to the nearest one-eighth of 1 percent, capped at 

8.25 percent. Borrowers can qualify for consolidation loans regardless of 

financial need. 

Loans eligible for inclusion in a consolidation loan must be comprised of 

at least one eligible FFELP or FDLP loan (subsidized and unsubsidized 

Stafford loans, PLUS loans, and, in some instances, consolidation loans). 

Other types of federal student loans made outside of FFELP and FDLP, 

which may carry a variable or fixed borrower interest rate, are also eligible 

for inclusion in a consolidation loan, including Perkins loans, Health 

Professions Student loans, Nursing Student Loans, and Health Education 

Assistance loans8

 (HEAL). 

Consolidation loans under FFELP and FDLP accounted for about 

44 percent of the $71.8 billion in total new student loan dollars that 

originated during fiscal year 2002. FFELP consolidation loans comprised 

about 72 percent of the fiscal year 2002 consolidation loan volume, while 

FDLP consolidation loans accounted for the remaining 28 percent. 

 6

State and nonprofit guaranty agencies receive federal funds to play the lead role in 

administering many aspects of the FFELP program, including reimbursing lenders when 

loans are placed in default and initiating collection work. 

7

In some cases, according to Education, borrowers’ outstanding loan balances may 

increase if collections costs assessed borrowers are included in the amounts being 

consolidated. 

8

Perkins Loans are fixed rate loans for both undergraduate and graduate students with 

exceptional financial need. Perkins loans are made directly by schools using funds 

contributed by the federal government and schools; borrowers must repay these loans to 

their school. The Health Professions Student Loans and Nursing Student Loans are fixed 

rate loans for borrowers who pursue a course of study in specified health professions. The 

HEAL program provided loans to eligible graduate students in specified health professions. 

HEAL was discontinued on September 30, 1998. 
Page 8 GAO-04-101 Student Loan Programs 

The Federal Credit Reform Act (FCRA) of 1990 was enacted to require 

agencies to more accurately measure the government’s cost of federal loan 

programs and to permit better cost comparisons among and between 

credit programs, such as FDLP and FFELP. Prior to implementing FCRA, 

the budgetary cost of a new direct loan or loan guarantee was reported on 

a cash basis. Thus, loan guarantees appeared to be free in the budget year, 

while direct loans appeared to be as expensive as grants. As a result, costs 

were distorted and credit programs could not be compared meaningfully 

with other programs and with each other. FCRA and the related 

accounting standards and budgetary guidance, together known as credit 

reform, were established to more accurately measure the government’s 

costs of federal credit programs. 

As part of implementing credit reform, agencies are required to estimate 

the long-term cost to the government of a direct loan or a loan guarantee, 

generally referred to as the subsidy cost, based on the present value of 

estimated net cash flows, excluding administration costs. 

For FFELP loans, the subsidy cost of a loan guarantee is the net present 

value, when a guaranteed loan is disbursed, of estimated cash flows such 

as: 

• Payments by the government to lenders to cover loan defaults and interest 

subsidies. (Interest subsidies include payments to lenders that provide 

them a guaranteed rate of return on the loans they make as well as 

payments of interest on behalf of subsidized Stafford loan borrowers who 

are in periods of deferment).9

• Payments by lenders to the government, including origination and other 

fees, penalties assessed borrowers, and recoveries on defaulted loans. 

(For consolidation loans, FFELP loan holders must pay, on a monthly 

basis, a fee calculated on an annual basis equal to 1.05 percent of the 

unpaid principal and accrued interest of the loans in their portfolio.) 

For FDLP loans, the subsidy cost of a direct loan is the net present value, 

at the time when the direct loan is disbursed, of estimated cash flows such 

as 

• loan disbursements by the government to borrowers and 

 9

Deferment equals a period of time during repayment in which the borrower, upon meeting 

certain conditions, is not required to make payments of loan principal. 

Federal Credit Reform Act 

of 1990 Helps Define 

Federal Costs Associated 

with Consolidation Loans 

Subsidy Costs 
Page 9 GAO-04-101 Student Loan Programs 

• principal repayments and payments of interest by borrowers to the 

government. 

The subsidy costs of FDLP loans are also affected by the interest 

Education must pay to Treasury to finance its lending activities. 

Administration costs include all costs directly related to FDLP program 

operations, including loan servicing, loan system development and 

maintenance, including computer costs, and the costs of collecting on 

delinquent loans. For FFELP loans, lenders incur a substantial portion of 

administration costs. The federal government initially pays many of these 

costs by paying an allowance to the lenders. These allowances are part of 

the subsidy cost under credit reform. For FDLP loans, the federal 

government pays for administration costs directly. 

Consolidation loan borrowers differed from nonconsolidation loan 

borrowers in a variety of ways. On average, consolidation loan borrowers 

had higher student loan debt, higher incomes, larger annual loan 

repayments, and longer repayment periods. They were also less likely to 

have attended a proprietary (or, for-profit) school and were more likely to 

have borrowed while attending graduate/professional school. In addition, 

they averaged more student loans from more lenders. Overall, 

consolidation loan borrowers defaulted less often than borrowers who had 

not consolidated their loans. 

Borrowers with consolidation loans had a higher average amount of 

student loan debt than nonconsolidation loan borrowers. Prior to 

consolidation, the average student loan debt for our sample of 

consolidation loan borrowers from January 1987 through November 2002 

was $21,735, more than twice the average of $9,587 for nonconsolidation 

borrowers (see fig. 1). While average student loan debt was higher for 

consolidation loan borrowers, the average student loan debt for both types 

of borrowers increased over time. Between 1992 and 2002, the average 

student loan debt increased from $17,420 to $35,339 for consolidation loan 

borrowers, and from $7,267 to $15,720 for nonconsolidation borrowers. 

Administration Costs 

Consolidation 

Borrowers Had More 

Debt, Higher Incomes, 

and Differed in Other 

Ways When 

Compared with 

Nonconsolidation 

Borrowers 

Consolidation Borrowers 

Had Higher Student Loan 

Debt and Incomes, Larger 

Loan Repayments, and 

Longer Repayment Periods 
Page 10 GAO-04-101 Student Loan Programs 

Figure 1: Average Student Loan Debt of Consolidation Loan Borrowers Prior to 

Consolidation Compared with Nonconsolidation Borrowers Originating Loans 

January 1987 to November 2002 

Note: Amounts analyzed and reported are in nominal dollars. 

Borrowers with consolidation loans had higher average incomes and 

higher average annual repayments on their student loans than 

nonconsolidation loan borrowers. In addition, loan repayments comprised 

a slightly higher percentage of the incomes of consolidation borrowers, 

with an annual student loan repayment-to-income ratio of 9.4 percent for 

consolidation loan borrowers and 8.4 percent for nonconsolidation 

borrowers (see table 1). Not only did consolidation loan borrowers have 

higher average incomes than nonconsolidation loan borrowers, 39 percent 

of them had family incomes greater than $50,000, compared with 23 

percent of nonconsolidation borrowers with family incomes greater than 

$50,000. 

