Treasury Presentation to TBAC
Office of Debt Management

Fiscal Year 2014 Q4 Report
Table of Contents

2

I. Fiscal

A. Quarterly Tax Receipts p. 4

B. Monthly Receipt Levels p. 5

C. Eleven Largest Outlays p. 6

D. Treasury Net Nonmarketable Borrowing p. 7

E. Cumulative Budget Deficits p. 8

F. Deficit and Borrowing Estimates p. 9

G. Budget Surplus/Deficit p. 10

II. Financing

A. Sources of Financing p. 13

B. OMB’s Projections of Net Borrowing from the Public p. 15

C. Interest Rate Assumptions p. 16

D. Net Marketable Borrowing on “Auto Pilot” Versus Deficit Forecasts p. 17

III. Portfolio Metrics

A. Weighted Average Maturity of Marketable Debt Outstanding with Projections p. 22

B. Projected Gross Borrowing p. 23

C. Recent and Projected Maturity Profile p. 24

IV. Demand

A. Summary Statistics p. 29

B. Bid-to-Cover Ratios p. 30

C. Investor Class Awards at Auction p. 35

D. Primary Dealer Awards at Auction p. 39

E. Direct Bidder Awards at Auction p. 40

F. Foreign Awards at Auction p. 41
Section I:

Fiscal

3
4 Source: United States Department of the Treasury 

(50%)

(25%)

0%

25%

50%

75%

Jun-04

Sep-04

Dec-04

Mar-05

Jun-05

Sep-05

Dec-05

Mar-06

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

Year over Year % Change

Quarterly Tax Receipts

Corporate Taxes Non-Withheld Taxes (incl SECA) Withheld Taxes (incl FICA)
5

Individual Income Taxes include withheld and non-withheld. Social Insurance Taxes include FICA, SECA, RRTA, UTF deposits, FUTA and 

RUIA. Other includes excise taxes, estate and gift taxes, customs duties and miscellaneous receipts. 

Source: United States Department of the Treasury 

0

20

40

60

80

100

120

140

Jun-04

Sep-04

Dec-04

Mar-05

Jun-05

Sep-05

Dec-05

Mar-06

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

$ bn

Monthly Receipt Levels

(12-Month Moving Average)

Individual Income Taxes Corporation Income Taxes Social Insurance Taxes Other
6 Source: United States Department of the Treasury 

0

100

200

300

400

500

600

700

800

900

1,000

HHS

SSA

Defense

Treasury

Agriculture

Labor

VA

Transportation

OPM

Education

Other Defense Civil

$ bn

Eleven Largest Outlays

Oct - Sept FY 2013 Oct - Sept FY 2014
7 Source: United States Department of the Treasury 

(35)

(30)

(25)

(20)

(15)

(10)

(5)

0

5

10

15

20

25

30

Q4-04Q1-05Q2-05Q3-05Q4-05Q1-06Q2-06Q3-06Q4-06Q1-07Q2-07Q3-07Q4-07Q1-08Q2-08Q3-08Q4-08Q1-09Q2-09Q3-09Q4-09Q1-10Q2-10Q3-10Q4-10Q1-11Q2-11Q3-11Q4-11Q1-12Q2-12Q3-12Q4-12Q1-13Q2-13Q3-13Q4-13Q1-14Q2-14Q3-14Q4-14

$ bn

Fiscal Quarter

Treasury Net Nonmarketable Borrowing

Foreign Series State and Local Govt. Series (SLGS) Savings Bonds
8 Source: United States Department of the Treasury 

0

200

400

600

800

1,000

1,200

1,400

October

November

December

January

February

March

April

May

June

July

August

September

$ bn

Cumulative Budget Deficits by Fiscal Year

FY2012 FY2013 FY2014
Primary 

Dealers1 CBO2

CBO's Analysis

of the

President's Budget3 OMB MSR4

FY 2015 Deficit Estimate 484 469 509 525

FY 2016 Deficit Estimate 536 556 548 525

FY 2017 Deficit Estimate 561 530 539 468

FY 2015 Deficit Range 425-550

FY 2016 Deficit Range 375-600

FY 2017 Deficit Range 325-700

FY 2015 Net Marketable Borrowing Estimate 602 508 579 655

FY 2016 Net Marketable Borrowing Estimate 633 622 611 658

FY 2017 Net Marketable Borrowing Estimate 648 594 604 596

FY 2015 Net Marketable Borrowing Range 463-740

FY 2016 Net Marketable Borrowing Range 480-757

FY 2017 Net Marketable Borrowing Range 450-820

Estimates as of: Oct-14 Aug-14 Apr-14 Jul-14

1

Based on primary dealer feedback on Oct 27, 2014. Estimates above are averages. 

2

Table 1 of the "An Update to the Budget and Economic Outlook: 2014 to 2024"

3

Table 1 of the "An Analysis of the President's 2015 Budget"

4

Table S-11 of the "Fiscal Year 2015 MSR"

9

FY 2015-2017 Deficits and Net Marketable Borrowing Estimates In $ billions
(12%)

(10%)

(8%)

(6%)

(4%)

(2%)

0%

2%

(2,500)

(2,000)

(1,500)

(1,000)

(500)

0

500

200120022003200420052006200720082009201020112012201320142015201620172018201920202021202220232024

$ bn

Fiscal Year

Budget Surplus/Deficit

Surplus/Deficit in $bn (L) Surplus/Deficit as a % of GDP (R)

Projections are from Table S-1 of OMB’s “Fiscal Year 2015 MSR” 

10

OMB’s Projection
Section II:

Financing

11
12

Assumptions for Financing Section (pages 13 to 19)

• Portfolio & SOMA holdings as of 09/30/2014.

• Estimated projections of the Large Scale Asset Purchase program, announced on 12/12/2012 by the 

Federal Reserve with SOMA redemptions until and including May 2021. These assumptions are based 

on the Federal Reserve’s September 2014 primary dealer survey and Chairman Bernanke’s June 2013 

press conference. 

• Assumes announced issuance sizes and patterns constant for Nominal Coupons, TIPS, and FRNs as of 

09/30/2014, while using an average of ~1.45 trillion of Bills Outstanding consistent with Treasury’s 

guidance of the FRN program replacing some Bills issuance. 

• The principal on the TIPS securities was accreted to each projection date based on market ZCIS levels 

as of 9/30/2014. 

• No attempt was made to match future financing needs. 
13

Sources of Financing in Fiscal Year 2014 Q4

*Assumes an end-of-September 2014 cash balance of $158 billion versus a beginning-of-July 2014 cash balance of $139 billion. By keeping the 

cash balance constant, Treasury arrives at the net implied funding number. 

Net Bill Issuance 23 Issuance Gross Maturing Net Gross Maturing Net

Net Coupon Issuance 182 Bills 4-Week 510 485 25 1,693 1,703 (10)

Subtotal: Net Marketable Borrowing 205 Bills 13-Week 345 325 20 1,459 1,504 (45)

Bills 26-Week 309 334 (25) 1,309 1,366 (57)

Ending Cash Balance 158 Bills 52-Week 75 72 3 313 320 (7)

Beginning Cash Balance 139 Bills CMBs 15 15 0 236 236 0

Subtotal: Change in Cash Balance 19 Bill Subtotal 1,254 1,231 23 5,010 5,129 (119)

Net Implied Funding for FY 2014 Q4* 186

Issue Gross Maturing Net Gross Maturing Net

2-Year 87 105 (18) 372 427 (55)

2-Year FRN 41 0 41 123 0 123

3-Year 81 97 (16) 348 390 (42)

5-Year 105 121 (16) 420 415 5

7-Year 87 0 87 348 0 348

10-Year 66 25 41 264 111 153

30-Year 42 0 42 168 0 168

5-Year TIPS 16 0 16 50 17 33

10-Year TIPS 28 24 4 82 50 32

30-Year TIPS 0 0 0 23 0 23

Coupon Subtotal 553 371 182 2,198 1,410 788

Total 1,807 1,602 205 7,208 6,539 669

July - September 2014 Fiscal Year to Date

Coupon Issuance

July - September 2014 July - September 2014 Fiscal Year to Date

Bill Issuance
Assuming Constant Coupon and Average Bill Issuance Sizes as of 9/30/2014* Issuance Gross Maturing Net Gross Maturing Net

Net Bill Issuance 28 Bills 4-Week 416 433 (17) 416 433 (17)

Net Coupon Issuance 186 Bills 13-Week 364 345 19 364 345 19

Subtotal: Net Marketable Borrowing 214 Bills 26-Week 325 299 26 325 299 26

Bills 52-Week 72 72 0 72 72 0

Treasury Announced Estimate: Net Marketable Borrowing** 232 Bills CMBs 0 0 0 0 0 0

