GAO-04-567R FDLP Cost Estimates 

United States General Accounting Office

Washington, DC 20548 

March 29, 2004 

The Honorable Jim Nussle 

Chairman, Committee on the Budget 

House of Representatives 

Subject: Department of Education’s Federal Direct Loan Program: Status of 

Recommendations to Improve Cost Estimates and Presentation of Updated Cash 

Flow Information 

Dear Mr. Chairman: 

Under the Department of Education’s Federal Direct Loan Program (FDLP), students 

or their parents borrow money directly from the federal government through the 

vocational, undergraduate, or graduate schools that students attend. FDLP offers four 

loan types, including consolidation loans, which allow borrowers to combine multiple 

loans, possibly from different federal student loan programs, into a single loan with 

one monthly payment and a fixed borrower interest rate. The other three FDLP loan 

types provide variable borrower interest rates. The reported outstanding gross 

balance of FDLP loans to borrowers was $84.5 billion as of September 30, 2003, and 

the related allowance for subsidy1

—or the cost Education expected to incur on the 

outstanding loans—was $657 million. The key driver of the FDLP cost to the 

government is the difference between the borrower interest rate and Education’s 

financing cost or borrowing rate from Treasury. 

Because of concerns about Education’s reliance on estimates to project FDLP costs 

and a lack of historical information on which to base those estimates, the Committee 

previously asked us to review key aspects of Education’s cost estimates for FDLP. 

Our January 2001 report2

 identified the need for Education to improve its cost 

estimation process to provide more meaningful information. Recently, at your 

request, we assessed Education’s progress in addressing our January 2001 

recommendations and we updated certain cash flow information related to FDLP. 

This letter summarizes the information provided during our briefing to your office on 

 

1

 The allowance for subsidy is a financial statement reporting account used to recognize the costs of a 

loan program that are not expected to be recovered from borrowers, including default costs, 

subsidized interest payments, and financing costs. 

2

 U.S. General Accounting Office, Department of Education: Key Aspects of the Federal Direct Loan 

Program’s Cost Estimates, GAO-01-197 (Washington, D.C.: January 2001). 
Page 2 GAO-04-567R FDLP Cost Estimates 

February 18, 2004. The enclosed briefing slides highlight the results of our work and 

the information provided at the briefing. 

Results in Brief

In January 2001, we reported on several key aspects of Education’s cost estimates for 

FDLP, including its financing and cash flows. Our work identified the need for 

Education to make a number of improvements to provide Congress and program 

decision makers with more meaningful cost estimate information upon which to 

make timely and well-informed judgments concerning FDLP. As a result, we made 

five recommendations for Education to improve its subsidy cost estimate 

information.3

 Since our last report, we found that Education has taken actions that 

substantially addressed three of our five prior recommendations. To address our 

recommendation to develop a method to acquire actual FDLP cash flow data on the 

same basis as the cash flow model,4 Education implemented a data system to readily 

acquire such FDLP actual data that could be used to facilitate a detailed comparison 

of estimated and actual loan performance. To address our recommendation to 

develop an approach to directly factor consolidations into the cash flow model, 

Education conducted an analysis of loan payoff patterns resulting from 

consolidations and used this analysis to develop prepayment assumptions that 

directly factor consolidations into the cash flow model. To address our 

recommendation to prepare interest rate reestimates,5

 Education implemented 

procedures to prepare interest rate reestimates for its budget submissions and 

financial statements. 

While Education made important improvements to its cost estimate information, it 

has not taken action to fully resolve our recommendations to (1) formalize sensitivity 

analysis6 of its cash flow model assumptions to ensure that the most significant 

assumptions are identified, or (2) develop and implement a method of comparing 

detailed estimated and actual cash flows to more thoroughly assess loan performance 

estimates over time. Education officials agreed that additional procedures related to 

sensitivity analysis and comparing estimated and actual loan performance would be 

beneficial and a recently formed working group will consider additional procedures 

related to these issues. 

We updated FDLP cash flow information presented in our 2001 report related to (1) 

borrowing from Treasury, (2) appropriations received, (3) cash inflows and outflows, 

and (4) comparisons of estimated and actual key cash flows. Amounts borrowed from 

Treasury, which are expected to be repaid using borrower payments in future years, 

totalled $137 billion from fiscal years 1995 through 2003, of which about $92 billion 

 

3

 As agreed with your office, our review did not include assessing Education’s actions to address our 

January 2001 recommendation related to Education’s administrative cost system. 

4

 The cash flow model uses assumptions, data, and calculations to estimate future loan performance 

and the estimated cost of the program. 

5

 Agencies are required to periodically update or “reestimate” loan program costs. An “interest rate 

reestimate” adjusts the cost for the effect of changes in interest rates while loans are disbursing. The 

“technical/default reestimate” adjusts the cost for the effect of changes in loan performance, as well as 

changes in interest rates, after loans are substantially disbursed (more than 90 percent). 6

 Sensitivity analysis is a process used to identify the cash flow assumptions, which, when adjusted, 

have the greatest impact on the estimated subsidy cost. 
Page 3 GAO-04-567R FDLP Cost Estimates 

was outstanding as of September 30, 2003. Appropriations received, which are meant 

to cover the estimated subsidy cost of the program, totalled about $2.7 billion for 

loans approved during fiscal years 1995 through 2003.7 From fiscal years 1995 through 

2003, total cash outflows exceeded total cash inflows by about $10.7 billion,8

 mainly 

because interest Education paid to Treasury was significantly greater than interest 

receipts from borrowers. This is primarily because Education is required to make 

interest payments to Treasury, even if borrowers are not making interest payments to 

Education, which could occur when borrowers are in school or in a grace or 

deferment period. Over this same period, FDLP’s actual key cash flows (principal 

receipts, interest receipts, origination fees, and collections on defaults) were less 

than estimated by about $4.2 billion, primarily because Education overestimated 

interest receipts by about $6.1 billion. According to Education officials, interest 

receipts are a difficult cash flow to estimate because of complexities associated with 

periods during which students are not required to make interest payments. However, 

they told us that they would continue to analyze the interest calculations in the cash 

flow model in order to improve the estimates. 