Average student loan debt

$0

Consolidation

loan borrowers

Nonconsolidation

loan borrowers

$5,000

$10,000

$15,000

$20,000

21,735

9,587

$25,000

Source: GAO analysis of NSLDS data.
Page 11 GAO-04-101 Student Loan Programs 

Table 1: Annual Income and Annual Student Loan Repayment of Consolidation 

Borrowers Compared with Nonconsolidation Borrowers Entering Repayment in 

1999 

 Consolidation borrowers Nonconsolidation borrowers 

Average income $47,150 $32,591 

Average annual 

repayment $3,355 $2,126 

Average student loan 

repayment-to-income ratio 9.4% 8.4% 

Source: GAO analysis of IRS and Education data. 

Note: The annual student loan repayment-to-income ratio was calculated as the average debt burden 

across five income categories weighted by the number of borrowers in each category. 

For the FDLP loans in our sample,10 consolidation loans tended to have 

longer repayment periods than nonconsolidation loans. Over 62 percent of 

consolidation loans had repayment terms of 12 years or more, compared 

with 26 percent for nonconsolidation loans. The smaller loan balances 

often carried by nonconsolidation loan borrowers could help explain why 

a smaller portion of nonconsolidation loans had repayment periods of 

more than 10 years. For example, under FDLP, many of the repayment 

plans that allow the extension of repayment periods require a minimum 

loan balance of $10,000. The repayment periods for loan balances over 

$10,000 usually vary depending on the amount of the loan, with 30 years 

being the maximum repayment period for loan balances of $60,000 or 

more. Since our analysis indicates that nonconsolidation loan borrowers 

had an average loan debt of $9,587, these borrowers would not qualify for 

extended repayment periods. However, even when consolidation loan 

borrowers had the option to extend their repayment term, nearly 4-in10 (37 percent) of the consolidation loans in our sample had a standard 

10-year repayment period (see fig. 2). 

 10NSLDS does not contain information about repayment terms for FFELP loans. 
Page 12 GAO-04-101 Student Loan Programs 

Figure 2: Repayment Periods of Consolidation Loans Compared with 

Nonconsolidation Loans Originating from January 1987 to November 2002 

Consolidation loan borrowers were less likely than nonconsolidation loan 

borrowers to have attended a proprietary (or, for-profit) school. 

Additionally, borrowers with consolidation loans were somewhat more 

likely to have attended public or private/nonprofit schools than were 

nonconsolidation borrowers. Overall, 80 percent of consolidation 

borrowers attended public or private/nonprofit schools and 74 percent of 

nonconsolidation borrowers attended a public or private/nonprofit school 

(see fig. 3). 

Consolidation Borrowers 

Were Less Likely to Attend 

Proprietary Schools and 

More Likely to Have 

Borrowed While Attending 

Graduate/Professional 

School 

Percent of borrowers

0

20

40

60

37

62

74

26

80

10 years

12+ years

Consolidation

loans

Nonconsolidation

loans

Source: GAO analysis of NSLDS data.
Page 13 GAO-04-101 Student Loan Programs 

Figure 3: Type of School Attended by Consolidation Loan Borrowers Compared 

with Nonconsolidation Borrowers Originating Loans, January 1987 to November 

2002 

Although both consolidation and nonconsolidation loan borrowers tended 

to borrow prior to graduate/professional school, our analysis indicates 

that consolidation loan borrowers were more likely than nonconsolidation 

borrowers to have taken out a student loan while attending 

graduate/professional school. About 28 percent of consolidation loan 

borrowers borrowed while they were in graduate/professional school 

compared with 12 percent of nonconsolidation loan borrowers (see fig. 4). 

Percent of borrowers

0

20

40

60

49

31

20

26 26

48

Public school

Private/nonprofit school

Proprietary school

Consolidation

loan borrowers

Nonconsolidation

loan borrowers

Source: GAO analysis of NSLDS data.
Page 14 GAO-04-101 Student Loan Programs 

Figure 4: Percentage of Consolidation Loan Borrowers Who Borrowed for 

Graduate/Professional School Compared with Nonconsolidation Borrowers 

Originating Loans, January 1987 to November 2002 

Prior to consolidating their loans, consolidation loan borrowers averaged 

more loans from more lenders than nonconsolidation loan borrowers. 

Consolidation loan borrowers had taken out an average of about six loans 

each, nearly twice the average number for nonconsolidation borrowers 

(see fig. 5). Furthermore, consolidation loan borrowers were more likely 

to have borrowed from more than one lender. Prior to consolidation, 

28 percent of consolidation loan borrowers had loans from three or more 

lenders compared with 9 percent for nonconsolidation borrowers (see 

table 2). 

Consolidation Borrowers 

Had More Loans and 

Borrowed from More 

Lenders 

0

10

20

30 28

12

Consolidation

loan borrowers

Nonconsolidation

loan borrowers

Percent of borrowers

Source: GAO analysis of NSLDS data.
Page 15 GAO-04-101 Student Loan Programs 

Figure 5: Average Number of Loans of Consolidation Loan Borrowers Compared 

with Nonconsolidation Borrowers Originating Loans, January 1987 to November 

2002 

Table 2: Number of Lenders of Consolidation Borrowers Compared to 

Nonconsolidation Borrowers Originating Loans, January 1987 to November 2002 

Number of lenders Consolidation borrowers Nonconsolidation borrowers 

1 37% 69% 

2 35% 22% 

3 or more 28% 9% 

Total 100% 100% 

Source: GAO analysis of NSLDS data. 

Fewer consolidation loan borrowers in our sample had defaulted on their 

consolidation loans than nonconsolidation borrowers had defaulted on 

their loans. The overall default rate for consolidation loan borrowers who 

had defaulted on their consolidation loans was about 8 percent compared 

with the overall default rate of 23 percent for nonconsolidation borrowers 

(see fig. 6). 

Consolidation Borrowers 

Defaulted Less Often 

Average number of loans

0

2

4

6

6.25

3.18

8

Consolidation

loan borrowers

Nonconsolidation

loan borrowers

Source: GAO analysis of NSLDS data.
Page 16 GAO-04-101 Student Loan Programs 

Figure 6: Percentage of Consolidation Borrowers Who Defaulted on Consolidation 

Loans Compared with Nonconsolidation Borrowers Who Defaulted on Loans, 

January 1987 to November 2002 

Some consolidation loan borrowers had defaulted on a student loan prior 

to obtaining their consolidation loan and then subsequently defaulted on 

their consolidation loan as well. About one-fifth (19 percent) of 

consolidation loan borrowers had, in fact, defaulted on a loan before they 

obtained a consolidation loan; of these borrowers, about 23 percent 

subsequently defaulted on their consolidation loans. Of the approximately 

four-fifths (81 percent) of consolidation loan borrowers that had never 

defaulted on a student loan prior to obtaining a consolidation loan, about 

5 percent defaulted on their consolidation loan. 