Implied: Increase in FY 2015 Q1 Net Issuances 18 Bill Subtotal 1,177 1,149 28 1,177 1,149 28

Issue Gross Maturing Net Gross Maturing Net

2-Year 87 105 (18) 87 105 (18)

2-Year FRN 41 0 41 41 0 41

3-Year 81 100 (19) 81 100 (19)

5-Year 105 129 (24) 105 129 (24)

7-Year 87 0 87 87 0 87

10-Year 66 25 41 66 25 41

30-Year 42 0 42 42 0 42

5-Year TIPS 16 0 16 16 0 16

10-Year TIPS 13 0 13 13 0 13

30-Year TIPS 7 0 7 7 0 7

Coupon Subtotal 545 359 186 545 359 186

Total 1,722 1,508 214 1,722 1,508 214

October - December 2014 October - December 2014 Fiscal Year to Date

Bill Issuance

October - December 2014 Fiscal Year to Date

Coupon Issuance

14

Sources of Financing in Fiscal Year 2015 Q1

*Keeping announced issuance sizes and patterns constant for Nominal Coupons, TIPS, and FRNs as of 09/30/2014, while using an average of 

~1.45 trillion of Bills Outstanding consistent with Treasury’s guidance of the FRN program replacing some Bills issuance.

**Assumes an end-of-December 2014 cash balance of $200 billion versus a beginning-of-October 2014 cash balance of $158 billion.

Financing Estimates released by the Treasury can be found via the following url: http://www.treasury.gov/resource-center/data-chartcenter/quarterly-refunding/Pages/Latest.aspx
15

OMB’s projections of net borrowing from the public are from Table S-11 of the “Fiscal Year 2015 Mid-Session Review.” Data labels at the top 

represent the change in debt held by the public in $ billions. “Other” represents borrowing from the public to provide direct and guaranteed 

loans.

655 658 596 569 669 695 698 738 706 672

55%

60%

65%

70%

75%

80%

(400)

(200)

0

200

400

600

800

1,000

2015201620172018201920202021202220232024

$bn

OMB's Projection of Borrowing from the Public

Primary Deficit Net Interest Other Debt Held by Public

as a Percent of GDP - RHS

Debt Held by Public Net of Financial Assets

as a Percent of GDP - RHS

$ bn %

Primary Deficit 127 2%

Net Interest 5,396 81%

Other 1,133 17%

Total 6,656

FY2015 - FY2024 Cumulative Total
1

1.5

2

2.5

3

3.5

4

4.5

5

5.5

2015201620172018201920202021202220232024

10-Year Treasury Note Rate, %

Interest Rate Assumptions: 10-Year Treasury Note

Implied Forward Rates as of 9/30/2014 OMB FY 2015 MSR Jul 2014

OMB’s economic assumption of the 10-year Treasury note rates are from Table 2 of the “Fiscal Year 2015 Mid-Session Review.” The implied 16

forward rates are the 10 year Treasury note rates from the beginning of each fiscal year.

10-Year Treasury Rate,

2.49%, as of 09/30/2014
17

0

200

400

600

800

1,000

1,200

2015201620172018201920202021202220232024

$bn

Fiscal Year

Projected Net Borrowing Assuming Constant Future Issuance

Projected Net Borrowing CBO: Update to the Budget and Economic Outlook

OMB's Fiscal Year 2015 MSR PD Survey Marketable Borrowing Estimates

Treasury’s primary dealer survey estimates can be found on page 9. OMB’s estimates of borrowing from the public are from Table S-11 of the 

“Fiscal Year 2015 Mid-Session Review.” CBO’s estimates of the borrowing from the public are from Table 1 of the “CBO: Update to the Budget 

and Economic Outlook.” See table at the end of this section for details.
18

Impact of SOMA Actions on Projected Net Borrowing Assuming Future 

Issuance Remains Constant

Treasury’s primary dealer survey estimates can be found on page 9. OMB’s estimates of borrowing from the public are from Table S-11 of the 

“Fiscal Year 2015 Mid-Session Review.” CBO’s estimates of the borrowing from the public are from Table 1 of the “CBO: Update to the Budget 

and Economic Outlook.” See table at the end of this section for details.

0

200

400

600

800

1,000

1,200

2015201620172018201920202021202220232024

Fiscal Year

With Fed Reinvestments ($bn)

Projected Net Borrowing

CBO: Update to the Budget and Economic Outlook

0

200

400

600

800

1,000

1,200

2015201620172018201920202021202220232024

Fiscal Year

Without Fed Reinvestments ($bn)

OMB's Fiscal Year 2015 MSR

PD Survey Marketable Borrowing Estimates
19

Historical Net Marketable Borrowing and Projected Net Borrowing 

Assuming Future Issuance Remains Constant, $ billions

Treasury’s primary dealer survey estimates can be found on page 9. OMB’s estimates of borrowing from the public are from Table S-11 of the 

“Fiscal Year 2015 Mid-Session Review.” CBO’s estimates of the borrowing from the public are from Table 1 of the “CBO: Update to the Budget 

and Economic Outlook.” See table at the end of this section for details.

Fiscal Year Bills 2/3/5 7/10/30 TIPS FRN

Historical/Projected 

Net Borrowing 

Capacity

OMB's Fiscal 

Year 2015 MSR

CBO: Update to the 

Budget and 

Economic Outlook

October 2014 

Primary 

Dealer Survey

2009 503 732 514 38 0 1,786

2010 (204) 869 783 35 0 1,483

2011 (311) 576 751 88 0 1,104

2012 139 148 738 90 0 1,115

2013 (86) 86 720 111 0 830

2014 (119) (92) 669 88 123 669

2015 43 (223) 639 87 164 710 655 508 602

2016 0 (101) 442 68 41 451 658 622 633

2017 0 (31) 256 69 0 293 596 595 648

2018 0 35 238 63 0 336 568 613

2019 0 35 104 64 0 202 669 715

2020 0 0 119 37 0 156 695 792

2021 0 15 155 11 0 181 698 876

2022 0 77 226 (2) 0 301 739 1,002

2023 0 46 191 (3) 0 235 706 1,013

2024 0 2 192 (4) 0 190 672 1,021
Section III:

Portfolio Metrics

20
21

Assumptions for Portfolio Metrics Section (pages 22 to 27) and Appendix

• Portfolio & SOMA holdings as of 09/30/2014.

• Estimated projections of the Large Scale Asset Purchase program, announced on 12/12/2012 by the 

Federal Reserve with SOMA redemptions until and including May 2021. These assumptions are based 

on the Federal Reserve’s September 2014 primary dealer survey and Chairman Bernanke’s June 2013 

press conference. 

• To match OMB’s projected borrowing from the public for the next 10 years, nominal coupon securities 

(2-, 3-, 5-, 7-, 10-, and 30-year) were adjusted by the same percentage. 

• The principal on the TIPS securities was accreted to each projection date based on market ZCIS levels 

as of 9/30/2014.

• OMB’s estimates of borrowing from the public are from Table S-11 of the “Fiscal Year 2015 Mid-Session 

Review.”
This scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the 22

basic trajectory of average maturity absent changes to the mix of securities issued by Treasury.

68.5 months on 

09/30/2014

58.7 months 

(Historical Average 

from 1980 to Present)

40

45

50

55

60

65

70

75

80

85

19801982198419861988199019921994199619982000200220042006200820102012201420162018202020222024

Weighted Average Maturity (Months)

Calendar Year

Weighted Average Maturity of Marketable Debt Outstanding

Historical Adjust Nominal Coupons to Match Financing Needs

Historical Average from 1980 to end of FY 2014 Q4
This scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the 23

basic trajectory of average maturity absent changes to the mix of securities issued by Treasury.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2015201620172018201920202021202220232024

$bn

Projected Gross Borrowing excluding Bills for Fiscal Year

Maturing in < 1 Year excluding Bills OMB's Projected Net Borrowing
This scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the 24

basic trajectory of average maturity absent changes to the mix of securities issued by Treasury. See table on following page for details. 

0

2

4

6

8

10

12

14

16

18

20

20142015201620172018201920202021202220232024

$ tr

Projected Maturity Profile from end of Fiscal Year

<= 1yr (1,2] (2,3] (3,5] (5,7] (7,10] >= 10yr
25

This scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the 

basic trajectory of average maturity absent changes to the mix of securities issued by Treasury. Portfolio Composition by original issuance type 

and term can be found in the appendix (Page 43).