Over the course of our work, we noted that Education did not disclose in its fiscal 

year 2003 financial statements an explanation of significant factors affecting a 

reestimate of about $5.1 billion, as required by Statement of Federal Financial 

Accounting Standards No. 18, Amendments to Accounting Standards for Direct 

Loans and Loan Guarantees. While this information was available, agency officials 

told us that it was not included in the financial statement disclosures because the 

disclosures were already very lengthy. Financial statement disclosures that explain 

significant factors contributing to reestimates, including changes in borrower rates, 

would provide Congress and other program decision makers with more meaningful 

cost estimation information about FDLP. 

Recommendation

To provide more meaningful cost estimate information that can be effectively used by 

Congress and program decision makers to make timely and well-informed judgments 

about FDLP, we are making one new recommendation. We recommend that the 

Department of Education’s Chief Financial Officer take the following action: 

• Provide additional financial statement disclosures that explain the significant 

factors, including the effect of changes in borrower interest rates, contributing to 

reestimates of FDLP, as required by established accounting guidance. 

Agency Comments

In oral comments the director of Education’s Cost Estimation and Analysis Division 

agreed with the findings, conclusions, and recommendation in our briefing slides. 

 

7

 The estimated FDLP subsidy cost could fluctuate (increase or decrease) significantly in the future 

depending on actual loan performance and changes in interest rates. 

8

 Our January 2001 report defined cash inflows for FDLP as loan origination fees and interest receipts 

from borrowers and defined cash outflows as net interest payments on Treasury borrowing. The same 

definitions were used for our briefing. 
Page 4 GAO-04-567R FDLP Cost Estimates 

Scope and Methodology

To determine what steps Education has taken to address our prior recommendations, 

we 

• interviewed knowledgeable Education officials to obtain an understanding of 

the actions they had taken since our prior report, 

• obtained and evaluated supporting documentation provided by Education to 

determine if Education’s actions resolved the previously identified 

weaknesses, and 

• used guidance issued by the Office of Management and Budget to determine if 

Education’s actions comply with applicable budget guidance. 

To update cash flow information from our prior report, we 

• reviewed Education’s audited financial statements for fiscal years 2000 to 2003 

and Appendices to the President’s Budget for fiscal years 2002 to 2005, and 

• obtained schedules of original FDLP subsidy estimates and reestimates for 

fiscal years 2000 to 2004 and schedules of estimated and actual FDLP cash 

flows (principal receipts, interest receipts, loan origination fees, and 

collections on defaults) for fiscal years 2000 to 2003 from Education. 

We verified the updated cash flow information to Education’s financial statements, 

budget documents, or other available source documents. We did not test the 

reliability of data included in Education’s new data system or data used by Education 

to develop new assumptions. 

We conducted our work from October 2003 through February 2004 in accordance 

with generally accepted government auditing standards. We requested and received 

oral comments on a draft of our briefing slides from cognizant Education officials. 

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

Financial Officer, and other interested parties. 

This report is available at no charge on our home page at http://www.gao.gov. If you 

have any questions about this report, please contact me at (202) 512-8341 or Phil 

McIntyre, Assistant Director, at (202) 512-4373. You may also reach us by e-mail at 

calboml@gao.gov or mcintyrep@gao.gov. Key contributors to this assignment were 

Marcia Carlsen and Brooke Whittaker. 

Sincerely yours, 

Linda M. Calbom 

Director, Financial Management 

 and Assurance 

Enclosure 
Enclosure 

Page 5 GAO-04-567R FDLP Cost Estimates 

1

Department of Education’s 

Federal Direct Loan Program

Status of Recommendations to Improve Cost 

Estimates and Presentation of Updated Cash 

Flow Information

Briefing to the Staff of the House Committee on the Budget

February 18, 2004
Enclosure 

Page 6 GAO-04-567R FDLP Cost Estimates 

2

Contents

• Disclosure of the Effect of Interest Rates on 39

Subsidy Costs

• Recommendation 60

• Conclusions 59

Page

• Agency Comments 61

• Updated Cash Flow Information 41

• Status of Recommendations 20

• Background 13

• Scope and Methodology 10

• Results in Brief 5

• Introduction 3
Enclosure 

Page 7 GAO-04-567R FDLP Cost Estimates 

3

Introduction

• Because of concerns about the Department of Education’s 

reliance on estimates to project the Federal Direct Loan 

Program’s (FDLP) costs and a lack of historical information 

on which to base those estimates, we were asked to review 

key aspects of Education’s cost estimates for FDLP.

• Our January 2001 report1 identified the need for 

Education to improve its cost estimation process to 

provide more meaningful information.

1 U.S. General Accounting Office, Department of Education: Key Aspects of the Federal Direct Loan Program’s 

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

Page 8 GAO-04-567R FDLP Cost Estimates 

4

Introduction

• This briefing provides the results of our follow-up review 

based on your request that we assess Education’s progress 

in improving its cost estimate information for FDLP. 

Specifically, our objectives were to

• determine what steps Education has taken to address our 

prior recommendations2 and whether these actions fully 

resolved the identified weakness, and

• update certain cash flow information related to FDLP, 

using the latest information available.

2As agreed with your staff, our review did not include assessing Education’s actions to address our 

recommendation related to Education’s administrative cost system.
Enclosure 

Page 9 GAO-04-567R FDLP Cost Estimates 

5

Results in Brief

• In January 2001, we reported on several key aspects of 

FDLP’s cost estimates. We found that the reliability of 

Education’s subsidy cost estimates (the cost of extending or 

guaranteeing credit over the life of the loans) were negatively 

affected by limitations in the department’s ability to monitor 

and adjust key factors in its subsidy cost estimation process. 