Although recent trends in interest rates and consolidation loan volumes 

have affected the FFELP and FDLP consolidation programs in somewhat 

different ways, the net effect has been an increase in estimated subsidy 

and administration costs for loans made in fiscal year 2003 as compared 

with loans made in fiscal year 2002. In FFELP, estimated subsidy costs 

rose from $1.3 billion for loans made in fiscal year 2002 to nearly $3 billion 

for loans made in fiscal year 2003. These estimated subsidy costs are 

affected by the amount the federal government must pay to lenders to 

guarantee them a statutorily established rate of return, which fluctuates 

over time as interest rates rise and fall. Increased FFELP consolidation 

loan volume in 2003 also raised costs. For FDLP consolidation loans, the 

margin of difference narrowed between the interest rate that Education 

Interest Rates and 

Increased Loan 

Volumes Have 

Increased Federal 

Costs 

0

10 8

23

20

30

Percent of borrowers

Consolidation

loan borrowers

Nonconsolidation

loan borrowers

Source: GAO analysis of NSLDS data.
Page 17 GAO-04-101 Student Loan Programs 

earned from borrowers and the rate that Education paid to the Treasury to 

finance direct loans. As a result of this smaller difference, as well as an 

expected decrease in demand for FDLP consolidation loans compared to 

prior years, the estimated net interest gain to the government dropped 

from $460 million in fiscal year 2002 to $286 million in fiscal year 2003. The 

movement of subsidy costs for loans made in future years will depend 

heavily on what happens to interest rates and loan volumes. 

Administration costs are not specifically tracked for either loan program, 

but available evidence indicates that these costs have also risen. 

Recent years have seen dramatic growth in loan volume for both 

consolidation loan programs, along with an overall drop in interest rates 

for borrowers that correspond to the overall decline in interest rates. 

From fiscal year 1998 through fiscal year 2002, the volume of consolidation 

loans made (or “originated”) rose from $5.8 billion to over $31 billion. Of 

the over $31 billion in consolidation loan volume for fiscal year 2002, 

$22.7 billion was in the FFELP and $8.8 billion was in the FDLP. While 

FDLP consolidation loan volume for fiscal year 2003 is expected to 

decrease, FFELP loan volume is expected to increase, resulting in a total 

consolidation loan volume of over $36 billion for the year. The dramatic 

growth in consolidation loan volume in recent years is due in part to 

declining interest rates that have made it attractive for many borrowers to 

consolidate their variable rate student loans at a low, fixed rate. From July 

2000 to June 2003, the minimum fixed interest rate for consolidation loans 

dropped 4 percentage points, with consolidation loan borrowers currently 

obtaining rates as low as 3.50 percent in the year beginning July 1, 2003. 

Figure 7 shows the relationship between these two factors. Under these 

conditions, some borrowers may find it in their economic self-interest to 

consolidate their loans so that they can lock in a low fixed interest rate for 

the life of the loan, as opposed to paying variable rates on their existing 

loans, regardless of whether they need a consolidation loan to avoid 

difficulty in making loan repayments. 

Borrowers’ Rates Have 

Dropped and Loan 

Volumes Have Risen 
Page 18 GAO-04-101 Student Loan Programs 

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

Underscoring the potential attractiveness of these loans to potential 

borrowers, many lenders, including newer loan companies that are 

specializing in consolidation loans, are aggressively marketing 

consolidation loans to compete for consolidation loan business as well as 

to retain the loans of their current customers. Their marketing techniques 

have included mass mailings, telemarketing, and Internet pop-ups to 

encourage borrowers to consolidate their loans. This increased marketing 

effort has likely contributed to the record level of consolidation loan 

volume. 

Overall estimated subsidy costs for consolidation loans made in fiscal year 

2003 were greater than for consolidation loans made in fiscal year 2002. In 

light of the differences between how the FFELP and FDLP operate, 

however, the costs of these two programs were affected in very different 

ways. For FFELP, the result was a substantial increase in estimated 

subsidy costs. For FDLP, the result was a narrowing of the net difference 

between the estimated interest payments paid by consolidated loan 

Effect on Subsidy Costs 

Varies between Programs 

Loan volume in billions

0

10

20

30

40

1998 1999 2000 2001 2002 2003

Borrower interest rate (percent)

0

2

4

6

8

10

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

Loan volume

Borrower rate

Fiscal year
Page 19 GAO-04-101 Student Loan Programs 

borrowers to Education and the costs paid by Education to Treasury to 

finance direct loans. 

Estimated subsidy costs for FFELP consolidation loans are expected to 

increase from $1.3 billion for loans made in fiscal year 2002 to almost 

$3 billion for loans made in fiscal year 2003. While part of the increase is 

the result of greater loan volume, the increase is primarily due to the 

higher interest subsidies the government is expected to pay to lenders to 

ensure they receive a guaranteed rate of return on student loans. 

The interest subsidy, which is called a special allowance payment (SAP), is 

based on a formula specified in law and paid by Education to lenders on a 

quarterly basis when the “guaranteed lender yield” exceeds the borrower 

rate. This guaranteed lender yield is currently based on the average 

3-month commercial paper11 interest rate plus an additional 2.64 percent. 

The amount of the quarterly SAP paid to loan holders equals the difference 

between the guaranteed lender yield and the borrower rate divided by four 

and multiplied by the average unpaid principal balance of all loans the 

lender holds. If the borrower’s interest rate exceeds the guaranteed lender 

yield, Education does not pay a SAP, and the lender receives the borrower 

rate. 

Education’s estimate of nearly $3 billion in subsidy costs for FFELP 

consolidation loans made in fiscal year 2003 is based on the assumption 

that the guaranteed lender yield will rise over the next several years, 

reflecting Education’s assumption that market interest rates are likely to 

rise from the historically low levels experienced in fiscal year 2003. In 

figure 8, the bottom line shows the fixed borrower rate for a FFELP 

consolidation loan made in the first 9 months of fiscal year 2003, while the 

top line shows Education’s estimated values for the guaranteed lender 

yield over time. In fiscal year 2003, market interest rates were such that 

the guaranteed lender yield established under the SAP formula was 

actually below the borrower rate. Lenders would therefore receive only 

the rate paid by borrowers; no SAP would be paid. However, in future 

years, when the guaranteed lender yield is expected to increase and be 

above the borrower rate, Education would have to make up the difference 

in the form of a SAP. As the figure shows, Education’s assumptions would 

 11Commercial paper is short-term, unsecured debt with maturities up to 270 days. It is 

issued in the form of promissory notes, primarily by corporations. Many companies use 

commercial paper to raise cash for current transactions, and many find it to be a lower-cost 

alternative to bank loans. 

Increased Special Allowance 

Payments to Lenders and 

Increased Loan Volume Caused 

FFELP Subsidy Costs to Rise 
Page 20 GAO-04-101 Student Loan Programs 

call for lenders to receive a SAP over most of the life of the consolidation 

loans made in fiscal year 2003. 

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

a

The estimated lender yield, which is based on the average 3-month commercial paper rates, as 

provided by the Office and Management and Budget (OMB), does not vary much after fiscal year 

2007 since the projected commercial paper rates do not vary much after fiscal year 2007. The actual 

lender yield could vary from these projections depending on future interest rates. 

b

This borrower rate is for a consolidation loan originated from October to June of fiscal year 2003 and 

whose underlying loans are Stafford loans disbursed after July1,1998, and in repayment at time of 

consolidation. 

In point of fact, Education is required to revise these estimates 

periodically to adjust for changing assumptions about interest rates and 

loan performance. Subsidy costs estimates for FFELP consolidation loans 

can vary substantially, depending on how much the guaranteed lender 

yield rises above the fixed rate paid by borrowers. Education is required to 

account for such changes in subsidy cost estimates by annually updating, 

or “reestimating,” loan program costs, in accordance with OMB budget 

4

5

6

0

2003

Fiscal year

2008 2010 2011 2012 2013 2014

Borrower rateb

Estimated lender yielda

SAP is the difference between the lender yield and the

borrower rate (if positive) times the principal balance.