Recent and Projected Maturity Profile, $ billions

End of Fiscal 

Year <= 1yr (1,2] (2,3] (3,5] (5,7] (7,10] >= 10yr Total (0, 5]

2007 1,606 639 341 545 267 480 557 4,434 3,130

2008 2,152 711 280 653 310 499 617 5,222 3,796

2009 2,702 774 663 962 559 643 695 6,998 5,101

2010 2,563 1,141 895 1,273 907 856 853 8,488 5,872

2011 2,620 1,334 980 1,541 1,070 1,053 1,017 9,616 6,476

2012 2,951 1,373 1,104 1,811 1,214 1,108 1,181 10,742 7,239

2013 2,939 1,523 1,242 1,965 1,454 1,136 1,331 11,590 7,669

2014 2,935 1,739 1,319 2,207 1,440 1,113 1,528 12,281 8,199

2015 3,194 1,793 1,357 2,370 1,469 1,113 1,650 12,946 8,714

2016 3,249 1,876 1,603 2,403 1,496 1,178 1,820 13,624 9,130

2017 3,332 2,139 1,556 2,473 1,504 1,245 1,998 14,247 9,500

2018 3,628 2,083 1,613 2,513 1,564 1,302 2,142 14,845 9,838

2019 3,573 2,228 1,709 2,647 1,692 1,388 2,313 15,550 10,157

2020 3,685 2,338 1,676 2,830 1,794 1,405 2,555 16,283 10,529

2021 3,796 2,280 1,924 2,922 1,828 1,457 2,816 17,023 10,921

2022 3,738 2,567 1,951 3,040 1,915 1,472 3,124 17,807 11,296

2023 4,025 2,575 2,029 3,051 1,961 1,485 3,434 18,561 11,680

2024 4,076 2,706 2,039 3,179 2,051 1,498 3,733 19,283 12,000
This scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the basic 26

trajectory of average maturity absent changes to the mix of securities issued by Treasury. See table on following page for details

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20142015201620172018201920202021202220232024

Projected Maturity Profile from end of Fiscal Year

<= 1yr (1,2] (2,3] (3,5] (5,7] (7,10] >= 10yr
27

Recent and Projected Maturity Profile, percent

This scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the 

basic trajectory of average maturity absent changes to the mix of securities issued by Treasury. Portfolio Composition by original issuance type 

and term can be found in the appendix (Page 43).

End of Fiscal 

Year <= 1yr (1,2] (2,3] (3,5] (5,7] (7,10] >= 10yr (0, 3] (0, 5]

2007 36.2% 14.4% 7.7% 12.3% 6.0% 10.8% 12.6% 58.3% 70.6%

2008 41.2% 13.6% 5.4% 12.5% 5.9% 9.6% 11.8% 60.2% 72.7%

2009 38.6% 11.1% 9.5% 13.7% 8.0% 9.2% 9.9% 59.1% 72.9%

2010 30.2% 13.4% 10.5% 15.0% 10.7% 10.1% 10.0% 54.2% 69.2%

2011 27.2% 13.9% 10.2% 16.0% 11.1% 10.9% 10.6% 51.3% 67.3%

2012 27.5% 12.8% 10.3% 16.9% 11.3% 10.3% 11.0% 50.5% 67.4%

2013 25.4% 13.1% 10.7% 17.0% 12.5% 9.8% 11.5% 49.2% 66.2%

2014 23.9% 14.2% 10.7% 18.0% 11.7% 9.1% 12.4% 48.8% 66.8%

2015 24.7% 13.9% 10.5% 18.3% 11.3% 8.6% 12.7% 49.0% 67.3%

2016 23.8% 13.8% 11.8% 17.6% 11.0% 8.6% 13.4% 49.4% 67.0%

2017 23.4% 15.0% 10.9% 17.4% 10.6% 8.7% 14.0% 49.3% 66.7%

2018 24.4% 14.0% 10.9% 16.9% 10.5% 8.8% 14.4% 49.3% 66.3%

2019 23.0% 14.3% 11.0% 17.0% 10.9% 8.9% 14.9% 48.3% 65.3%

2020 22.6% 14.4% 10.3% 17.4% 11.0% 8.6% 15.7% 47.3% 64.7%

2021 22.3% 13.4% 11.3% 17.2% 10.7% 8.6% 16.5% 47.0% 64.2%

2022 21.0% 14.4% 11.0% 17.1% 10.8% 8.3% 17.5% 46.4% 63.4%

2023 21.7% 13.9% 10.9% 16.4% 10.6% 8.0% 18.5% 46.5% 62.9%

2024 21.1% 14.0% 10.6% 16.5% 10.6% 7.8% 19.4% 45.7% 62.2%
Section IV:

Demand

28
29

*Weighted averages of Competitive Awards.

**Approximated using prices at settlement and includes both Competitive and Non-Competitive Awards. For TIPS’ 10-year equivalent, a 

constant auction BEI is used as the inflation assumption.

Summary Statistics for Fiscal Year 2014 Q4 Auctions

Security 

Type Term Stop Out Rate 

(%)*

Bid-toCover 

Ratio*

Competitive 

Awards ($ bn)

% 

Primary 

Dealer*

% 

Direct*

% 

Indirect*

NonCompetitive 

Awards ($ bn)

SOMA 

Add Ons 

($ bn)

10-Yr 

Equivalent 

($ bn)**

Bill 4-Week 0.022 4.2 534.8 69.5% 6.0% 24.4% 3.3 0.0 5.1

Bill 13-Week 0.024 4.6 334.9 70.6% 6.3% 23.1% 5.5 0.0 10.2

Bill 26-Week 0.050 4.8 298.3 61.0% 6.5% 32.5% 4.9 0.0 13.0

Bill 52-Week 0.112 4.1 74.4 63.0% 3.2% 33.8% 0.4 0.0 6.9

Bill CMBs 0.025 4.5 15.0 93.8% 3.0% 3.2% 0.0 0.0 0.1

Coupon 2-Year 0.554 3.4 86.2 49.9% 14.2% 35.9% 0.5 0.0 18.2

Coupon 3-Year 0.994 3.2 80.5 46.8% 17.3% 35.8% 0.2 0.0 25.6

Coupon 5-Year 1.722 2.7 104.8 34.4% 15.2% 50.4% 0.1 0.0 55.5

Coupon 7-Year 2.177 2.5 86.9 36.6% 15.2% 48.2% 0.1 0.0 62.9

Coupon 10-Year 2.520 2.7 65.9 39.2% 14.2% 46.6% 0.1 0.0 66.2

Coupon 30-Year 3.274 2.6 42.0 32.5% 19.4% 48.0% 0.0 0.0 92.0

TIPS 5-Year (0.281) 2.5 16.0 40.2% 3.5% 56.3% 0.0 0.0 8.4

TIPS 10-Year 0.417 2.4 27.9 39.0% 8.1% 52.9% 0.1 0.0 31.3

FRN 2-Year FRN 0.056 4.3 40.9 47.2% 3.7% 49.1% 0.1 0.0 0.1

Total Bills 0.034 4.5 1,257.3 67.7% 6.0% 26.3% 14.1 0.0 35.3

Total Coupons 1.718 2.9 466.3 40.3% 15.6% 44.0% 1.0 0.0 320.5

Total TIPS 0.163 2.4 43.9 39.4% 6.5% 54.1% 0.1 0.0 39.7

Total FRN 0.056 4.3 40.9 47.2% 3.7% 49.1% 0.1 0.0 0.1
30

1

1.5

2

2.5

3

3.5

4

4.5

5

5.5

6

Sep-04Sep-05Sep-06Sep-07Sep-08Sep-09Sep-10Sep-11Sep-12Sep-13Sep-14

Bid-to-Cover Ratio

Bid-to-Cover Ratios for Treasury Bills

4-Week (13-week moving average) 13-Week (13-week moving average)

26-Week (13-week moving average) 52-Week (6-month moving average)
31

1

1.5

2

2.5

3

3.5

4

4.5

5

5.5

6

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

Jul-14

Aug-14

Sep-14

Bid-to-Cover Ratio

Bid-to-Cover Ratios for FRNs
32

1

1.5

2

2.5

3

3.5

4

4.5

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

Bid-to-Cover Ratio

Bid-to-Cover Ratios for 2-, 3-, and 5-Year Nominal Securities

(6-Month Moving Average)

2-Year 3-Year 5-Year
33

1

1.5

2

2.5

3

3.5

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

Bid-to-Cover Ratio

Bid-to-Cover Ratios for 7-, 10-, and 30-Year Nominal Securities

(6-Month Moving Average)

7-Year 10-Year 30-Year
34

1

1.5

2

2.5

3

3.5

Sep-00Sep-01Sep-02Sep-03Sep-04Sep-05Sep-06Sep-07Sep-08Sep-09Sep-10Sep-11Sep-12Sep-13Sep-14

Bid-to-Cover Ratio

Bid-to-Cover Ratios for TIPS

5-Year 10-Year (6-month moving average) 20-Year 30-Year
35 Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository Institutions, Individuals, 

Pension and Insurance.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13

Mar-13

May-13

Jul-13

Sep-13

Nov-13

Jan-14

Mar-14

May-14

Jul-14

Sep-14

13-week moving average

Percent Awarded in Bills Auctions by Investor Class

(3-Month Moving Average) 

Other Dealers and Brokers Investment Funds Foreign and International Other
36 Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository Institutions, Individuals, 

Pension and Insurance.

