Testimony 

Before the Committee on Education and 

the Workforce, House of Representatives

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 10:30 a.m. EST 

Wednesday, March 17, 2004 STUDENT LOAN 

PROGRAMS 

Lower Interest Rates and 

Higher Loan Volume Have 

Increased Federal 

Consolidation Loan Costs 

Statement of Cornelia M. Ashby, Director 

Education, Workforce, and Income Security Issues 

GAO-04-568T 
Page 1 GAO-04-568T 

Mr. Chairman and Members of the Committee: 

Thank you for inviting me here today to discuss issues related to 

consolidation loans and their cost implications for taxpayers and 

borrowers. Consolidation loans, available under the Department of 

Education’s (Education) two major student loan programs—the Federal 

Family Education Loan Program (FFELP) and the William D. Ford Direct 

Loan Program (FDLP)—help borrowers manage their student loan debt. 

By combining multiple loans into one loan 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. Consolidation loans under 

FFELP and FDLP accounted for about 48 percent of the $87.4 billion in 

total new student loan dollars that originated during fiscal year 2003. 

FFELP consolidation loans comprised about 84 percent of the fiscal year 

2003 consolidation loan volume, while FDLP consolidation loans 

accounted for the remaining 16 percent. 

Two main types of federal cost pertain to consolidation loans. One is 

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

government that result from providing these loans to borrowers. 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. 

My testimony today will focus on two key issues: (1) recent changes in 

interest rates and consolidation loan volume and (2) how these changes 

have affected federal costs for FFELP and FDLP consolidation loans. My 

comments are based on the findings from our October 2003 report for this 

Committee, Student Loan Programs: As Federal Costs of Loan 

Consolidation Rise, Other Options Should Be Examined (GAO-04-101, 

October 31, 2003). Those findings were based on review and analysis of 

data from a variety of sources, including officials from Education’s Office 

of Federal Student Aid and Budget Service, and representatives of FFELP 
Page 2 GAO-04-568T 

lenders; a sample of student loan data extracted from Education’s National 

Student Loan Data System (NSLDS)—a comprehensive national database 

of student loans, borrowers, and other information; relevant cost analyses 

prepared by Education; and statutory, regulatory and other published 

information. For this testimony, we updated our numbers to reflect recent 

estimates made by the Department of Education. Our work was conducted 

in accordance with generally accepted government auditing standards. 

In summary: 

• Recent years have seen a drop in interest rates for student loan borrowers 

along with dramatic overall growth in consolidation loan volume. From 

July 2000 to June 2003, the interest rate for consolidation loans dropped by 

more than half, with consolidation loan borrowers obtaining rates as low 

as 3.50 percent as of July 1, 2003. From fiscal year 1998 through fiscal year 

2003, the volume of consolidation loans made (or “originated”) rose from 

$5.8 billion to over $41 billion. 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. 

• Recent trends in interest rates and consolidation loan volume have 

affected the cost of 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 $0.651 billion for loans made in fiscal year 2002 to $2.135 billion for 

loans made in fiscal year 2003. Both higher loan volumes and lower 

interest rates available to borrowers in fiscal year 2003 increased these 

costs. Lower interest rates increase 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. 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 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 the Treasury to finance its lending. However, the 

drop in loan volume and interest rates that occurred in fiscal year 2003, 

contributed to cutting the government’s estimated net gain from $570 

million in fiscal year 2002 to $543 million for loans made in fiscal year 

2003. Administration costs are not specifically tracked for either 
Page 3 GAO-04-568T 

consolidation loan program, but available evidence indicates that these 

costs have risen, primarily reflecting increased overall loan volumes. 

In our prior report, we recommended 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. Education agreed with our recommendation. 

Consolidation loans differ from other loans in the FFELP and FDLP 

programs in that they enable borrowers who have multiple loans—

possibly from different lenders, different guarantors,1

 and even from 

different loan programs—to combine their loans into a single loan and 

make one monthly payment. 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 the underlying 

loans. Maximum repayment periods allowed vary by the amount of the 

consolidation loan (see table 1). 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, including subsidized and unsubsidized Stafford loans, PLUS 

loans,2

 and, in some instances, consolidation loans. Both subsidized and 

unsubsidized Stafford loans, and PLUS loans are variable rate 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 

 1

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. 

2

Both subsidized and unsubsidized Stafford loans 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. 

The federal government pays the interest on behalf of subsidized loan borrowers while the 

student is in school. Students can qualify for unsubsidized Stafford loans regardless of 

financial need. 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. 