2004 2005 2006 2007 2009

1

2

3

7

8

Interest rate (percent)

Source: GAO analysis of Education's Budget Service data.
Page 21 GAO-04-101 Student Loan Programs 

guidance.12 Any increase or decrease in the subsidy cost estimates 

resulting from reestimates is reflected in future program budget estimates 

as appropriate and Education’s end of the fiscal year financial statements 

whenever the reestimated amount is significant. Thus, Education’s 

estimates for both fiscal year 2002 loans and fiscal year 2003 loans are 

subject to change in the future. 

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

from fiscal years 2002 to 2003, but to a lesser degree than the higher 

interest subsidies the government is expected to pay to lenders. On their 

own, loan volumes can increase subsidy amounts. To illustrate, estimated 

subsidy costs can be converted into subsidy rates, reflecting the estimated 

unit cost per loan dollar to the federal government. For example, a $1,000 

loan with a federal subsidy cost of $100 would have a subsidy rate of 

10 percent. The subsidy rate for FFELP consolidation loans made in fiscal 

year 2002 was approximately 5.9 percent. Given a fiscal year 2002 FFELP 

consolidation loan volume of about $22.7 billion, and a subsidy rate of 

5.9 percent, federal subsidy costs can be determined by multiplying the 

loan volume by the subsidy rate ($22.7 billion X 0.059 = $1.3 billion). 

Viewed in this way, it is clear that even if the subsidy rate remained the 

same from fiscal year 2002 to 2003, the larger expected FFELP 

consolidation loan volume of $30.5 billion in fiscal year 2003 would have 

increased total subsidy costs to $1.8 billion (i.e., $30.5 billion X 0.059 = 

$1.8 billion), an increase of $0.5 billion from fiscal year 2002. However, the 

higher interest subsidies the government is expected to pay to lenders, as 

previously discussed, also increased the subsidy rate for FFELP 

consolidation loans made in fiscal year 2003. This rate—9.8 percent—

coupled with the estimated loan volume of $30.5 billion, resulted in the 

total FFELP consolidation loan subsidy costs of about $3 billion 

($30.5 billion X 0.098). 

 12To estimate the cost of loan programs, Education first estimates the future performance 

of direct and guaranteed loans when preparing their annual budgets. These first estimates 

establish the subsidy estimates for the current-year originated loans. The data used for the 

first estimates are reestimated later to reflect any changes in loan performance and 

expected changes in future economic performance. Reestimates are necessary because 

projections about interest and default rates and other variables that affect loan program 

costs change over time. Any increase or decrease in the estimated subsidy cost results in a 

corresponding increase or decrease in the estimated cost of the loan program for both 

budgetary and financial statement purposes. 
Page 22 GAO-04-101 Student Loan Programs 

Subsidy costs can occur within FDLP as well, but in a different way. The 

FDLP consolidation program is a direct loan program and therefore 

involves no guaranteed yields to private lenders. Still, the program has 

potential subsidy costs determined in part by the relationship between 

interest rates Education earns from borrowers—the borrower rate and the 

rate Education pays Treasury to finance its lending. The government’s cost 

of capital is determined by the interest rate Education pays Treasury to 

finance direct student loans, which is equivalent to the discount rate.13 The 

difference between borrowers’ rates and the discount rate—called the 

interest rate spread—is a key driver of subsidy estimates for FDLP loans. 

When the borrower rate is greater than the discount rate, Education will 

receive more interest from borrowers than it will pay in interest to 

Treasury to finance its loans, resulting in a positive interest rate spread—

or a gain (excluding administrative costs) to the government. Conversely, 

when the borrower rate is less than the discount rate, Education will pay 

more in interest to Treasury than it will receive from borrowers, which 

will result in a negative interest rate spread—or a cost to the government. 

For FDLP consolidation loans made in fiscal years 2002 and 2003, no such 

negative interest rate spreads were incurred in either year, based on the 

methodology Education uses to determine these costs. In both years, 

borrower interest rates for FDLP consolidation loans were somewhat 

higher than the discount rate, resulting in a net gain to the government. 

However, while Education continued to benefit from lending at interest 

rates higher than its cost of borrowing for FDLP consolidation loans made 

in fiscal year 2003, the size of this benefit is expected to decline from 

$460 million in fiscal year 2002 to $286 million in fiscal year 2003.14

 13While the discount rate is the interest rate used to calculate the present value of the 

estimated future cash flows to determine subsidy cost estimates, it is also generally the 

same rate at which interest is paid by Education on the amounts borrowed from Treasury 

to finance the direct loan program. 

14The subsidy estimates for consolidation loans made in fiscal year 2003 were developed by 

Education in August 2003. To account for recent changes in interest rates, we asked 

Education to update its estimates as of August 18, 2003, using a discount rate that we 

calculated based on the average of daily Treasury rates for various short- and long-term 

maturities during fiscal year 2003. Because our calculation was as of August 18, 2003, we 

approximated the Treasury rates through the remainder of the fiscal year based on the 

August 18, 2003, rates. At the end of fiscal year 2003, when OMB determines the actual 

discount rates for fiscal year 2003, estimated subsidy costs of the fiscal year 2003 FFELP 

and FDLP consolidation loans will likely change. 

Changing Interest Rates Also 

Affected FDLP Consolidation 

Loans 
Page 23 GAO-04-101 Student Loan Programs 

The smaller net gain that is expected to occur in fiscal year 2003 reflects a 

narrowed difference between the discount rate and the borrower rate. In 

fiscal year 2003, this difference narrowed in part because borrower rates 

dropped more than the discount rate. The borrower rates for FDLP 

consolidation loans dropped 2 percentage points, from 6 percent in fiscal 

year 2002 to 4 percent in fiscal year 2003. The discount rate, on the other 

hand, dropped by only 0.95 percentage points. The resulting interest rate 

spread decreased from 1.1 percent to 0.05 percent (see table 3). In other 

words, each $100 of consolidated FDLP loans made in fiscal year 2002, will 

result in $1.10 more in interest received by Education than it will pay out 

in interest to the Treasury. A similar loan originated in fiscal year 2003, 

however, will generate only $0.05 more in interest for the government. 

Table 3: Interest Rate Spread for FDLP Consolidation Loans Originated in Fiscal 

Years 2002 and 2003 

Fiscal 

year 

Borrower 

rate 

Discount 

rate 

Interest rate 

spread 

Estimated interest payments 

for each $100 of loans 

2002 6.0% 4.90% 1.1% 1.1% x $100 = $1.10 

2003 4.0% 3.95% 0.05% 0.05% x $100 = $0.05 

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

Note: The discount rate of 3.95 percent is an estimated discount rate on August 18, 2003. The actual 

discount rate for fiscal year 2003 may be higher or lower, which would reduce or increase the interest 

rate spread for fiscal year 2003. 