0%

5%

10%

15%

20%

25%

30%

35%

Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Dec-12

Feb-13

Apr-13

Jun-13

Aug-13

Oct-13

Dec-13

Feb-14

Apr-14

Jun-14

Aug-14

6-month moving average

Percent Awarded in 2-, 3-, 5-Year Nominal Security Auctions by 

Investor Class (6-Month Moving Average)

Other Dealers and Brokers Investment Funds Foreign and International Other
37 Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository Institutions, Individuals, 

Pension and Insurance.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Dec-12

Feb-13

Apr-13

Jun-13

Aug-13

Oct-13

Dec-13

Feb-14

Apr-14

Jun-14

Aug-14

6-month moving average

Percent Awarded in 7-, 10-, 30-Year Nominal Security Auctions 

by Investor Class (6-Month Moving Average)

Other Dealers and Brokers Investment Funds Foreign and International Other
38 Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository Institutions, Individuals, 

Pension and Insurance.

0%

10%

20%

30%

40%

50%

60%

Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Dec-12

Feb-13

Apr-13

Jun-13

Aug-13

Oct-13

Dec-13

Feb-14

Apr-14

Jun-14

Aug-14

6-month moving average

Percent Awarded in TIPS Auctions by Investor Class 

(6-Month Moving Average)

Other Dealers and Brokers Investment Funds Foreign and International Other
39 Excludes SOMA add-ons. 

35%

40%

45%

50%

55%

60%

65%

70%

75%

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

% of Total Competitive Amount Awarded

Primary Dealer Awards at Auction, Percent

4/13/26-Week (13-week moving average) 52-Week (6-month moving average)

2/3/5 (6-month moving average) 7/10/30 (6-month moving average)

TIPS (6-month moving average)
40 Excludes SOMA add-ons. 

0%

5%

10%

15%

20%

25%

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

% of Total Competitive Amount Awarded

Direct Bidder Awards at Auction, Percent

4/13/26-Week (13-week moving average) 52-Week (6-month moving average)

2/3/5 (6-month moving average) 7/10/30 (6-month moving average)

TIPS (6-month moving average)
41 Foreign includes both private sector and official institutions.

0

20

40

60

80

100

120

140

160

180

200

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13

Mar-13

May-13

Jul-13

Sep-13

Nov-13

Jan-14

Mar-14

May-14

Jul-14

Sep-14

$bn

Total Foreign Awards of Treasuries at Auction, $ Billion

Bills 2/3/5 7/10/30 TIPS FRN
Appendix

42
This scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the basic 43

trajectory of average maturity absent changes to the mix of securities issued by Treasury. See table on following page for details

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015201620172018201920202021202220232024

Projected Portfolio Composition by Issuance Type, Percent

Bills 2/3/5 7/10/30 TIPS (principal accreted to projection date) FRN
44

Recent and Projected Portfolio Composition by Issuance Type, percent

This scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the 

basic trajectory of average maturity absent changes to the mix of securities issued by Treasury. 

End of Fiscal Year Bills 2-, 3-, 5-Year Nominal 

Coupons

7-, 10-, 30-Year 

Nominal Coupons

Total Nominal 

Coupons

TIPS (principal 

accreted to 

projection date)

FRN

2007 21.6% 38.9% 29.2% 68.1% 10.3% 0.0%

2008 28.5% 34.5% 26.9% 61.4% 10.0% 0.0%

2009 28.5% 36.2% 27.4% 63.6% 7.9% 0.0%

2010 21.1% 40.1% 31.8% 71.9% 7.0% 0.0%

2011 15.4% 41.4% 35.9% 77.3% 7.3% 0.0%

2012 15.0% 38.4% 39.0% 77.4% 7.5% 0.0%

2013 13.2% 35.8% 43.0% 78.7% 8.1% 0.0%

2014 11.5% 33.0% 46.0% 79.0% 8.5% 1.0%

2015 11.2% 29.3% 48.4% 77.7% 8.8% 2.2%

2016 10.7% 28.0% 49.9% 77.9% 9.0% 2.4%

2017 10.2% 27.8% 50.4% 78.2% 9.3% 2.3%

2018 9.8% 27.7% 50.7% 78.4% 9.6% 2.2%

2019 9.4% 28.1% 50.6% 78.8% 9.8% 2.1%

2020 8.9% 28.5% 50.7% 79.3% 9.8% 2.0%

2021 8.5% 28.6% 51.2% 79.9% 9.7% 1.9%

2022 8.2% 28.5% 52.0% 80.5% 9.5% 1.8%

2023 7.8% 28.5% 52.6% 81.1% 9.3% 1.8%

2024 7.5% 28.2% 53.3% 81.5% 9.2% 1.7%
*Weighted averages of Competitive Awards. 45

**Approximated using prices at settlement and includes both Competitive and Non-Competitive Awards.

Issue Settle Date Stop Out 

Rate (%)*

Bid-toCover 

Ratio*

Competitive 

Awards ($ 

bn)

% 

Primary 

Dealer*

% 

Direct*

% 

Indirect*

NonCompetitive 

Awards ($ bn)

SOMA 

Add Ons 

($ bn)