As a result, we made several recommendations for Education 

to improve its process. Since our last report, we found that 

Education has taken actions to improve its subsidy cost 

estimate information, including the implementation of a new 

data system to readily acquire detailed FDLP cash flow 

information, the development of new assumptions to directly 

factor consolidations into its cost estimates, and the 

preparation of interest rate reestimates. 
Enclosure 

Page 10 GAO-04-567R FDLP Cost Estimates 

6

Results in Brief

• While Education made several important improvements to its cost estimate 

information, it has not taken actions to fully resolve our recommendations 

to formalize and document the sensitivity analysis3 of assumptions in the 

cash flow model and to develop and implement a method of comparing 

detailed estimated to actual cash flows. However, Education officials 

indicated that a new working group will consider these issues. Table 1 

summarizes our prior report’s recommendations and Education’s progress 

in implementing them.

• In addition, because Education is not providing required financial statement 

disclosures that explain significant factors contributing to subsidy cost 

reestimates, we are making a new recommendation to enhance financial 

statement disclosures to provide more meaningful cost estimation

information for Congress and other program decision makers.

3Sensitivity analysis is a process used to identify which cash flow assumptions, when adjusted, have the greatest 

impact on the estimated subsidy cost.
Enclosure 

Page 11 GAO-04-567R FDLP Cost Estimates 

7

Results in Brief

Table 1 – Status of our January 2001 Recommendations 

Recommendations Substantial 

progress made

Additional action 

needed

Develop and implement a method to acquire actual cash flow data 

on the same basis as the cash flow model to facilitate a detailed 

comparison of estimated to actual cash flows.

*

Formalize and document the sensitivity analysis of assumptions 

included in the FDLP cash flow model to determine the sensitivity 

of FDLP subsidy costs to changes in the assumptions.

*

Develop and implement a method of routinely comparing FDLP's 

estimated and actual cash flows in order to determine if, over time, 

projected loan performance is reasonably predictive of actual 

performance.

*

Perform an analysis of the effects of consolidation on FDLP 

subsidy costs and develop an approach to directly factor 

consolidations into the cash flow model.

*

Develop and implement a plan to prepare interest rate reestimates 

to isolate the effects of changes in interest rates on subsidy costs. *

Source: GAO.
Enclosure 

Page 12 GAO-04-567R FDLP Cost Estimates 

8

Results in Brief

• We updated information related to FDLP’s financing, estimated 

cost, and cash flows based on the latest data available. 

• As of September 30, 2003, Education had borrowed about 

$137 billion from Treasury to finance FDLP lending, of which 

$92 billion was outstanding. 

• The fiscal year 1995 through 2003 cohorts4 have received 

appropriations of about $2.7 billion to cover the estimated 

subsidy cost. The estimated subsidy cost of the program could 

fluctuate significantly in the future (increases or decreases), 

depending on actual loan performance and changes in interest 

rates. 

4 A cohort includes those direct loans or loan guarantees of a program for which a subsidy appropriation is 

provided for in a given fiscal year even if the loans are not disbursed until subsequent years.
Enclosure 

Page 13 GAO-04-567R FDLP Cost Estimates 

9

Results in Brief

• From fiscal years 1995 through 2003, total cash outflows exceeded 

total cash inflows by about $10.7 billion because interest receipts from 

and origination fees paid by borrowers were less than the amount of 

interest Education paid to Treasury.5 This is primarily due to a 

difference between when Education pays interest to Treasury and 

when borrowers make interest payments to Education.

• Over the same period, FDLP’s actual cash flows (principal receipts, 

interest receipts, origination fees, and collections on defaults) were 

$4.2 billion less than estimated, primarily because Education 

overestimated interest receipts.

• We obtained oral comments on a draft of our briefing slides from cognizant 

Education officials, who agreed with our findings, conclusions, and 

recommendation.

5Our January 2001 report defined cash inflows for FDLP as loan origination fees and interest receipts from 

borrowers and defined cash outflows as net interest payments on Treasury borrowing.
Enclosure 

Page 14 GAO-04-567R FDLP Cost Estimates 

10

Scope and Methodology

• To determine what steps Education has taken to implement our 

recommendations, we

• Interviewed knowledgeable personnel from Education’s Budget Service and Federal Student Aid (FSA) offices to obtain an 

understanding of the actions taken to address our recommendations.

• Obtained and evaluated supporting documentation provided by 

Education officials to determine if Education’s actions resolved the 

previously identified weaknesses.

• Used the Office of Management and Budget (OMB) Circular A-11, 

Preparation, Submission, and Execution of the Budget, to determine if 

Education’s actions comply with applicable budget guidance.

• We did not test the reliability of data included in Education’s new 

database or data used by Education to develop new prepayment 

assumptions.6

6We did not evaluate the reasonableness of Education’s new assumptions because we believe more historical 

experience is needed before the actual quality of the assumptions can be determined.
Enclosure 

Page 15 GAO-04-567R FDLP Cost Estimates 

11

Scope and Methodology

• To update cash flow information from our January 2001 report, we

reviewed and verified data as follows

• borrowing from Treasury and repayments to Treasury for fiscal years 

2000 through 2003 were obtained from Education’s audited financial 

statements; 

• schedules of original subsidy estimates and reestimates for fiscal 

years 2000 to 2004 were obtained from Education and verified to 

source documentation or information from OMB;

• interest paid to Treasury for fiscal years 2000 through 2003 was

obtained from the Appendices to the President’s Budget; and 

• schedules of estimated7 and actual principal receipts, interest receipts, 

loan origination fees, and collections on defaults for fiscal years 2000 

through 2003 were obtained from Education. We verified actual 

amounts to the Appendices in the President’s Budget.

7Because these are estimates, no source verification could be made.
Enclosure 

Page 16 GAO-04-567R FDLP Cost Estimates 

12

Scope and Methodology

• Our audit work was conducted in Washington, D.C. from October 

2003 through February 2004 in accordance with generally accepted

government auditing standards. On February 17, 2004, we 

obtained oral comments on a draft of our briefing slides from 

cognizant Education officials, which are summarized on page 61.
Enclosure 

Page 17 GAO-04-567R FDLP Cost Estimates 

13

Background

• Prior to the Federal Credit Reform Act (FCRA) of 1990, credit 

programs—like most other federal programs—were reported in the 

budget on a cash basis.

• Loan guarantees appeared to be free in the budget year while direct loans appeared to be as expensive as grants.

• This cash basis distorted costs and, thus, the comparison of credit program costs with other programs and each other.