While Education revises estimates periodically to adjust for changing 

assumptions about future interest rates for FFELP consolidation loans, the 

borrower rate and the discount rate used to derive the subsidy cost for 

FDLP consolidation loans made in fiscal year 2003 are generally fixed for 

the life of the loans. As a result, the subsidy cost of FDLP consolidation 

loans made in any given fiscal year do not vary in the way that subsidy 

costs for FFELP consolidation loans do.15

 15Subsidy cost estimates for consolidation loans made in fiscal year 2003 will be updated 

when the actual discount rate for the loans made in fiscal year 2003 is known at the close 

of fiscal year 2003. Reestimates for interest rates for FDLP consolidation loans would 

generally not occur due to the fixed discount and borrower rates used for calculating 

subsidy cost estimates. However, technical reestimates which are made after the close of 

each fiscal year to adjust for changes in assumptions other than interest rates (e.g., 

defaults, recoveries, prepayments, and fees), may still occur and could result in changes to 

the subsidy cost estimates. 
Page 24 GAO-04-101 Student Loan Programs 

Loan volume also played a role in the smaller net gain that occurred in 

fiscal year 2003. While FDLP consolidation loan volume increased from 

about $5.4 billion in fiscal year 2000 to about $8.8 billion in fiscal year 

2002, Education estimated a decrease in demand for FDLP consolidation 

loans for 2003, expecting volume to be about $6 billion.16 The unit cost per 

loan dollar, or subsidy rate, for FDLP consolidation loans made in fiscal 

year 2002 was a negative 5.2 percent, which resulted in a negative 

subsidy17—that is, a “gain”—to the government of $0.052 for each dollar 

lent (excluding administrative costs). As previously discussed, the 

difference between the discount rate and the borrower rate narrowed 

from fiscal year 2002 to fiscal year 2003, which contributed to the 

increased subsidy rate from a negative 5.2 percent to a negative 

4.8 percent, resulting in a smaller gain, per loan dollar, to the government. 

Had the subsidy rate remained the same from fiscal year 2002 to fiscal year 

2003, the decrease in FDLP consolidation loan volume would have 

resulted in a reduced gain to the government of about $147 million. The 

subsidy rate increase from fiscal year 2002 to fiscal year 2003, however, 

coupled with reduced loan volume, resulted in a reduced gain of 

$174 million. 

As the discussion of both FFELP and FDLP loans shows, interest rates 

have a strong effect on whether subsidy costs occur and how large they 

are. As a measure of how great an effect different interest rate 

assumptions can have, we asked Education to conduct two additional sets 

of calculations for fiscal year 2002 FFELP and FDLP consolidation loans. 

Using the same loan volume and other assumptions of the fiscal year 2002 

estimates, Education applied the interest rate assumptions that were used 

to develop the estimates for the fiscal year 2001 and 2003 consolidation 

loans. These assumptions differed from those in place in fiscal year 2002, 

as well as from each other. In general, the interest rate assumptions for 

fiscal year 2001 were higher than the assumptions used in fiscal year 2002, 

and future interest rates were expected to decrease. The interest rate 

assumptions for fiscal year 2003, on the other hand, were generally lower 

 16Education’s $6 billion estimate was calculated as part of the 2003 Mid-Session Review and 

based on actual consolidation loan volume for the first two quarters of fiscal year 2003. 

Actual volume may differ. Further, in July 2003, borrower interest rates decreased from the 

prior year, which may increase demand for FDLP consolidation loans during the remainder 

of fiscal year 2003. 

17Negative subsidies mean subsidy costs that are less than zero. They occur if the present 

value of cash inflows to the government exceeds the present value of cash outflows. 

Subsidy Costs Are 

Sensitive to Interest Rate 

Changes 
Page 25 GAO-04-101 Student Loan Programs 

than the assumptions used in fiscal year 2002, and future interest rates 

were expected to increase. 

Calculating subsidy estimates under these three different sets of interest 

rate assumptions produced substantially different results. As figure 

9 shows, the results of this analysis indicated that for FFELP consolidation 

loans, the fiscal year 2001 interest rate assumptions would result in 

estimated subsidy costs totaling $129 million, or about $1 billion less than 

the estimated subsidy costs under the actual fiscal year 2002 estimates. In 

contrast, the fiscal year 2003 interest rate assumptions resulted in 

estimated subsidy costs totaling $2.4 billion, an increase of more than 

$1.2 billion in subsidy costs, even though the estimate was calculated 

across the same volume of loans. For FDLP consolidation loans, the 

analysis indicated that a greater interest rate spread between the discount 

rate and the borrower rate for the fiscal year 2001 interest rate 

assumptions, resulted in a net gain to the government totaling about 

$645 million or about $264 million more than the gain under the actual 

fiscal year 2002 estimates. In contrast, the fiscal year 2003 interest rate 

assumptions resulted in an estimated subsidy cost to the government 

totaling about $370 million, a change of about $751 million. This increase 

is primarily due to the negative interest rate spread in which the borrower 

rate used in fiscal year 2003 was less than the discount rate used in the 

fiscal year 2003 interest rate assumptions. 
Page 26 GAO-04-101 Student Loan Programs 

Figure 9: Illustration of Net Subsidy Costs to the Federal Government for 

Consolidation Loans Made in Fiscal Year 2002 Using Three Different Sets of Interest 

Rate Assumptions 

Note: Results were obtained by applying Education’s interest rate assumptions for fiscal years 2001, 

2002, and 2003 to the 2002 consolidation loans. Negative subsidy costs for FDLP using fiscal years 

2001 and 2002 rates represent a net gain for the federal government. 

Loan volume affects administrative costs, in that cost is in part a function 

of the number of loans originated and serviced during the year. As a result, 

when loan volume increases, administration costs also increase. 

Education’s current cost accounting system does not specifically track 

administration costs incurred by each of the student loan programs. 

Consequently, we were unable to determine the total administration costs 

Administration Costs Also 

Increase, but Mainly 

Because of Loan Volume 

-$1.0

FY 2001 assumptions

Discount rate (FDLP) 5.31%

Borrower rate 7.75%

Lender yield (FFELP)

-- In FY 2001 7.53%

-- In 10 years 7.36%

-$0.5

$0.0

$0.5

0.129

1.169

2.41

0.37

-0.381

-0.649

$1.0

$1.5

$2.0

$2.5

Billions

Results using

FY 2001 assumptions

Results using

FY 2002 assumptions

Results using

FY 2003 assumptions

FY 2002 assumptions

Discount rate (FDLP) 4.90%

Borrower rate 5.63%

Lender yield (FFELP)

-- In FY 2002 4.52%

-- In 10 years 7.36%

FY 2003 assumptions

Discount rate (FDLP) 5.47%

Borrower rate 4.13%

Lender yield (FFELP)

-- In FY 2003 4.02%

-- In 10 years 7.36%

Subsidy costs for FFELP loans

Subsidy costs for FDLP loans

Source: GAO analysis of Education's Budget Service data.
Page 27 GAO-04-101 Student Loan Programs 

incurred by consolidation loan programs or any off-setting administrative 

cost reductions associated with the prepayment of loans underlying 

consolidation loans. However, based on available Education data, we were 

able to determine some of the direct costs associated with the origination, 

servicing and collection of FDLP consolidation loans. For fiscal year 2002, 

these costs totaled roughly $52.3 million. This total includes approximately 

$31 million for loan origination, $19 million for loan servicing, and 

$3 million for loan collection. The $52.3 million does not include overhead 

costs, which include such expenses as personnel, rent, travel, training, and 

other activities related to maintaining program operations. For fiscal year 

2003, the estimated costs for the origination, servicing, and collection of 

FDLP consolidation loans is projected to increase by about $7 million to 

$59.5 million. 