10-Yr 

Equivalent ($ 

bn)**

4-Week 7/3/2014 0.025 4.19 29.77 68.1% 10.5% 21.4% 0.23 0.00 0.28

4-Week 7/10/2014 0.020 4.27 34.76 79.7% 10.4% 9.9% 0.24 0.00 0.33

4-Week 7/17/2014 0.020 4.32 34.77 67.6% 4.9% 27.4% 0.23 0.00 0.33

4-Week 7/24/2014 0.025 3.94 34.77 86.8% 4.9% 8.3% 0.23 0.00 0.33

4-Week 7/31/2014 0.030 4.12 38.97 66.6% 6.3% 27.1% 0.24 0.00 0.38

4-Week 8/7/2014 0.020 4.26 39.77 69.2% 7.4% 23.4% 0.23 0.00 0.38

4-Week 8/14/2014 0.040 3.73 49.74 73.5% 6.7% 19.7% 0.26 0.00 0.48

4-Week 8/21/2014 0.035 3.86 49.73 69.3% 8.7% 21.9% 0.27 0.00 0.46

4-Week 8/28/2014 0.030 3.80 48.98 64.2% 5.5% 30.3% 0.27 0.00 0.47

4-Week 9/4/2014 0.015 4.49 39.78 50.6% 4.2% 45.3% 0.22 0.00 0.36

4-Week 9/11/2014 0.005 4.73 34.77 61.9% 3.0% 35.2% 0.23 0.00 0.33

4-Week 9/18/2014 0.000 4.61 29.76 81.6% 3.0% 15.5% 0.24 0.00 0.28

4-Week 9/25/2014 0.000 5.11 39.46 80.3% 3.3% 16.4% 0.22 0.00 0.38

4-Week 10/2/2014 0.020 3.77 29.78 55.9% 5.0% 39.0% 0.22 0.00 0.28

13-Week 7/10/2014 0.030 4.62 24.54 77.7% 7.5% 14.8% 0.41 0.00 0.74

13-Week 7/17/2014 0.025 4.82 24.46 66.9% 5.7% 27.4% 0.44 0.00 0.75

13-Week 7/24/2014 0.025 4.65 25.52 67.4% 7.3% 25.3% 0.46 0.00 0.78

13-Week 7/31/2014 0.030 4.71 25.70 66.7% 5.2% 28.2% 0.40 0.00 0.81

13-Week 8/7/2014 0.025 4.56 27.52 67.5% 6.4% 26.0% 0.38 0.00 0.84

13-Week 8/14/2014 0.030 4.47 28.45 64.9% 4.8% 30.3% 0.45 0.00 0.87

13-Week 8/21/2014 0.030 4.70 28.45 51.5% 3.6% 44.9% 0.45 0.00 0.84

13-Week 8/28/2014 0.030 4.31 27.84 81.4% 8.1% 10.5% 0.38 0.00 0.86

13-Week 9/4/2014 0.025 4.58 27.40 67.9% 8.4% 23.7% 0.40 0.00 0.81

13-Week 9/11/2014 0.020 5.39 25.58 68.4% 5.5% 26.1% 0.42 0.00 0.76

13-Week 9/18/2014 0.015 4.91 23.51 81.2% 8.3% 10.6% 0.39 0.00 0.71

13-Week 9/25/2014 0.010 4.59 22.60 80.4% 4.5% 15.1% 0.42 0.00 0.72

13-Week 10/2/2014 0.015 4.17 23.31 81.7% 6.8% 11.6% 0.44 0.00 0.72

26-Week 7/10/2014 0.060 4.86 22.11 54.8% 9.7% 35.5% 0.39 0.00 1.35

26-Week 7/17/2014 0.060 4.93 22.26 57.7% 5.2% 37.1% 0.37 0.00 0.53

26-Week 7/24/2014 0.055 4.66 23.17 50.4% 8.3% 41.3% 0.45 0.00 0.60

26-Week 7/31/2014 0.055 4.73 22.67 53.8% 3.6% 42.7% 0.40 0.00 0.66

26-Week 8/7/2014 0.050 4.87 24.12 67.0% 4.4% 28.6% 0.41 0.00 1.48

26-Week 8/14/2014 0.050 4.72 24.03 64.5% 3.4% 32.0% 0.39 0.00 0.80

26-Week 8/21/2014 0.050 4.83 24.15 48.4% 3.6% 48.0% 0.40 0.00 0.83

26-Week 8/28/2014 0.050 4.58 22.91 69.4% 6.4% 24.3% 0.34 0.00 0.85

26-Week 9/4/2014 0.050 4.79 23.37 70.1% 5.4% 24.5% 0.35 0.00 1.37

26-Week 9/11/2014 0.045 5.38 22.26 64.3% 3.0% 32.8% 0.36 0.00 0.92

26-Week 9/18/2014 0.045 4.99 22.39 64.7% 7.8% 27.5% 0.33 0.00 0.97

26-Week 9/25/2014 0.040 4.71 21.66 64.0% 13.6% 22.4% 0.36 0.00 1.02

26-Week 10/2/2014 0.040 4.30 23.21 66.4% 8.4% 25.2% 0.32 0.00 1.39

52-Week 7/24/2014 0.110 4.27 24.80 68.1% 3.3% 28.6% 0.12 0.00 2.07

52-Week 8/21/2014 0.105 4.10 24.77 60.0% 3.0% 37.0% 0.15 0.00 2.24

52-Week 9/18/2014 0.120 4.06 24.78 61.1% 3.2% 35.7% 0.14 0.00 2.48

CMBs 9/4/2014 0.025 4.54 15.00 93.8% 3.0% 3.2% 0.00 0.00 0.05

Bills
46

*Weighted averages of Competitive Awards.

**Approximated using prices at settlement and includes both Competitive and Non-Competitive Awards. For TIPS’ 10-Year Equivalent, a 

constant auction BEI is used as the inflation assumption.

Issue Settle Date Stop Out 

Rate (%)*

Bid-toCover 

Ratio*

Competitive 

Awards ($ 

bn)

% 

Primary 

Dealer*

% 

Direct*

% 

Indirect*

NonCompetitive 

Awards ($ bn)

SOMA 

Add Ons 

($ bn)

10-Yr 

Equivalent ($ 

bn)**

2-Year FRN 7/31/2014 0.070 4.09 14.97 50.0% 3.3% 46.7% 0.03 0.00 0.03

2-Year FRN 8/29/2014 0.055 4.38 12.98 50.2% 3.3% 46.5% 0.02 0.00 0.03

2-Year FRN 9/26/2014 0.041 4.45 12.98 41.0% 4.6% 54.4% 0.02 0.00 0.02

2-Year 7/31/2014 0.544 3.22 28.73 58.7% 14.3% 27.0% 0.17 0.01 5.82

2-Year 9/2/2014 0.530 3.48 28.72 48.0% 12.1% 39.8% 0.18 0.00 5.94

2-Year 9/30/2014 0.589 3.56 28.75 43.0% 16.1% 40.9% 0.15 0.00 6.28

3-Year 7/15/2014 0.992 3.38 26.83 49.1% 12.7% 38.2% 0.07 0.00 8.27

3-Year 8/15/2014 0.924 3.03 26.85 44.8% 19.0% 36.2% 0.05 0.00 8.62

3-Year 9/15/2014 1.066 3.17 26.83 46.6% 20.3% 33.1% 0.07 0.00 8.65

5-Year 7/31/2014 1.720 2.81 34.95 25.9% 25.9% 48.2% 0.05 0.01 18.41

5-Year 9/2/2014 1.646 2.81 34.91 36.4% 10.8% 52.7% 0.04 0.00 18.27

5-Year 9/30/2014 1.800 2.56 34.90 41.0% 8.8% 50.3% 0.05 0.00 18.73

7-Year 7/31/2014 2.250 2.58 28.98 37.4% 15.2% 47.4% 0.02 0.01 20.89

7-Year 9/2/2014 2.045 2.57 28.97 30.7% 20.4% 48.8% 0.03 0.00 20.78

7-Year 9/30/2014 2.235 2.48 28.98 41.7% 10.0% 48.3% 0.02 0.00 21.16

10-Year 7/15/2014 2.597 2.57 20.98 46.5% 13.9% 39.6% 0.02 0.00 20.99

10-Year 8/15/2014 2.439 2.83 23.95 37.9% 15.1% 47.0% 0.05 0.00 24.18

10-Year 9/15/2014 2.535 2.71 20.99 33.5% 13.5% 53.0% 0.01 0.00 21.00

30-Year 7/15/2014 3.369 2.40 12.99 35.7% 11.1% 53.2% 0.01 0.00 28.01

30-Year 8/15/2014 3.224 2.60 15.98 29.8% 24.4% 45.9% 0.02 0.00 35.57

30-Year 9/15/2014 3.240 2.67 12.99 32.8% 21.8% 45.5% 0.01 0.00 28.43

Issue Settle Date Stop Out 

Rate (%)*

Bid-toCover 

Ratio*

Competitive 

Awards ($ 

bn)

% 

Primary 

Dealer*

% 

Direct*

% 

Indirect*

NonCompetitive 

Awards ($ bn)

SOMA 

Add Ons 

($ bn)

10-Yr 

Equivalent ($ 

bn)**

5-Year 8/29/2014 -0.281 2.48 15.98 40.2% 3.5% 56.3% 0.02 0.00 8.42

10-Year 7/31/2014 0.249 2.49 14.95 36.6% 10.3% 53.1% 0.05 0.00 16.77

10-Year 9/30/2014 0.610 2.20 12.98 41.7% 5.7% 52.7% 0.02 0.00 14.48

Nominal Coupons

TIPS
1

Treasury Borrowing Advisory Committee

November 4, 2014
2

Table of Contents

Charge to the Committee: Please provide an update on the trends in the student loan market over the 

last several years. What issues, if any, should Treasury consider with regard to student loans? 

Topics to discuss:

1. A brief history of the student lending program and key elements today, including an update on trends since the July 2012 TBAC

presentation on the topic 

2. Default trends and implications

3. Key factors driving growth in student loans

4. Broader implications of student lending growth

5. How the Committee expects the student loan market to develop, including potential reform proposals

6. Main risks associated with student lending, including the funding implications for Treasury under the status quo versus alternate 

potential scenarios
3

Executive Summary

• In July 2012, TBAC addressed the topic of student lending, providing a broad review of the program, its growth, benefits and risks. 

Notably for TBAC, the Student Aid and Fiscal Responsibility Act (SAFRA) of 2010 ceased the origination of federal student loans by 

private lenders and as of July 1, 2010, all federal student loans are made directly by the Department of Education and funded by the 

U.S. Treasury Department.

— As a result of this shift, the liability management task of Treasury has a new expanding dimension, moving from a focus on financing 

the deficit, toward an increasing share of overall issuance supporting the funding needs of financial assets owned by Treasury, 

some purchased during the financial crisis, but future growth primarily driven by direct student lending.

• Since the 2012 report, student loan balances and default rates have increased.

— The balance of student loans outstanding has grown from $1.0 trillion as of YE2011 to $1.3 trillion as of 2Q2014.(1) The government 

represents more than 85% of origination volume. There are four key factors that continue to drive growth:

• More people choosing to consume more years of higher education, in part reflecting demographic change with growth in the 20-

34 year cohort and in part due to the weak economy with students staying in school longer. 

– A greater proportion of students are taking out Federal student loans (48% as of 2012, up from 33% in 2002).(2)

• The increasing cost of higher education exacerbated by reduced subsidies from state governments to in-state schools.