• FCRA was, among other reasons, enacted to more accurately 

measure the cost of federal loan programs and to permit better 

comparisons both among credit programs and between credit and 

noncredit programs.
Enclosure 

Page 18 GAO-04-567R FDLP Cost Estimates 

14

Background

• Under FCRA, agencies are required to estimate the cost of extending or 

guaranteeing credit over the life of the loan, called the subsidy cost.

• As indicated in figure 1, subsidy cost is equal to the present value8 of 

disbursements minus estimated payments to the government, over the 

life of the loan, excluding administrative costs.

• Figure 1: Calculation of Direct Loan Subsidy Cost

8Present value is the worth of a future stream of returns or costs in terms of money paid immediately. In calculating 

present value, prevailing interest rates provide the basis for converting future amounts into their “money now” 

equivalents.

Present Value of 

Disbursements by 

Government

Present Value of 

Estimated Payments to 

the Government

Subsidy 

Cost Less =

•Loan disbursements

•Other payments

•Principal repayments

•Interest payments

•Fees

•Other recoveries and 

payments

•Appropriated Amount
Enclosure 

Page 19 GAO-04-567R FDLP Cost Estimates 

15

Background

• Agencies are required by FCRA to periodically update or “reestimate” loan 

program costs for differences between (1) estimated loan performance and 

related cost and (2) the actual program costs recorded in the accounting 

records as well as expected changes in future economic performance.

• OMB Circular A-11 requires agencies to prepare two types of reestimates.

• An “interest rate reestimate” must be done when a cohort is substantially disbursed, generally 90 percent. This reestimate adjusts for the effect of 

changes in interest rates while the loans are disbursing.

• A “technical/default reestimate” generally must be done annually, as long as the loans are outstanding. This reestimate adjusts for the effect of 

changes in loan performance, such as defaults, recoveries, prepayments, 

and fees, as well as changes in interest rates after the loans are 

substantially disbursed.

• Accounting guidance for credit programs generally mirrors the budget 

guidance. 
Enclosure 

Page 20 GAO-04-567R FDLP Cost Estimates 

16

Background

• Agencies finance the disbursement of direct loans through a 

combination of borrowing from Treasury and appropriations as 

required by FCRA. 

• The portion borrowed from Treasury represents amounts that 

an agency expects to be repaid by borrowers in future years 

and is not considered a cost to the government.

• The portion covered by appropriations represents the subsidy 

cost, which generally includes the amount not expected to be 

repaid by borrowers, any interest payments subsidized for 

borrowers, and the cost associated with financing the lending to

borrowers.
Enclosure 

Page 21 GAO-04-567R FDLP Cost Estimates 

17

Background

• Under FDLP, students or their parents borrow money directly from the 

federal government through the schools the students attend, which include 

vocational, undergraduate, and graduate schools.

• The first FDLP loans were made in fiscal year 1994.

• FDLP is a mandatory lending program, or entitlement program. The

amount of funding needed depends on the number of borrowers satisfying 

eligibility and benefits rules. FDLP has a permanent indefinite appropriation 

for whatever amount of subsidy cost is needed to meet borrower demands.

• As of September 30, 2003, Education reported that the outstanding gross balance of FDLP was $84.5 billion and the related allowance for subsidy—

the amount Education expects to lose on the outstanding loans—was $657 

million.
Enclosure 

Page 22 GAO-04-567R FDLP Cost Estimates 

18

Background

• FDLP offers four different loan types:

• Federal Direct Stafford Subsidized/Ford Loan Program provides variable rate loans to undergraduate and graduate 

students with demonstrated financial need,

• Federal Direct Unsubsidized Stafford/Ford Loan Program provides variable rate loans to undergraduate and graduate 

students regardless of financial need,

• Federal Direct PLUS Program provides variable rate loans to parents of dependent undergraduate students, and

• Federal Direct Consolidation Loan Program (Consolidation loans) allows borrowers to combine multiple loans possibly 

from different federal student loan programs into a single loan 

with one monthly payment and a fixed borrower rate.9

9GAO has ongoing work analyzing differences between Education’s direct loan and loan guarantee consolidation 

borrowers and how Education accounts for these differences in developing its cost estimates.
Enclosure 

Page 23 GAO-04-567R FDLP Cost Estimates 

19

Background

• The key driver of FDLP subsidy costs is the difference, or spread, between the 

borrower rate (the rate Education earns interest from borrowers) and the discount 

rate (generally the borrowing rate from Treasury).

• 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 lending, resulting in a positive interest rate spread and a lower subsidy cost.

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

more interest to Treasury to finance its lending than it will receive from 

borrowers, resulting in a negative interest rate spread and a higher subsidy 

cost. 

• Because most FDLP loans offer a variable borrower interest rate, and these rates 

cannot be readily predicted from year to year, estimating the subsidy cost of FDLP is 

very difficult. Therefore, wide fluctuations in subsidy costs can be expected, 

depending on the extent of interest rate changes.10

10Under Pub. L. No. 107-139, 116 Stat. 8 (2002), new FDLP loans for which the first disbursement is made on 

or after July 1, 2006, shall have a fixed borrower rate.
Enclosure 

Page 24 GAO-04-567R FDLP Cost Estimates 

20

Status of Recommendations

The Following Are Actions Education Has Taken to Address 

Recommendations in Our January 2001 Report

Department of Education: Key Aspects of the Federal Direct 

Loan Program’s Cost Estimates (GAO-01-197)
Enclosure 

Page 25 GAO-04-567R FDLP Cost Estimates 

21

Status of Recommendations

• We assessed Education’s progress in improving its cost 

estimation process in the following areas:

• Data availability

• Sensitivity analysis

• Comparing estimated and actual cash flows

• Effect of consolidations on FDLP subsidy costs

• Interest rate reestimates
Enclosure 

Page 26 GAO-04-567R FDLP Cost Estimates 

22

Status of Recommendation - Data 

Availability

2001 Recommendations

To provide more meaningful FDLP cost estimation information,

we recommended that the Secretary of the Department of

Education charge the Budget Director responsible for preparing

FDLP cost estimates to:

• Develop and implement a method to acquire actual cash flow 

data on the same basis as the cash flow model—by loan 

profile,11 cohort, and key assumption—to facilitate a detailed 

comparison of estimated to actual cash flows.