While we similarly were unable to determine Education’s administration 

costs directly related to FFELP consolidation loans, they are likely to be 

smaller than for FDLP consolidation loans. This is because under FFELP, 

a large portion of administration cost is borne directly by lenders, who 

make and service the loans. The special allowance payments to lenders, 

which rise and fall as interest rates change are designed to ensure that 

lenders are compensated for administration and other costs, and provided 

with a reasonable return on their investment so that they will continue to 

participate in the program. 
Page 28 GAO-04-101 Student Loan Programs 

Repayment options, other than consolidation loans, that allow borrowers 

to simplify loan repayment and reduce repayment amounts are now 

available to some borrowers under both FFELP and FDLP, but these 

alternatives are not available to all borrowers. Since consolidation loans 

were first offered to borrowers, Congress has changed student loan 

programs in ways that provide borrowers with these loan repayment 

options. These options include provisions for combining multiple loan 

payments into one and for restructuring the repayment terms or 

lengthening the repayment period in order to lower monthly repayment 

amounts. However, these options are limited, in some cases, to borrowers 

who have loans with one lender, or whose loan balances meet certain 

criteria. These options also differ from the consolidation loan program in 

that they carry a variable borrower interest rate, while consolidation loans 

allow borrowers to lock in a fixed interest rate. In today’s environment, 

with current low interest rates that are expected to rise over time, the 

ability to lock in a low fixed rate may affect many borrowers’ decisions 

about which approach to take. Borrowers’ choices of whether to use 

consolidation loans or these other options have a budgetary effect for the 

federal government. Proposed legislation has been introduced in the 

108th Congress that, among other things, would replace the fixed 

borrower interest rate for consolidation loans with a variable interest rate. 

Other options, outside of consolidation, now exist for some borrowers to 

make single payments on multiple loans and reduce their payment 

amounts—options that were unavailable when Congress first introduced 

consolidation loans under the FFELP. For example, when Congress 

created the FDLP in 1993, Education provided FDLP borrowers with the 

ability to combine payments on multiple FDLP loans into a single 

payment. Similarly, in 1999, Education promulgated regulations requiring 

FFELP lenders to combine all of a borrower’s FFELP loans into a single 

account to be repaid under a single repayment schedule. Furthermore, 

Congress has provided borrowers with a number of repayment plans that 

give certain FFELP and FDLP borrowers who do not consolidate their 

loans flexibility to reduce monthly payment amounts in a variety of ways. 

For example, “graduated” and “income-sensitive” repayment plans 

introduced in 1992, allow borrowers to make smaller payments early in a 

repayment period, followed by larger payments in future years. (These 

plans assume that a borrower’s income will increase over the repayment 

period.) While borrowers who use the FFELP graduated and incomesensitive repayment plans must generally repay their loans over a 

10-year period, another repayment plan—“extended”—allows certain 

FFELP borrowers to lengthen their repayment terms up to 25 years, thus 

Repayment Options 

Other Than 

Consolidation Loans 

That Allow Borrowers 

to Simplify Loan 

Repayments and 

Reduce Repayment 

Amounts Exist, but 

Borrowers’ Use of 

These Options Is 

Limited by Several 

Factors 

Flexible Repayment 

Options Similar to 

Consolidation Are 

Available to Some 

Borrowers 
Page 29 GAO-04-101 Student Loan Programs 

reducing monthly repayment amounts. Under FDLP, borrowers have 

similar repayment options, plus additional flexibility to repay loans over 

longer periods, outside of consolidation. Table 4 summarizes the 

repayment plans available to borrowers under FFELP and FDLP. 

Table 4: Description of Borrower Repayment Plans 

FFELP repayment plans FDLP repayment plans 

Standard Borrowers make fixed monthly payments of at least 

$50 for up to 10 years.a

 Standard Borrowers make fixed monthly payments of at 

least $50 for up to 10 years.a

Graduated Borrowers make smaller payments early in a 

repayment period, and larger payments later, within 

certain limits (no repayment can be more than three 

times greater than any other). Repayment must occur 

within 10 years. 

 Graduated Borrowers make fixed monthly repayments at two 

or more levels (usually a lower amount for the 

early years of repayment and a larger amount in 

the later years) over a period of time that varies 

with the size of the loan and is the same as for the 

FDLP extended repayment plan (see below). 

Borrowers’ payments may not be less than the 

interest due or less than 50 percent, or more than 

150 percent, of the monthly repayment required 

under the standard plan. 

Extended Borrowers make fixed or graduated monthly 

repayments of at least $50 for a period of time that 

varies depending on the amount of the loan. 

Repayment must occur within 25 years. Extended 

repayment is limited to new borrowers on or after 

October 7, 1998, who accumulate (after such date) 

outstanding loans totaling more than $30,000. 

 Extended Borrowers make fixed 

monthly repayments of at 

least $50 for a period of 

time that varies 

depending on the amount 

of the loan: 

Amount: 

Less than 

$10,000..................... 

$10,000 to 

$19,999......... 

$20,000 to 

$39,999.......... 

$40,000 to 

$59,999.......... 

$60,000 or 

more.............. 

Maximum term: 

12 years 

15 years 

20 years 

25 years 

30 years 

Incomesensitive Borrowers’ payment amounts may be adjusted 

annually to reflect changes in a borrower’s income. 

Repayment plan is limited in the amount of 

adjustment that can be made by statutory 

requirements that the loan be repaid within the 10-

year maximum and that monthly repayments are, at a 

minimum, sufficient to cover interest.b

 Incomecontingent 

Borrowers’ payment amounts are based on the 

total amount of the borrower’s loan, income, and 

family size for a period up to 25 years. Under this 

repayment plan, borrowers repay based on annual 

income for up to 25 years with any remaining 

amount owed on the loan discharged at that time. 

Sources: HEA, Congressional Research Service, and Education. 
Page 30 GAO-04-101 Student Loan Programs 

a

Because of the variable interest rate for nonconsolidation loans, the loan holder may adjust either the 

size of the monthly repayment or the length of the repayment period annually. If the change in interest 

rates would result in a borrower being unable to complete repayment within the 10-year maximum, 

the loan holder may provide administrative forbearance for a maximum of 3 years (effectively 

extending the repayment period). 

b

FFELP regulations allow lenders some flexibility to extend repayment up to 15 years through 

“administrative forbearance” to accommodate the variable interest rates and sensitivity to very low 

incomes under this repayment plan. 

Consolidation loan borrowers, like other FFELP and FDLP borrowers, 

may choose among the four repayment plans offered under the programs. 

Borrowers who consolidate under FFELP may—in addition to flexibility 

offered by the repayment plans—extend their repayment periods up to 

30 years by choosing a standard, graduated, or income-sensitive 

repayment plan. Extending repayment periods, in general, will lower 

borrowers’ monthly repayment amount. Table 5 compares the repayment 

periods allowed by FFELP under consolidation with those allowed under 

nonconsolidation. 

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

 Maximum repayment period for nonconsolidation loans Maximum repayment period for consolidation loans 

Standard Up to 10 years 10-30 years 

depending on 

outstanding balance 

of loans: 

Amount 

Maximum period 

Less than $7,500... 