• Outstanding balances declining more slowly than originally anticipated due to both increased volume of loans in deferral and 

forbearance as well as longer loan tenors.

• The growth in for-profit schools, which accounts for the majority of growth in higher education students and has broadened the 

use of student financing.

— Default rates are high and rising, with the two-year cohort default rate increasing to 10.0% vs. 8.8% as of the 2012 TBAC report.

(3)

• Notably, “default” in the context of federal student loans is generally defined as 270 days without payment.

(4) Loans in default 

represent 9% of the stock of outstanding federal student loans.

– Behind the default rate is a shadow book of potential future defaults, reflected in the volume of loans in deferment and 

forbearance. Those loans add 23% to the 9% that are already listed in default (see slide 12).

– Additionally, the growing volume of seriously delinquent loans (90+ days) indicate further potential defaults on the horizon.

Student loan delinquency rates are the highest among any consumer debt product.

(5)

Notes

1. Based on data released by the Federal Reserve on October 7, 2014 for 2011 and 2Q14. Including student loans originated under FFELP and Direct Loan Programs; Perkins loans; and private student loans 

without government guarantees.

2. U.S. Department of Education, National Center for Education Statistics.

3. Department of Education two-year cohort default rates, which refer to the percentage of borrowers entering repayment during one fiscal year and defaulting by the end of the next fiscal year. The 2-year cohort 

default rate for 2011 was 10.0% (the most recent available) and for 2009 was 8.8% (the most recent available at the time of the 2012 TBAC presentation).

4. Department of Education. Varies by type of loan, date of origination and processing time.

5. Federal Reserve Bank of New York Quarterly Report on Household Debt and Credit (August 2014).
4

Executive Summary (Continued)

— A key concern is that students are taking on student loans because historically an education has been correlated with economic 

mobility; however, today an average of 40% of students at four-year institutions (and 68% of students in for-profit institutions) do not 

graduate within six years,(1) which means they most likely do not benefit from the income upside from a higher degree yet have the 

burden of student debt.

• Unlike all other indebtedness, student debt cannot be extinguished in bankruptcy in almost all cases and the government can 

offset income tax refunds, Social Security and other federal benefits.

— This outcome contrasts to the goal behind the Federally subsidized student loans which has been to ensure access to higher 

education, economic opportunity and social mobility. 

• As first commented by President Johnson at the inception of the program, the act should be “a way to deeper personal 

fulfillment, greater personal productivity, and increased personal reward.”(2)

— CBO calculations indicate that the student loan program delivers a $135Bn profit to taxpayers over the next decade.(3) 

• However, as the CBO acknowledges, there are substantial potential liabilities that are hidden by required government 

accounting that calculates the cost of the program based on the program as mandated and without factoring in market risk.

– According to the CBO, under fair value accounting (incorporating market risk) the program will cost taxpayers $88 billion.(3)

— In addition, the estimate does not include the potential cost or benefit associated with recent proposals to redesign elements of the 

student lending program, including: (i) reducing the interest rate; (ii) increasing repayment options; and (iii) addressing the pace of 

origination with a focus on qualifying institutions eligible for such programs.

• Nor does it reflect potential efficiency benefits by addressing disparities in the quality of student loan servicing.

• For example, the gross cost of maturity extension in order to increase the probability of repayment would be approximately $220 

billion, although before factoring in the economic and social costs / benefits. 

— Due to the relatively recent growth in both origination volume and default rates, it is premature to conclude the extent to which 

student lending is crowding out other forms of credit creation and thus acting as a drag on other parts of the economy. However,

credit availability could be a problem as this age group bears the brunt of increased student debt.(4)

• While this presentation will attempt to identify important characteristics of the basic features of some of the more common loans offered 

directly by the federal government, clearly a more exhaustive analysis, including the collection and availability of important data about 

the performance and borrower trends is needed to complete a full assessment of the funding strategy for these loan programs.

Notes

1. National Center for Education Statistics. Based on graduation rates of Bachelor’s Degree-Seeking Students at 4-Year Postsecondary Institutions (cohort entry year: 2006).

2. President Lyndon Johnson, “Remarks at Southwest Texas State College Upon Signing the Higher Education Act of 1965” (November 8, 1965).

3. Congressional Budget Office, “Fair-Value Estimates of the Cost of Selected Federal Credit Programs for 2015 to 2024” (May 2014).

4. Federal Reserve Bank of New York Quarterly Report on Household Debt and Credit (August 2014).
5

Section 1: Overview of the Student Lending Program and 

Key Elements Today
6

History of the Student Lending Program

• Student loans are used to finance post-secondary education, which is typically targeted for undergraduate and postgraduate education 

but also can include eligible vocational or trade schools. 

• The U.S. government began offering Federal financing for Institutions of Higher Education (IHE) in 1965 with Title IV of the Higher 

Education Act (HEA). 

— HEA is re-authorized every five years, although the re-authorization process can take years to get through Congress: HEA’s 

reauthorization has been temporarily extended beyond its December 2013 expiry as Congress negotiate changes.

• Key elements of the Federal student loan financing in the last 25 years:

— 1990: IHEs were given restrictions on eligibility for federal student loan financing, based on Cohort Default Rates (CDRs). Today, 

an institution loses its eligibility for the FFELP and Direct Loan programs if the most recent 3-year CDR is greater than 40% and / or 

if the three most recent 3-year CDRs are each 30% or greater. (1)

— 1998: Federal student loan debt cannot be discharged in personal bankruptcy. Private sector student loans cannot be 

discharged in bankruptcy after 2005.

— 2008: Federal student loans could be discharged for permanently disabled people who have “no substantial gainful activity” (similar 

to the Social Security definition for disability)

— 2010: The Student Aid and Fiscal Responsibility Act (SAFRA) of 2010 ceased the origination of federal student loans by private 

lenders, and as of July 1, 2010, all federal student loans are made directly by the Department of Education and funded by the 

U.S. Treasury Department. Newly originated federal student loans since July 1, 2006 are fixed rate loans. 

— 2013: Introduction of Income-Based Repayment (IBR) alternative repayment schemes

Note

1. Federal Pell Grants are subject to the three most recent 3-year CDR restriction. 
7

Student Debt Outstanding Is Growing Rapidly, With >85% Backed 

by the Federal Government

Student Debt Outstanding Has Doubled Since 2007

Source: Federal Reserve, Department of Education

($Bn)

Reflecting Increases in Both Borrowers and Balances

’07: 18.2

’07: 28.3

’13: 26.3

’13: 39.6

(Million) ($000s)

Source: National Student Loan Data System (NSLDS) Federal Student Aid Portfolio Summary

With Sizeable Taxpayer Exposure, Given the 

Percentage Backed by the Government

Outstanding Student Loans by Type as of Dec. 31, 2013

12%

9%

8%

5%

14%

51%

Source: Department of Education, Consumer Financial Protection Bureau, Federal Reserve

FFELP – Non-Profits, 

Corporates and Other

FFELP – Sallie Mae

FFELP – Banks

Private Loans Perkins Loans, 1%

Federal Direct

Loans

And the Rising Cost of Education

Cumulative 4Y Tuition Relative to Median Household Income (25Y to 34Y)

Source: U.S. Department of Education, National Center for Education Statistics, Haver 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

2007200920112013

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

Private tuition as a % of median household income

Public tuition as a % of median household income FFELP – Government
8

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Nonfederal Loans Grad PLUS Loans Parent PLUS Loans

Perkins and Other Federal Loans Federal Subsidized Stafford Loans Federal Unsubsidized Stafford Loans

More Than 75% of Federal Student Loans Are Originated With No 

Credit Underwriting

Note

1. Data for academic year ending in years shown above. Nonfederal loans include loans to students from states and from institutions in addition to private loans by banks, credit unions, and Sallie Mae.

• Approximately 76% of student loans, 

all government programs, were 

originated in AY 2012 – 2013 with no 

credit underwriting

• Federal loans made with no credit 

underwriting

− Federal Unsubsidized Stafford 

Loans (50.3%)

• Offered to undergraduate and 

graduate students; interest 

accrues while in school 

− Federal Subsidized Stafford 

Loans (25.1%)

• Offered to undergraduate 

students; federal government 

pays the interest while enrolled 

in school 

− Perkins Loans (1%)

• Low interest loans offered to 

undergraduate and graduate 

students with exceptional 

financial need 

• Federal loans made with limited credit 

underwriting

− Parent PLUS Loans (8.9%)

• Loans to parents with 

dependent children 

• Requires credit check (limited)

− Grad PLUS Loans (6.7%)

• Loans offered to graduate 

students 

• Requires credit check (limited)

• Private Student Loans (1) (8%)

− Comprehensive credit underwriting

(Annual Student Loan Originations, %)

Percentage Share of Federal and Non-Federal Student Loans Originations (1)

Source: College Board, “Trends in Student Aid, 2013.” http://trends.collegeboard.org/sites/default/files/student-aid-2013-full-report.pdf

25.1

50.3

8.9

6.7

1.0

8.0

41.4

33.2

9.3

3.2

12.9
9

Unlike Other Credit, Can’t Extinguish Student Loans in Bankruptcy

Default Consequences:

• Tax Refund Offsets: IRS can offset the borrower’s income tax refund until the defaulted loan is paid in 

full. A number of states also have laws that authorize state guaranty agencies to take state income tax 

refunds.