11The loan profile encompasses the loan type, the type of school the student attends, and in some cases the year 

of schooling for the student and the repayment option selected.
Enclosure 

Page 27 GAO-04-567R FDLP Cost Estimates 

23

Status of Recommendation - Data 

Availability

Education Actions

• FSA implemented a new system, the Credit Management Data Mart 

(CMDM), which has loan-level financial data and demographic 

information for FDLP borrowers.

• CMDM data sources include the Financial Management 

System and the Direct Loan Servicing System. 

• Data from CMDM is available on the same basis as the cash 

flow model—by loan profile, cohort, and key assumption.

• According to Education, CMDM allows it to obtain 

comprehensive reporting for direct loan data.
Enclosure 

Page 28 GAO-04-567R FDLP Cost Estimates 

24

Status of Recommendation - Data 

Availability

Progress Assessment

• Substantial progress made. Recommendation closed.
Enclosure 

Page 29 GAO-04-567R FDLP Cost Estimates 

25

Status of Recommendation - Sensitivity 

Analysis

Recommendation

• Formalize and document the sensitivity analysis of 

assumptions included in the cash flow model to ensure that 

all key assumptions used in the cash flow model have been 

identified and to determine the sensitivity of FDLP subsidy 

costs to changes in these assumptions.

Education Actions

• Education’s sensitivity analysis process is the same as prior 

to our recommendation.
Enclosure 

Page 30 GAO-04-567R FDLP Cost Estimates 

26

Status of Recommendation - Sensitivity 

Analysis

• Education continues to prepare sensitivity analysis for interest rate 

assumptions for its financial statement auditor.

• Informal sensitivity analysis continues to be used by Education to 

analyze and test cash flow model revisions.

• Education officials said that they know the key assumptions 

affecting FDLP costs and that the detailed sensitivity analysis 

performed for our January 2001 report confirmed this. However, 

they agreed that periodically preparing additional sensitivity 

analysis of significant cash flow assumptions would be beneficial.
Enclosure 

Page 31 GAO-04-567R FDLP Cost Estimates 

27

Status of Recommendation - Sensitivity 

Analysis

• Education officials indicated that a recently formed credit 

reform working group, which will focus on formalizing and 

documenting cash flow assumptions and making its credit 

subsidy estimates more transparent, will consider more 

formalized procedures related to performing and 

documenting sensitivity analysis. 
Enclosure 

Page 32 GAO-04-567R FDLP Cost Estimates 

28

Status of Recommendation - Sensitivity 

Analysis

Progress Assessment

• Additional action is needed. Recommendation remains open.

• We will continue to monitor any changes that result from 

the credit reform working group’s efforts.
Enclosure 

Page 33 GAO-04-567R FDLP Cost Estimates 

29

Status of Recommendation - Comparing 

Estimated and Actual Cash Flows

Recommendation

• Develop and implement a method of routinely comparing 

FDLP’s estimated and actual cash flows, including

• identifying significant differences in total and by cohort,

• researching significant differences to determine the specific cause,

• determining any revisions needed in the cash flow model to ensure that it reasonably predicts future borrower 

behavior, and

• determining whether, over time, projected loan performance is reasonably predictive of actual loan 

performance.
Enclosure 

Page 34 GAO-04-567R FDLP Cost Estimates 

30

Status of Recommendation - Comparing 

Estimated and Actual Cash Flows

Education Actions

• Education’s process for comparing estimated to actual cash flows is 

the same as prior to our recommendation—that is, Education 

continues to make comparisons of estimated and actual cash flows

at the program level but not at the cohort level.

• Education continues to annually prepare a comparison of estimates to actuals for borrower collections, fees, and 

recoveries, at the program level, for its financial statement 

auditor.

• Education officials indicated that informal comparisons of estimates to actuals are used regularly as an analytical tool to

improve the estimation process.
Enclosure 

Page 35 GAO-04-567R FDLP Cost Estimates 

31

Status of Recommendation - Comparing 

Estimated and Actual Cash Flows

• Education officials said that they have not been comparing estimates to actuals at a 

cohort level because it would be too time consuming, but they believe their process 

has allowed them to research significant differences; identify the need for cash 

model revisions; and assess whether, over time, projected loan performance is 

reasonably predictive of actual loan performance.

• With the implementation of CMDM, data are now readily available for Education to 

periodically prepare a detailed comparison of estimates to actuals at the cohort level. 

This would provide a more meaningful analysis than comparing fiscal year totals 

because it would isolate differences among cohorts, which could indicate anomalies 

or trends that are not expected. Comparing fiscal year totals might not isolate these 

differences because of potential offsetting effects.

• Education officials agreed that a cohort level analysis would be beneficial and stated 

that the credit reform working group will consider additional procedures related to 

comparing estimated and actual cash flows.
Enclosure 

Page 36 GAO-04-567R FDLP Cost Estimates 

32

Status of Recommendation - Comparing 

Estimated and Actual Cash Flows

Progress Assessment

• Additional action is needed. Recommendation remains open.

• We will continue to monitor any changes that result from 

the credit reform working group’s efforts.
Enclosure 

Page 37 GAO-04-567R FDLP Cost Estimates 

33

Status of Recommendation - Effect of 

Consolidations on FDLP Subsidy Costs

Recommendation

• Perform an analysis of the effects of consolidations on FDLP 

subsidy costs and develop an approach to directly factor 

consolidations into the cash flow model.

Education Actions

• Education hired a contractor to develop a process to use data 

from the National Student Loan Data System (NSLDS) to link 

consolidated loans with the paid-off underlying loans.
Enclosure 

Page 38 GAO-04-567R FDLP Cost Estimates 

34

Status of Recommendation - Effect of 

Consolidations on FDLP Subsidy Costs

• This linking allowed Education to analyze the payoff patterns of underlying 

loans due to consolidation and to develop prepayment assumptions that 

directly factor consolidations into the cash flow model.