Background 
Page 4 GAO-04-568T 

inclusion in a consolidation loan, including Perkins loans, Health 

Professions Student loans, Nursing Student Loans, and Health Education 

Assistance loans (HEAL).3

Table 1: Consolidation Loan Repayment Periods, by Loan Amount 

Amount Maximum term (years)

Less than $7,500 (FFELP) 10

Less than $10,000 (FDLP) 12

$7,500 to $9,999 (FFELP) 12

$10,000 to $19,999 15

$20,000 to $39,999 20

$40,000 to $59,999 25

$60,000 or more 30

Source: Higher Education Act, Congressional Research Service, and Education. 

The Federal Credit Reform Act (FCRA) of 1990 helps define federal costs 

associated with consolidation loans and was enacted to require agencies, 

including Education, to more accurately measure federal loan program 

costs. Under FCRA, Education is 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. Subsidy cost estimates are calculated based on the 

present value of estimated net cash flows to and from the government that 

result from providing loans to borrowers.4 For FFELP consolidation loans, 

cash flows include, for example, fees paid by lenders to the government5

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 

 3

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. 

4

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). 

5

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 on the loans in their portfolio. 
Page 5 GAO-04-568T 

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. Unlike FFELP, FDLP 

involves no guaranteed yields or special allowance payments to lenders 

because the program is a direct loan program. The subsidy costs of FDLP 

consolidation loans are also affected by the interest Education must pay to 

Treasury to finance its lending activities. Another type of cost pertaining to 

consolidation loans is administration, which includes such items as 

expenses related to originating and servicing direct loans.6

In estimating loan subsidy costs, Education first estimates the future 

economic performance (net cash flows to and from the government) of 

direct and guaranteed loans when preparing its annual budgets. These first 

estimates establish the subsidy estimates for the current-year originated 

loans. The data used for the first estimates are reestimated in later years to 

reflect any changes in actual loan performance and expected changes in 

future 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. 

Recent years have seen a drop in interest rates for student loan borrowers 

along with dramatic overall growth in consolidation loan volume. From 

July 2000 to June 2003, the interest rate for consolidation loans dropped by 

more than half, with consolidation loan borrowers obtaining rates as low 

as 3.50 percent as of July 1, 2003. From fiscal year 1998 through fiscal year 

2003, the volume of consolidation loans made (or originated) rose from 

$5.8 billion to over $41 billion. Over four-fifths of the fiscal year 2003 loan 

volume is in FFELP. While overall volume rose in 2003, the trends differed 

by program. FDLP consolidation loan volume for fiscal year 2003 

decreased, but loan volume in the larger FFELP increased, resulting in 

total consolidation loan volume of well over $41 billion. 

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 

 6

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—

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

commercial paper. 

Borrowers’ Rates 

Have Dropped, and 

Loan Volume Has 

Risen 
Page 6 GAO-04-568T 

borrowers to consolidate their variable rate student loans at a low, fixed 

rate. Figure 1 shows the relationship between these two factors. When 

interest rates are low, some borrowers may find it in their economic selfinterest 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 and avert default. 

Figure 1: Consolidation Loan Volume Increased Dramatically as Borrower Interest 

Rates Fell from Fiscal Year 2001 to Fiscal Year 2003 

Underscoring the potential attractiveness of these loans to potential 

borrowers, many lenders, including newer loan companies that are 

specializing in consolidation loans, have aggressively marketed 

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. 

Loan volume (billions of dollars)

0

10

20

30

40

50

1998 1999 2000 2001 2002 2003

Fiscal year

Borrowers rate (percent)

0

2

4

6

8

10

Loan volume

Borrower’s rate

Source: GAO analysis based on data provided by Education’s Budget Service.
Page 7 GAO-04-568T 

While the estimated future costs for consolidation loans can vary greatly 

from year to year, low interest rates and recent loan volume changes have 

resulted in substantial increases in overall costs to the federal government. 

However, in light of the differences between how FFELP and FDLP 

operate, the subsidy costs within these two programs were affected in very 

different ways. For FFELP, the result was a substantial increase. For 

FDLP, the result was a narrowing of the net difference between the 

estimated interest payments paid by consolidated loan borrowers to 

Education and the costs paid by Education to Treasury to finance direct 

loans. 

Estimated subsidy costs for FFELP consolidation loans rose from $0.651 

billion for loans made in fiscal year 2002 to $2.135 billion for loans made in 

fiscal year 2003. The increase is largely 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 and the result of greater loan 

volume. 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 paper7

 interest rate plus an additional 2.64 

percent. When this guaranteed yield is higher than the amount of interest 

being paid by borrowers, Education makes up the difference. 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 $2.135 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. The 

effect of this rise is shown in figure 2, where the bottom line shows the 

fixed borrower rate for a FFELP consolidation loan made in the first 9 

months of fiscal year 2003, and the top line shows Education’s estimated 

 7

Commercial 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. 