• Federal Benefits Offsets: The government can offset certain Social Security benefits to collect 

government student loans. Just as with other types of student loan collection, there is no time limit on 

Social Security offsets, according to a 2005 Supreme Court Case.

• Wage Garnishments: The government can also garnish wages as a way to recover money owed on a 

defaulted student loan. The United States Department of Education or a Student Loan Guarantor can 

garnish 15% of disposable pay(1) per pay period without a court order.

• Effect on Credit History: Adversely affects credit for many years. If borrower defaults, loan will be listed 

as a current debt that is in default. The default will also be listed in the historical section of borrower’s 

credit report, specifying the length of the default.

• License Revocations: A number of states allow professional and vocational boards to refuse to certify, 

certify with restrictions, suspend or revoke a member’s professional or vocational license and, in some 

cases, impose a fine, when a member defaults on student loans.

Note

1. Disposable pay is the pay remaining after deduction of any amounts required by law to be withheld. The maximum for student loan and all other garnishments is 25% of disposable income. Wage garnishment 

amounts may be lower, as the borrower must be left with weekly earnings after garnishment that are at least 30 times the Federal minimum wage ($7.25 an hour since July 24, 2009).

Source: National Consumer Law Center; Finaid.org
10

Section 2: Default Trends and Implications
11

• In attempting to gauge the potential future cost of the program, it is important to consider not only the volume of loans in default, but 

also the volumes in three other categories that could indicate difficulty repaying: deferment, forbearance, and serious delinquency.

• Default: “Default” in the context of student loans is generally defined as 270 days without payment.

(1)

— For each group of loans maturing in a given federal fiscal year, the Department of Education publishes default rates occurring 

through the end of the following fiscal year (2-year Cohort Default Rate, or CDR) and the second following fiscal year (3-year CDR).

— An institution loses its eligibility for the FFELP and Direct Loan programs if the most recent 3-year CDR is greater than 40% and / or 

if the three most recent 3-year CDRs are each 30% or greater. (2)

— For reference, the most recent national 3-year cohort default rate was 13.7% (the national 2-year cohort default rate was 10% as of 

the last published mark for FY2011, up 300 bps from 2008 and 550 bps from the trough of 4.5% in 2003).

— Universities that lose eligibility may appeal the decision, meaning they may not lose federal financing for a long period, if ever.

— Default trends are weaker at for-profit institutions, nearly 400 bps above the national two-year CDR as of the most recent mark 

published for 2011.

— Based on this threshold, 21 institutions of 6,100+ schools which qualified for Title IV funding lost eligibility in the most recent year.

• Deferment: Payments have been postponed as a result of certain circumstances such as returning to school, military service, or 

economic hardship.

• Forbearance: Payments have been temporarily suspended or reduced as a result or certain types of financial hardships.

• The ability to defer or forbear on loans distinguishes student lending from other credit. During deferment or forbearance, the principal 

and interest of the loans capitalize, making balances larger for students and exacerbating repayment potential.

• Serious Delinquency (90+ Days): Classified as in repayment, but given the high volume relative to historical levels, some portion can 

be considered at risk of default.

• Result: There are nearly $100Bn in defaults (or an average of $14,100 per borrower), which is 9% of the stock of federal student loans, 

with default rates differing meaningfully for the various types of institutions.

(3)

Sizeable Loan Growth: Assessing Default Risk

Notes

1. Department of Education. Varies by type of loan, date of origination and processing time.

2. Federal Pell Grants are subject to the three most recent 3-year CDR restriction. 

3. U.S. Department of Education, Default Coordination Team, Operations Performance Division. Default Management Database. http://ifap.ed.gov/DefaultManagement/DefaultManagement.html
12

0

2

4

6

8

10

12

14

$0

$5

$10

$15

$20

$25

$30

$35

03:Q104:Q105:Q106:Q107:Q108:Q109:Q110:Q111:Q112:Q113:Q114:Q1

Balance ($Bn, LHS)

% of Total Student Loans (RHS)

• The following table outlines the current status of the outstanding stock of Federal student loans. The blue-shaded areas show the total 

stock of Federal student financing. The pink-shaded area outlines the portion of the stock that is in deferment or forbearance. 

Default, Defined as Loans That Are 270+ Days Delinquent, And Three 

Other Categories Are Potential Risks

At risk of default

2-Year Cohort Default Rates by Type of Institution (%)

Default Rates Vary by Type of Institution

Source: U.S. Department of Education

Source: U.S. Department of Education, National Center for Education Statistics

Amount of 90+ Days Delinquent Loans has Grown 

Significantly

Source: Federal Reserve Bank of New York

Breakdown of U.S. Federal Student Financing by Repayment Status, Type (As of June 2014)

In School

In Grace 

Period Repayment Deferment Forbearance Default Other Total

Direct (Student Borrower) $136 $43 $300 $89 $75 $37 $5 $686

# of borrowers (millions) 7.6 1.8 12.3 3.4 2.5 2.6 0.2 30.4

FFEL (Family Borrower) $6 $3 $243 $39 $44 $62 $6 $403

# of borrowers (millions) 0.4 0.2 12.2 2.0 1.7 4.4 0.2 21.1

Total Fed Student Lending $142 $46 $543 $128 $119 $99 $11 $1,088

# of borrowers (millions) 8.0 2.0 24.5 5.4 4.2 7.0 0.4 51.5

% of notional US$Bn 13% 4% 50% 12% 11% 9% 1% 100%

5.2%

8.7%

5.1%

3.2%

10.0%

13.6%

9.6%

5.2%

0%

5%

10%

15%

National Private ForProfitPublic Private NonProfit

2002 2011
13

0%

10%

20%

30%

40%

50%

60%

70%

2005-01 2006-01 2007-01 2008-01 2009-01 2010-01 2011-01 2012-01 2013-01 2014-01

2005 2006 2007 30% Threshold 40% Threshold

Some Parallels to the Subprime Mortgage Market Pre-Crisis

Subprime Mortgages – Percentage of Seriously Delinquent (90+ Day) Loans Originated Between 2005-2007

Source: Loan Performance Database

Balance of Loans that Ever Reached 90+ Day Delinquency / Total Loans Outstanding, By Vintage (%)

Implied crisis trigger

• To the extent it is appropriate to draw parallels to the subprime mortgage market, although clearly substantial differences exist, one can 

look at the rate of serious delinquencies as a percent of the balance of total subprime loans originated leading up to the crisis. The 

market experienced a balance of 90+ day delinquencies greater than 30% and 40% only in mid/late 2009, suggesting that a 30% or 

40% threshold as a trigger would be too generous.

— It is important to note the subprime mortgage data is for delinquency versus default, and there are differences in the markets for 

subprime loans and student loans. However, in an attempt to calibrate the appropriate threshold, we find the data instructive.
14

Section 3: Key Factors Driving Growth in Student Loans
15

Growing Number of Students Receiving Student Loans

Notes

1. Data for academic year ending in years shown above.

2. Full-time, first time degree/certificate seeking undergraduates enrolled in all private or public degree-granting institutions. Student loans include only those made directly to students and do not include parent 

loans.

Percentage of Undergraduate Students Receiving Loans: 2001 - 2013 (1)

Source: U.S. Department of Education National Center for Education Statistics “Digest of Education Statistics,” 2013, Table 331.20, 2013.
16

More People Are Consuming More Years of Higher Education

• There are more college-aged people... The US population cohort aged 20y to 24y has grown +9.4% over the last 10y.

(1) This is the 

baby-boom ‘echo’ that should begin to slow noticeably from 2015 onward.

• ...And more of them are pursuing college degrees... College enrollment has grown +19% over the last 10y.

(2) 

— Graph 1 shows the growth of full time students in 4y universities of different types – public, non-profit private and for-profit private. 

Graph 2 shows the rising proportion of the US population aged 20y to 24y that attend different types of 4y universities.