• Education analyzed the prepayment assumptions and determined that 

consolidations can either increase or decrease the subsidy cost of the 

underlying loans,12 depending on the interest rate environment. 

• For example, if the discount rate is lower than the borrower rate, 

prepayments result in an additional cost because the shorter 

repayment term reduces net interest receipts from the positive interest 

spread.

• However, if the discount rate is greater than the borrower rate,

prepayments result in a savings because the shorter repayment term 

reduces net interest payments from the negative interest spread.

12In order to determine whether or not consolidations increase or decrease the overall FDLP cost, both the effect 

of the consolidation on the underlying loans and the cost of the new consolidation loan need to be considered. 
Enclosure 

Page 39 GAO-04-567R FDLP Cost Estimates 

35

Status of Recommendation - Effect of 

Consolidations on FDLP Subsidy Costs

• In addition, although Education has already taken steps to 

consider the effect of consolidation on FDLP subsidy costs, 

the issue of consolidations will be further addressed as part 

of the credit reform working group.

• Education officials indicated that they are considering the 

development of a loan-level cash flow model to further 

address issues related to consolidations.
Enclosure 

Page 40 GAO-04-567R FDLP Cost Estimates 

36

Status of Recommendation - Effect of 

Consolidations on FDLP Subsidy Costs

Progress Assessment

• Substantial progress made. Recommendation closed.
Enclosure 

Page 41 GAO-04-567R FDLP Cost Estimates 

37

Status of Recommendation - Interest 

Rate Reestimates

Recommendation

• Develop and implement a plan to prepare interest rate reestimates to 

isolate the effects on subsidy costs of changes in interest rates versus 

changes in other assumptions.

Education Actions

• In response to our recommendation, Education began preparing interest 

rate reestimates.

• For budget purposes, Education has prepared interest rate reestimates since the submission of its fiscal year 2002 budget.

• For financial statement purposes, Education first prepared interest rate reestimates for its fiscal year 2001 financial statements.13

13Because the fiscal year 2002 financial statements were prepared early, updated discount rates were not available. 

As a result, no interest rate reestimate was prepared. These discount rates were updated in the fiscal year 2003 

financial statements. Going forward, Education plans to continue to use the most recent discount rates available. 
Enclosure 

Page 42 GAO-04-567R FDLP Cost Estimates 

38

Status of Recommendation - Interest 

Rate Reestimates

Progress Assessment

• Substantial progress made. Recommendation closed.
Enclosure 

Page 43 GAO-04-567R FDLP Cost Estimates 

39

Disclosure of the Effect of Interest Rates 

on Subsidy Costs

• Although Education is now preparing interest rate reestimates in

accordance with OMB Circular A-11,14 we found that it did not 

disclose an explanation of significant factors, including changes in 

borrower interest rates, affecting reestimates in its financial 

statements, as required by established accounting guidance.

• Statement of Federal Financial Accounting Standards (SFFAS) 

No. 1815 requires agencies to disclose, discuss, and explain 

events and changes in economic conditions, among other 

factors, that have had a significant and measurable effect on 

subsidy rates, subsidy expense, and subsidy reestimates.

14Interest rate reestimates isolate the effect of changes in interest rates while loans are disbursing. Because FDLP offers a variable borrower 

rate, its interest rate reestimates do not isolate the effect of changes in the borrower rate after the loans are disbursed. 15SFFAS No. 18 became effective for fiscal year 2001 financial statements.
Enclosure 

Page 44 GAO-04-567R FDLP Cost Estimates 

40

Disclosure of the Effect of Interest Rates 

on Subsidy Costs

• Education’s fiscal year 2003 financial statements disclose reestimates of about $5.1 billion for FDLP. However, the disclosure does not explain the 

factors, such as the effect of variable borrower rates, contributing to the 

significant reestimate.

• While this information was available, Education officials indicated that it 

was not included in the financial statement disclosures because the 

disclosures were already very lengthy.

• Since the interest rate spread is the key driver of FDLP subsidy costs, 

changes in the variable borrower rate can have a significant impact on the 

reestimated cost of the program. Financial statement disclosures that 

explain significant factors contributing to reestimates, including changes in 

borrower interest rates, would provide Congress and other program 

decision makers with additional meaningful cost estimation information 

about FDLP.
Enclosure 

Page 45 GAO-04-567R FDLP Cost Estimates 

41

Updated Cash Flow Information

• To address our second objective, we updated FDLP cash flow 

information from our January 2001 report in the following areas:

• Borrowing from Treasury

• Appropriations Received

• Cash Inflows and Outflows16

• Estimated and Actual Key Cash Flows (principal receipts, interest receipts, origination fees, and collections on defaults)

• As indicated in our scope and methodology section, all updated 

actual cash flow information were agreed to Education’s financial 

statements, budget documents, or other available source 

documents.

16Our January 2001 report defined cash inflows for FDLP as loan origination fees and interest receipts from 

borrowers and defined cash outflows as net interest payments on Treasury borrowing. The same definitions were 

used for this briefing.
Enclosure 

Page 46 GAO-04-567R FDLP Cost Estimates 

42

Cash Flow Information – Borrowing from 

Treasury

• From fiscal years 1995 through 2003, Education borrowed $136.7 

billion from Treasury to finance FDLP. As of September 30, 2003,

$45.3 billion was repaid to Treasury. See table 2.

• Repayments to Treasury are affected by beginning cash 

balances, collections, additional borrowing, interest revenue, 

disbursements, and interest expense.

• According to Education officials, repayments to Treasury 

increased significantly in fiscal year 2003 because of increased

payoffs of underlying loans due to new consolidation loans and 

the $4.6 billion upward reestimate17 in fiscal year 2003.