$7,500 to $9,999...... 

$10,000 to 

$$19,999... 

$20,000 to 

$39,999..... 

$40,000 to 

$59,999..... 

$60,000 or 

more........ 

10 years 

12 years 

15 years 

20 years 

25 years 

30 years 

Graduated Up to 10 years 10-30 years depending on outstanding balance of loans 

(see above) 

Incomesensitive Up to 10 years 10-30 years depending on outstanding balance of loans 

(see above) 

Extendeda Up to 25 years Up to 25 years 

Sources: HEA, Congressional Research Service, and Education. 
Page 31 GAO-04-101 Student Loan Programs 

a

Limited to borrowers who accumulate after October 7, 1998, outstanding loans totaling more than 

$30,000. 

Compared with FFELP borrowers, FDLP borrowers have more flexibility 

to extend the repayment periods for FDLP loans without obtaining a 

consolidation loan. Under the graduated and extended repayment plans, 

for example, FDLP borrowers may obtain a repayment period of up to 

30 years, regardless of whether they choose a consolidation loan or 

nonconsolidation option. Table 6 shows the repayment periods available 

for FDLP borrowers. 

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

 Maximum repayment period 

Standard Up to 10 years 

Graduated 12–30 years depending on loan 

amount: 

Amount 

Maximum period 

Less than $10,000..... 

$10,000 to $19,999...... 

$20,000 to $39,999...... 

$40,000 to $59,999...... 

$60,000 or more.......... 

12 years 

15 years 

20 years 

25 years 

30 years 

Extended 12–30 years depending on loan amount (see above) 

Income-contingent Up to 25 years 

Sources: HEA, Congressional Research Service, and Education. 

While the options, outside of consolidation, allow some borrowers to 

make single repayments on multiple loans and reduce their monthly 

repayment amounts—thus achieving ends similar to consolidation loans—

not all borrowers can take advantage of these flexibilities. First, borrowers 

who obtained FFELP loans from multiple lenders are still faced with 

making multiple loan payments because lenders are only required to 

combine borrowers’ repayments on the loans they make. Second, 

borrowers may be required to meet certain eligibility criteria—such as 

accumulating loans exceeding specified thresholds—to qualify for 

extended repayment periods. Finally, borrowers who obtained loans under 

multiple programs—FFELP, FDLP, or other programs—are also faced 

with multiple payments and may or may not be able to obtain lower 

monthly repayment amounts. Table 7 compares the extent to which 

borrowers can combine multiple loan payments into one, lower monthly 
Page 32 GAO-04-101 Student Loan Programs 

repayment amounts, and extend repayment periods under consolidation 

and nonconsolidation options. 

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

Composition of borrower’s loans 

Able to reduce to single 

payment? 

Able to adjust monthly 

payments through 

graduated or income-based 

approaches? 

Able to extend the 

repayment period? 

Consolidation loans 

 FFELP Yes Yes Yes for all borrowers, with 

length of period dependent on 

loan balance. 

 FDLP Yes Yes Yes for all borrowers, with 

length of period dependent on 

loan balance. 

 Combination of FFELP and FDLP 

and/or other loansa

Yes Yes Yes for all borrowers, with 

length of period dependent on 

loan balance. 

Nonconsolidation loans 

 FFELP loans from a single lender Yes Yes Yes, but only for borrowers 

with loans totaling more than 

$30,000. 

 FFELP loans from multiple lenders No Yes Yes, but only for borrowers 

with loans totaling more than 

$30,000. 

 FDLP loans Yes Yes Yes for all borrowers, with 

length of period dependent on 

loan balance. 

Combination of FFELP and FDLP 

and/or other loansa

No Varies by type of loan Varies by type of loan. 

Source: GAO analysis. 

a

Other federal student loans eligible for inclusion in a consolidation loan include Perkins loans, Health 

Professions Student loans, HEA loans, and Public Health Service Act Nursing Student Loans. 

Another key difference between consolidation loans and other repayment 

options for nonconsolidation loans is that these other options carry a 

variable interest rate, while consolidation loans carry a fixed interest rate 

for the life of the loan. Depending on prevailing interest rates and 

borrowers’ expectations about future interest rates, this difference may 

affect the decisions that borrowers make regarding whether to obtain a 

consolidation loan or use other options to combine payments, lower 

payments, and extend repayment periods. When interest rates are low, as 

they are now, and are expected to increase in the future, a consolidation 

Available Options Involve 

Variable Interest Rates, 

While Consolidation Offers 

Currently Attractive Fixed 

Rate 
Page 33 GAO-04-101 Student Loan Programs 

loan that carries a low fixed interest rate may be more attractive to 

borrowers because a variable rate may exceed the fixed rate during most 

or all of the remaining repayment period, which could be up to 30 years. 

However, if rates are expected to decrease in the future, repayment 

options that carry a variable rate may be more attractive, and borrowers 

may choose other options over consolidation, hoping to take advantage of 

lower rates in the future. Since it is difficult to predict interest rates over a 

lengthy period, borrowers need to be aware of all the risks involved before 

they make their final decision. Once student loans are consolidated, the 

interest rate is fixed for the life of the loan and, under current law, 

borrowers generally cannot reconsolidate their existing consolidation 

loans to take advantage of lower interest rates. Consequently, borrowers 

who chose to consolidate their student loans several years ago—and 

locked in what are now high rates relative to what borrowers can now 

obtain—are unable to take advantage of the current rate. For example, 

borrowers who consolidated between February and June 1999, have a 

locked rate of 8.25 percent.18 Borrowers who elected to consolidate 

between July 2002 and June 2003 received a rate of 4 percent, and for 

2004, the rate is expected to be about 3.5 percent. 

The choices that borrowers ultimately make will have consequences for 

federal costs. As previously discussed, federal costs for FFELP 

consolidation loans have recently increased because of the greater 

difference between borrowers’ fixed low interest rate and the variable rate 

guaranteed to lenders, which is expected to increase in the future. In this 

situation, were borrowers to choose an alternative option, costs to the 

federal government would likely be less because a variable borrower rate 

would increase along with the variable rate guaranteed to lenders and the 

difference between the two rates would be less. This decreased difference 

would result in decreased FFELP federal subsidy costs. If circumstances 

were different, however, federal subsidy costs could increase. For 

example, if borrowers obtained a consolidation loan with a fixed interest 

rate at a time when rates were expected to decrease in the future, federal 

subsidy costs would be lower, than is currently the case, because the 

borrower rate would likely exceed the rate guaranteed to lenders, and the 

federal government would not be required to pay a SAP. In such situations, 

if borrowers were to choose an alternative option with variable borrower 

 18This assumes that the underlying loans being consolidated were Stafford loans disbursed 

between July 1995 and July 1998 and were in repayment at the time of consolidation. 

Borrowers’ Choices 

between Fixed or Variable 

Rate Alternatives Affect 

Federal Costs 
Page 34 GAO-04-101 Student Loan Programs 

rates, federal subsidy costs could increase because the borrower rate 

would decline along with the variable rate guaranteed to lenders. In this 

case, the decreased difference could result in increased FFELP federal 

subsidy costs, if SAP payments became necessary. 