Changes in Interest 

Rates and Loan 

Volume Affect FFELP 

and FDLP Costs in 

Different Ways, but in 

the Aggregate, 

Estimated Costs 

Increased 

FFELP Subsidy Costs 

Affected by Increased 

Special Allowance 

Payments to Lenders and 

Increased Loan Volume 
Page 8 GAO-04-568T 

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, therefore, received only the rate paid by borrowers; no SAP was 

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 figure 2 shows, 

Education’s assumptions would call for lenders to receive a SAP over most 

of the life of the consolidation loans made in fiscal year 2003. 

Figure 2: 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, 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 July 1, 1998, and in repayment at time of 

consolidation. 

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

from fiscal years 2002 to 2003. However, the effect of the increased loan 

volume was not as large as that of the higher interest subsidies the 

government is expected to pay to lenders in the future. 

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

FDLP’s consolidation program is a direct loan program and, therefore, 

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

potential subsidy costs if the government’s cost of borrowing is higher 

than the interest rate borrowers are paying. The government’s cost of 

FDLP Loans also Affected 

by Changing Interest Rates 

0

1

2

3

4

5

6

7

8

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Interest Estimated lender yielda

Borrower rateb

SAP is the difference between the lender yield and the 

borrower rate (if positive) times the principal balance.

Source: GAO analysis based on data provided by Education’s Budget Service.

Fiscal year
Page 9 GAO-04-568T 

borrowing is determined by the interest rate Education pays Treasury to 

finance direct student loans, which is equivalent to the discount rate.8

 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 declines from $571 million in 

fiscal year 2002 to $543 million in fiscal year 2003. 

The smaller net gain that occurred in fiscal year 2003 reflects both a 

decrease in the loan volume and a narrowed difference between the 

discount rate and the borrower rate. Loan volume in fiscal year 2003 was 

$6.7 billion, a decrease from $8.8 billion in fiscal year 2002. 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 1.2 percentage points, from 6.3 percent in fiscal year 2002 to 

5.1 percent in fiscal year 2003. The discount rate, on the other hand, 

dropped by only 0.88 percentage points, from 4.72 percent in fiscal year 

2002 to 3.84 percent in fiscal year 2003. The resulting interest rate spread 

decreased from 1.59 percent to 1.22 percent (see table 2). In other words, 

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

in $1.59 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 $1.22 more in interest for the government. 

 8

While 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. 
Page 10 GAO-04-568T 

Table 2: 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 6.31% 4.72% 1.59% 1.59% x $100 = $1.59

2003 5.06% 3.84% 1.22% 1.22% x $100 = $1.22

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

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 

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 does not include overhead 

costs, which include costs incurred for 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 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 a large portion 

of FFELP 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. 

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. The movement of subsidy costs for consolidation loans made in future 

years will depend heavily on what happens to interest rates. As we have 

shown, subsidy cost estimates for FFELP consolidation loans can increase 

Administration Costs also 

Increase, Mainly because 

of Loan Volume 

Concluding 

Observations 
Page 11 GAO-04-568T 

substantially, depending on how much the guaranteed lender yield rises 

above the fixed rate paid by borrowers, which, in turn, requires the federal 

government to pay subsidies to lenders. Conversely, if borrowers obtained 

consolidation loans with a fixed interest rate at a time when rates were 

expected to decrease in the future, federal subsidy costs could be lower, 

than is currently the case, because the borrower rate could exceed the rate 

guaranteed to lenders, and the federal government might not be required 

to pay lender subsidies. 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. 

We noted in our prior report9

 that borrowers’ choices between obtaining a 

fixed rate consolidation loan or retaining their variable rate loans can 

significantly affect federal costs. While consolidation loans may be 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. Providing for these larger 

interest subsidies on behalf of a broad spectrum of borrowers 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. 

In our October 2003 report, we also discussed the extent to which 

repayment options other than consolidation loans allow borrowers to 

simplify loan repayment and reduce repayment amounts. We found that 

other repayment options that allow borrowers to make a single payment to 

cover multiple loans and smaller monthly payments are now available for 

some borrowers under both FFELP and FDLP, but these alternatives are 

not available to all borrowers. In that report, we concluded that 

restructuring the consolidation loan program to specifically target 

 9

GAO-04-101. 
Page 12 GAO-04-568T 

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 change to, 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. 

In our October 2003 report, we recommended 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 suggested options that 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. We also 

noted that, 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. Furthermore, if Education determines that statutory changes are 

needed to implement more cost-effective repayment options, we believe it 

should seek such changes from Congress. Education agreed with our 

recommendation. 

Mr. Chairman, this concludes my prepared statement. I would be pleased 

to respond to any questions that you or other members of the Committee 

may have. 

For further contacts regarding this testimony, please call Cornelia M. 

Ashby at (202) 512-8403. Individuals making key contributions to this 

testimony include Jeff Appel, Susan Chin, Cindy Decker, and Julianne 

Hartman-Cutts. 

GAO Contact and 

Acknowledgments 

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