17An upward reestimate indicates that the estimated cost increased. When the budget authority is received for the 

reestimate, borrowing from Treasury can be repaid.
Enclosure 

Page 47 GAO-04-567R FDLP Cost Estimates 

43

Cash Flow Information – Borrowing from 

Treasury

Table 2: Amounts Borrowed From Treasury to Finance FDLP

(Dollars in millions)

Opening Borrowing Repayments Ending 

Fiscal year balance from Treasury to Treasury balance

1995 433 $ 4,868 $ (235) $ 5,066 $ 

1996 5,066 7,957 (669) 12,354

1997 12,354 11,333 (975) 22,712

1998 22,712 13,669 (1,284) 35,097

1999 35,097 21,571 (4,599) 52,069

2000 52,069 16,347 (3,069) 65,347

2001 65,347 20,704 (8,862) 77,189

2002 77,189 20,605 (8,296) 89,498

2003 89,498 19,637 (17,348) 91,787

Total 136,691 $ (45,337) $ 

Source: GAO analysis of data from the Department of Education.
Enclosure 

Page 48 GAO-04-567R FDLP Cost Estimates 

44

Cash Flow Information – Appropriations 

Received

• For the fiscal years 1995 through 2003 cohorts, based on Education’s 

original subsidy estimates and reestimates to date, the net reestimated 

cost of FDLP was about $2.7 billion. This net reestimated cost, which could 

fluctuate significantly in the future (increases or decreases), depending on 

actual loan performance and changes in interest rates, is financed by 

appropriations. See table 3. 

• For example, to date, $1,110 million in appropriations were needed to 

fund the net reestimated subsidy cost of the 2000 cohort, as shown in 

table 3. This group of loans was originally estimated to have a

negative subsidy18 (gain) of $1,316 million. Since then, Education has 

reestimated the cost of the cohort three times, increasing its cost by 

$1,065 million in fiscal year 2001, $1,079 million in fiscal year 2003, 

and $282 million in fiscal year 2004.

18Negative subsidy occurs when the present value of the estimated cash inflows to the government exceeds the 

present value of the estimated cash outflows by the government.
Enclosure 

Page 49 GAO-04-567R FDLP Cost Estimates 

45

Cash Flow Information – Appropriations 

Received

Table 3: Appropriations to Finance FDLP

(Dollars in millions)

1995 1996 1997 1998 1999 2000 2001 2002 2003 Total

Original Subsidy 

Estimate $ 237 490 $ 336 $ 213 $ (378) $ (1,316) $ (852) $ (781) $ (292) $ (2,343) $ 

1996 Reestimate (6) (6)

1997 Reestimate (157) 128 (29)

1998 Reestimate (58) 153 80 175

1999 Reestimate (81) (71) (69) (129) (350)

2000 Reestimate (69) (382) (444) (861) (668) (2,424)

2001 Reestimate (87) (190) (229) (160) 94 1,065 493

2002 Reestimate

2003 Reestimate 162 397 607 1,026 792 1,079 237 270 4,570

2004 Reestimate 164 250 300 425 425 282 832 (70) (33) 2,575

Net reestimated 

cost (gain) $ 358 $ 522 $ 581 $ 514 $ 265 $ 1,110 $ 217 $ (581) $ (325) $ 2,661 

Note: OMB did not execute the reestimates in fiscal year 2002.

Source: GAO analysis of data from the Department of Education.

Cohort
Enclosure 

Page 50 GAO-04-567R FDLP Cost Estimates 

46

Cash Flow Information – Cash Inflows and 

Outflows

• The cash inflows (interest receipts and origination fees) and cash 

outflows (interest payments) of FDLP are greatly affected by 

differences in the interest cash flows because Education is required 

to make interest payments to Treasury, even if borrowers are not

making interest payments to Education. For example, 

• unsubsidized borrowers in school, in a grace period, or in 

deferment19 are not required to pay interest. If borrowers do not 

pay interest during these periods, it is accrued and capitalized

when the borrowers enter repayment.

• interest is not charged to subsidized borrowers while in school,

in a grace period, or in deferment. 

19A borrower could be eligible for a deferment period, among other reasons, if the borrower is seeking and unable 

to find full-time employment or experiences economic hardship. 
Enclosure 

Page 51 GAO-04-567R FDLP Cost Estimates 

47

Cash Flow Information – Cash Inflows and 

Outflows

• Between fiscal years 1995 through 2003, total cash outflows 

exceeded total cash inflows by $10.7 billion because 

origination fees and interest receipts from borrowers were 

less than the amount of interest Education paid on Treasury 

borrowing. See table 4.

• As of September 30, 2003, accrued interest due from 

borrowers was $2.8 billion.

• According to Education officials, approximately, $2 billion 

of interest was capitalized during fiscal years 2002 and 

2003. 
Enclosure 

Page 52 GAO-04-567R FDLP Cost Estimates 

48

Cash Flow Information – Cash Inflows and 

Outflows

Table 4: Cash Inflows and Outflows by Fiscal Year

(Dollars in millions)

Fiscal year Loan origination fees

Interest receipts from 

borrowers

Net interest 

payments on 

Treasury borrowing

Net cash 

inflows/(outflows)

1995 85 $ 14 $ (86) $ 13 $ 

1996 318 113 (348) 83

1997 352 300 (1,180) (528)

1998 382 606 (1,686) (698)

1999 387 1,067 (2,395) (941)

2000 359 1,463 (3,211) (1,389)

2001 283 1,868 (4,043) (1,892)

2002 334 1,961 (4,744) (2,449)

2003 366 1,720 (4,954) (2,868)

Total 2,866 $ 9,112 $ (22,647) $ (10,669) $ 

Source: GAO analysis of data from the Department of Education.
Enclosure 

Page 53 GAO-04-567R FDLP Cost Estimates 

49

Cash Flow Information – Estimated and Actual 

Key Cash Flows

• For fiscal years 1995 through 2003, three of the four key 

cash flows—interest receipts, origination fees, and default 

collections—included in this comparison had actual cash 

flows that were less than the amount Education estimated. 

See table 5.

• Over this same period, actual principal receipts were 

greater than the amount Education estimated. 