Borrowers’ choices between fixed and variable rate loans and among 

repayment periods also affect costs to the federal government associated 

with FDLP loans. A significant driver of FDLP costs, as previously 

discussed, is the difference between the discount rate and the borrower 

rate. In general, higher borrower rates will result in Education receiving 

larger interest payments from borrowers, thus decreasing federal costs. 

Allowing borrowers to lock in a low fixed rate might result in decreased 

federal revenues if the variable interest rates on those loans borrowers 

converted to a consolidation loan would have otherwise increased in the 

future. For both programs, federal costs are also affected by the 

repayment period chosen by borrowers. For example, longer FFELP 

repayment periods can result in the federal government making special 

allowance payments to lenders over a longer period of time. For FDLP, 

longer repayment periods can increase the amount of interest borrowers 

pay to Education on their loans and increase the amount of interest paid 

by Education on the amounts borrowed from Treasury. 

Proposed legislation has been introduced in the 108th Congress that, 

among other things, would replace the fixed borrower interest rate for 

consolidation loans with a variable interest rate, which will affect federal 

costs associated with consolidation loans. In particular, the Student Loan 

Fairness Consolidation Act of 2003 (H.R. 2504) would eliminate provisions 

that prevent borrowers who previously obtained a consolidation loan from 

obtaining a new consolidation loan and replace the current fixed borrower 

rate with a variable borrower rate for borrowers who refinance their 

existing consolidation loans as well as for new consolidation loan 

borrowers. 19 For example, borrowers who obtained a consolidation loan 

in the past and are paying higher rates of interest would be provided the 

 19Other proposed legislation includes the Consolidation Student Loan Flexibility Act of 

2003 (H. R. 942) and the College Loan Assistance Act of 2003 (H.R. 2505). H.R. 942 would, 

among other things, eliminate a requirement that borrowers certify to having sought and 

been unable to obtain a consolidation loan from any holders of the outstanding loans the 

borrower has selected for consolidation. Like H.R. 2504, H.R. 2505 would, among other 

things, eliminate provisions that prevent borrowers who previously obtained a 

consolidation loan from obtaining a new consolidation loan. 

Proposed Legislation 

Concerning Consolidation 

Loans Could Affect 

Federal Costs 
Page 35 GAO-04-101 Student Loan Programs 

opportunity to obtain a new consolidation loan at current (lower) 

borrower interest rates. In addition, in “re-consolidating” their loans, the 

proposed legislation would replace the current fixed borrower rate with a 

variable borrower rate. If enacted, the proposed legislation would affect 

federal costs due to the refinancing of previous consolidation loans and 

the change from fixed to variable borrower interest rates. 

Although additional options to consolidation are now available that give 

some FFELP and FDLP borrowers opportunities to simplify loan 

repayment and reduce repayments to more manageable levels, not all 

borrowers qualify. As a result, many borrowers may find that 

consolidation loans remain the only option for combining loans and 

lowering their monthly repayments. While consolidation loans may thus 

remain an important tool to help borrowers manage their educational debt 

and thus reduce the cost of student loan defaults, the surge in the number 

of borrowers consolidating their loans suggests that many borrowers who 

face little risk of default are choosing consolidation as a way of obtaining 

low fixed interest rates—an economically rational choice on the part of 

borrowers. If borrowers continue to consolidate their loans in the current 

low interest rate environment, and interest rates rise, the government 

assumes the cost of larger interest subsidies for FFELP consolidation 

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

spectrum of borrowers, however, may outweigh any government savings 

associated with the reduced costs of loan defaults for the smaller number 

of borrowers who might default in the absence of the repayment flexibility 

offered by consolidation loans. For FDLP consolidation loans, allowing 

borrowers to lock in a low fixed rate might result in decreased federal 

revenues if the variable interest rates on those loans borrowers converted 

to a consolidation loan would have otherwise increased in the future. The 

exact effects of FDLP consolidation loans, however, depend on a number 

of factors, including the length of loan repayment periods, borrower 

interest rates, and discount rates. Restructuring the consolidation loan 

program to specifically target borrowers who are experiencing difficulty in 

managing their student loan debt and at risk of default, and/or who are 

unable to simplify and reduce repayment amounts by using existing 

alternatives, might reduce overall federal costs by reducing the volume of 

consolidation loans made. In addition, making the other nonconsolidation 

options more readily available to borrowers might be a more cost-effective 

way for the federal government to provide borrowers with repayment 

flexibility while reducing federal costs. An assessment of the advantages 

of consolidation loans for borrowers and the government, taking into 

account program costs and the availability of, and potential changes to, 

Conclusion 
Page 36 GAO-04-101 Student Loan Programs 

existing alternatives to consolidation, and how consolidation loan costs 

could be distributed among borrowers, lenders, and the taxpayers, would 

be useful in making decisions about how best to manage the consolidation 

loan program and whether any changes are warranted. 

We recommend that the Secretary of Education assess the advantages of 

consolidation loans for borrowers and the government in light of program 

costs and identify options for reducing federal costs. Options could 

include targeting the program to borrowers at risk of default, extending 

existing consolidation alternatives to more borrowers, and changing from 

a fixed to a variable rate the interest charged to borrowers on 

consolidation loans. In conducting such an assessment, Education should 

also consider how best to distribute program costs among borrowers, 

lenders, and the taxpayers and any tradeoffs involved in the distribution of 

these costs. If Education determines that statutory changes are needed to 

implement more cost-effective repayment options, it should seek such 

changes from Congress. 

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

In commenting on the draft, Education agreed with our reported findings 

and recommendation, noting that our work will contribute to the policy 

discussions related to the reauthorization of the HEA. In addition, 

Education noted that it was pleased with our conclusion that 

consolidation loans have advantages for borrowers and may help them 

avoid default and that improving flexible repayment options for borrowers 

would provide several benefits. Education also provided technical 

comments, which we incorporated where appropriate. Education’s written 

comments appear in appendix I. 

As agreed with your offices, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days from its 

issue date. At that time we will send copies to the Secretary of Education 

and other interested parties. We will also make copies available to others 

upon request. In addition, the report will be available at no charge on 

GAO’s Web site at http://www.gao.gov

Recommendation for 

Executive Action 

Agency Comments 
Page 37 GAO-04-101 Student Loan Programs 

If you or your staff have any questions or wish to discuss this material 

further, please call me at (202) 512-8403, or Jeff Appel at (202) 512-9915. 

Other contacts and staff acknowledgments are listed in appendix II. 

Cornelia M. Ashby 

Director, Education, Workforce, 

 and Income Security Issues 
Appendix I: Comments from the Department 

of Education 

Page 38 GAO-04-101 Student Loan Programs 

Appendix I: Comments from the Department 

of Education 
Appendix II: GAO Contacts and Staff 

Acknowledgments 

Page 39 GAO-04-101 Student Loan Programs 

Jeff Appel (202) 512-9915 

Susan Chin (206) 287-4827 

In addition to those named above, Cindy Decker, Ben Jordan, Heather 

Macleod, Corinna Nicolaou, Stan Stenersen, Vanessa Taylor, and Marcia 

Carlsen made important contributions to this report. 

Appendix II: GAO Contacts and Staff 

Acknowledgments 

GAO Contacts 

Staff 

Acknowledgments 

(130269) 
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