• However, this was more than offset by the large variance 

between estimated and actual interest receipts. 
Enclosure 

Page 54 GAO-04-567R FDLP Cost Estimates 

50

Cash Flow Information – Estimated and Actual 

Key Cash Flows

Table 5: Total Estimated and Actual Key Cash Flows, Fiscal Years 1995-2003

(Dollars in millions)

Actual cash Estimated Difference Percentage

Key cash flows flows cash flows in dollars difference

Principal receipts 38,991.7 $ 36,259.4 $ 2,732.3 $ 7.0%

Interest receipts 9,113.0 15,237.0 (6,124.0) (67.2)%

Origination fees 2,864.7 3,008.2 (143.5) (5.0)%

Default collections 1,547.4 2,234.7 (687.3) (44.4)%

Total 52,516.8 $ 56,739.3 $ (4,222.5) $ (8.0)%

Source: GAO analysis of data from the Department of Education.
Enclosure 

Page 55 GAO-04-567R FDLP Cost Estimates 

51

Cash Flow Information – Estimated and Actual 

Key Cash Flows

• For fiscal years 1995 through 2003, actual principal receipts 

were greater than estimated by $2.7 billion, or 7 percent. 

See figure 2.

• In our January 2001 report, we reported that for fiscal 

years 1995 through 1999, actual principal receipts were 

greater than estimated by 12.8 percent.
Enclosure 

Page 56 GAO-04-567R FDLP Cost Estimates 

52

Cash Flow Information – Estimated and Actual 

Key Cash Flows

Source: GAO analysis of data from the Department of Education.

Figure 2: Estimated and Actual Principal Receipts

0

3,000

6,000

9,000

12,000

15,000

1995 1996 1997 1998 1999 2000 2001 2002 2003

Estimated Actual

(Dollars in millions)
Enclosure 

Page 57 GAO-04-567R FDLP Cost Estimates 

53

Cash Flow Information – Estimated and Actual 

Key Cash Flows

• For fiscal years 1995 through 2003, actual interest receipts were less than estimated by $6.1 billion, or about 67 percent. See figure 

3.

• In our January 2001 report, we reported that for fiscal years 1995 through 1999, actual interest receipts were less than 

estimated by 74.3 percent.

• Education officials stated that interest receipts are a difficult cash flow to model because of the complexities associated with 

accruing and capitalizing interest. However, now that the cash 

flow model includes prepayment assumptions to directly 

consider the effects of consolidations, Education officials said

that it will be easier to analyze the interest calculations in the 

model.
Enclosure 

Page 58 GAO-04-567R FDLP Cost Estimates 

54

Cash Flow Information – Estimated and Actual 

Key Cash Flows

Source: GAO analysis of data from the Department of Education.

Figure 3: Estimated and Actual Interest Receipts

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1995 1996 1997 1998 1999 2000 2001 2002 2003

Estimated Actual

(Dollars in millions)
Enclosure 

Page 59 GAO-04-567R FDLP Cost Estimates 

55

Cash Flow Information – Estimated and Actual 

Key Cash Flows

• For fiscal years 1995 through 2003, actual origination fees 

were less than estimated by $144 million, or 5 percent. See 

figure 4.

• In our January 2001 report, we reported that for fiscal 

years 1995 through 1999, actual origination fees were 

less than estimated by 5.7 percent.
Enclosure 

Page 60 GAO-04-567R FDLP Cost Estimates 

56

Cash Flow Information – Estimated and Actual 

Key Cash Flows 

Source: GAO analysis of data from the Department of Education.

Figure 4: Estimated and Actual Origination Fees

0

100

200

300

400

500

1995 1996 1997 1998 1999 2000 2001 2002 2003

Estimated Actual

(Dollars in millions)
Enclosure 

Page 61 GAO-04-567R FDLP Cost Estimates 

57

Cash Flow Information – Estimated and Actual 

Key Cash Flows

• For fiscal years 1995 through 2003, actual collections on defaults 

were less than estimated by $687 million, or about 44 percent. See 

figure 5.

• In our January 2001 report, we reported that for fiscal years 

1995 through 1999, actual collections on defaults were less 

than estimated by 67.9 percent.

• According to Education officials, they believe that the large 

variance is due to the use of data from the guarantee loan 

program to estimate collections on defaults since FDLP does 

not have enough historical data. 

• It appears that the estimates are getting closer to the actuals.

For fiscal year 2003, the difference was about 13 percent.
Enclosure 

Page 62 GAO-04-567R FDLP Cost Estimates 

58

Cash Flow Information – Estimated and Actual 

Key Cash Flows

Source: GAO analysis of data from the Department of Education.

Figure 5: Estimated and Actual Collections on 

Defaults

0

100

200

300

400

500

600

700

1995 1996 1997 1998 1999 2000 2001 2002 2003

Estimated Actual

(Dollars in millions)
Enclosure 

Page 63 GAO-04-567R FDLP Cost Estimates 

59

Conclusions

• Education has made progress to improve its cost estimation process by 

implementing a new data system, developing new cash flow assumptions 

for consolidations, and preparing interest rate reestimates. These actions 

resolved three of our five prior recommendations. To address the

remaining two prior recommendations, Education should enhance its 

analytical tools to evaluate and improve its subsidy cost estimates by 

periodically conducting more formal sensitivity analysis and comparing 

estimated and actual cash flows at the cohort level. By forming the credit 

reform working group that will consider these and other issues, it appears 

that Education officials recognize that there are opportunities to make the 

subsidy cost estimates more transparent, which would result in more 

meaningful information for Congress and program decision makers. In 

addition, because FDLP’s subsidy costs are determined largely by interest 

rates, transparency would be further enhanced if Education included an 

explanation in its financial statement footnotes of how changes in borrower 

interest rates and other significant factors affect the reestimated cost. 
Enclosure 

Page 64 GAO-04-567R FDLP Cost Estimates 

60

Recommendation

• To provide more meaningful cost estimation information that can be 

effectively used by Congress and program decision makers to 

make timely and well-informed judgments about FDLP, we 

recommend that the Department of Education’s Chief Financial 

Officer to take the following action:

• Provide additional financial statement disclosures that explain 

the significant factors, including the effect of changes in 

borrower interest rates, contributing to reestimates of FDLP, as

required by SFFAS No. 18. 
Enclosure 

Page 65 GAO-04-567R FDLP Cost Estimates 

(190121) 

61

Agency Comments

• We obtained oral comments on a draft of our briefing slides from

the director of Education’s Cost Estimation and Analysis Division, 

who agreed with our findings, conclusions, and recommendation.
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