— Not only do both graphs show absolute and proportionate increase, but both graphs show that the Great Financial Crisis appears to 

have accelerated the growth in students attending school.

— Equally important, both graphs show that the bulk of the increase in students was driven by ‘for profit’ universities.

Notes

1. Haver / US Census Bureau.

2. US Department of Education, National Center for Educational Statistics, Digest of Education Statistics – 2012 and Digest of Education Statistics – 2013. http://nces.ed.gov/programs/digest/

Source: U.S. Department of Education, National Center for Education Statistics Source: U.S. Department of Education, National Center for Education Statistics

Graph 1: Growth of Full-Time Students in Four-Year 

Universities, By Type

Graph 2: Proportion of U.S. Population Aged 20Y-24Y 

Attending Four-Year Universities, by Type
17

• ...And even more people are going to university for longer, in part pursuing post-graduate degrees and in part taking longer to 

graduate... Anecdotally, this is evident as a consequence of the Great Financial Crisis and spike in unemployment. Factually, it is also 

evident in the data as shown in Graph 3, which details the proportion of degrees granted in each that are above undergraduate/college 

degrees – i.e. Masters, Doctorate or Specialist (MD, MBA, etc...). Graph 3 shows a similar trend – more people are pursuing postgraduate degrees since the mid-1980s and this trend accelerated post-2008.

• ...And there are more universities to service them. There was a significant rise in the number of institutes of higher education (IHE) 

since 1992, as ‘for profit’ universities saw rapid growth. Graph 4 details the absolute number of IHEs by type that are eligible to receive 

students with Federal student aid.

— Again, the bulk of the growth in the last 15y was driven by ‘for profit’ universities.

• These three trends mean that the absolute stock of student loan debt should increase – a rising share of a growing population are 

choosing to consume more years of higher education.

— Even if we assume that the same proportion of this education expense was debt-financed (it is now a higher proportion) and that the 

cost of higher education remain constant (it has grown), the absolute stock of student financing would increase. In fact, a greater 

proportion of students are taking out Federal student loans (48% as of 2012, up from 33% in 2002).

More People Are Consuming More Years of Higher Education (Cont’d) 

Graph 3: More Students + More Students Getting Graduate 

Degrees

Graph 4: Growth in the Number of Degree-Granting 

Four-Year Institutions

Source: U.S. Department of Education, National Center for Education Statistics Source: U.S. Department of Education, National Center for Education Statistics
18

Recent Growth in ‘For Profit’ Schools Has Broadened the Use of 

Student Financing

• Simply put: “for profit” universities have grown rapidly in number and in enrollment, and students at “for profit” universities are twice as 

likely to utilize Federal student financing.

• To give some context as to why ‘for profit’ schools have grown and consolidated, as well as to why they are very much a factor in the 

growth in student loan financing, Table 3 below is a snapshot for average four-year undergraduate university income statement as well 

as the average cumulative source of financing for the student. 

— The financial metrics are broken down as revenues and costs per student per year. 

• Note the two boxes highlighted: the pink box shows the average operating profit per student at a ‘for profit’ university, while the yellow 

box shows that student financing covers roughly all public university tuition over the course of four years (which presumably was the 

design).
19

Section 4: Broader Implications of Student Lending 

Growth
20

One of the Key Drivers for Default is Failure to Graduate...

Graduation Rates Raise Questions about the Value of Loans for Most Borrowers

39% 33%

53%

23%

55% 52%

63%

28%

59% 57%

66%

32%

0%

20%

40%

60%

80%

100%

All Universities Public Private, Non-Profit Private, For-Profit

Source: Department of Education, National Center for Education Statistics

Graduation Rates of Bachelor’s Degree Seeking Students at 4-Year Postsecondary Institutions 

(Cohort Entry Year: 2006)

4 Years 5 Years 6 Years

41% 43% 34%

68%
21

...Failure to Graduate Exacerbates Already Weak Labor Market 

Outcomes

• Failure-to-graduate remains the most deadly of traps for higher education. As shown in the following Graphs 8, 9 and 10, the marginal 

benefit of higher education is clear in terms of lifetime earnings and better employment stability. Failure-to-graduate combined with 

leverage is a poor mix: the debt burden remains but very little of the economic benefits accrue. Whatever the reasons that the student 

failed-to-graduate, he or she is left with all of the downside and limited upside. 
22

Student Loan Debt Could Affect Credit Formation

Source: Federal Reserve (total figures), Federal Reserve Bank of New York (age distribution)

Credit Availability Could be a Problem as This Age Group 

Represents a Large Portion of Student Debt Expense

Source: Freddie Mac, Case Schiller, Census Bureau

First Time Homebuyers Face Affordability Issues

Monthly Payments as a % of Income

Outstanding Student Loan Debt ($Bn)

Student Loan Debt Has Surpassed Auto Loans for the First Time

Source: Federal Reserve, Federal Reserve Bank of New York

Consumer Debt Market Size by Type – Excluding Mortgages
23

The Increase in Student Loan Debt Shows Some Impact on 

Willingness to Purchase Housing

• There has been much debate as to whether the growth in student loan debt is crowding out other financing for post-graduates aged 24y 

to 34y. The academic and policy literature is mixed on the topic, primarily because there is limited data that is appropriated sliced by 

student loan debt level, income level and housing-secured debt. 

• Federal Reserve Bank of New York analysis:

• The first panel shows that post-Great Financial Crisis, those with student-loan debt are marginally less likely to have mortgage debt and 

suffered a larger fall in mortgage debt. The second panel suggests there’s no difference in utilization of auto-loan debt between those 

with and without student loans; however, like with mortgage debt, those with student-loan debt suffered a larger fall in auto debt. The 

final panel shows that the difference in credit/FICO scores for those with and without student loan debt has widened, either because 

FICO scores are more accurate or credit standards are more stringent.

• In addition to the potential spillovers to other credit, various academic studies show that there’s a correlation between higher student 

debt burden and (a) lower propensity to pursue graduate education, (b) reduced retirement savings, (c) higher propensity to live with 

parents, (d) delayed age of marriage, and even (e) lower reported satisfaction of marriage.

• Correlations could be related to higher student debt but more broadly to the extreme stress on employment prospects, volatility in asset 

markets and housing markets, and meaningful structural change across several industries in the post-Great Financial Crisis.
24

More Households Have More Student Debt; Significant Burden For 

Those With Lowest Income

Note

1. Brookings Institute. Is a Student Loan Crisis on the Horizon? June 2014. Beth Akers and Matthew Chingos
25

Section 5: How the Committee Expects the Student Loan 

Market to Develop, Including Potential Reform Proposals
26

Current Trends Imply Continued Loan Growth and CBO Budget 

Savings Projections Do Not Factor in Market Risk or Shifts in 

Macroeconomic Conditions

As currently designed, the federal student loan programs are projected to grow significantly over the next ten years

• The CBO estimates that the government’s four largest student loan programs will increase by $1.2 trillion on a gross basis from FY2015 

through FY2024.

— Annual growth is expected to be $103Bn in FY2015, increasing to annual growth of $133Bn in FY2024 (also on a gross basis).

CBO estimates that the program as currently designed yields budget savings of $135Bn from FY15 to FY24 (1)

• Based on the current accounting methodology as prescribed by the Federal Credit Reporting Act of 1990 (FCRA).

However, under fair-value accounting, the program results in an $88Bn cost to taxpayers (1)

• FCRA discounts expected future cash flows of the loan program using current UST rates, without accounting for market risk. 

• In contrast, under the alternative fair-value accounting approach analyzed by the CBO, “estimates are based on market values...which 

more fully account for the cost of the risk the government takes on.” 

— The CBO explains: “Market risk... arises from shifts in macroeconomic conditions, such as productivity and unemployment, and 

from changes in expectations about future macroeconomic conditions. The government is exposed to market risk when the 

economy is weak because borrowers default on their debt obligations more frequently and recoveries from borrowers are lower. 

When the government extends credit, the associated market risk of those obligations is effectively passed along to taxpayers, who, 

as investors, would view that risk as having a cost. Therefore, the fair-value approach offers a more comprehensive estimate 

of federal costs.” 

Note

1. Excluding administrative costs.

Source: Congressional Budget Office, “Fair-Value Estimates of the Cost of Selected Federal Credit Programs for 2015 to 2024” (May 2014).
27

Potential Reform Proposals Could Alter Economics of Program

Overview

• Given the social and economic cost of default, it is important to note various ideas for reform that have been proposed.

• The primary reform proposals, described below, address: (i) cost of the program to students; (ii) options available for repayment; and 

(iii) volume of loan origination. 

• The cost/benefit analysis of the program is beyond the scope of this presentation. The approaches to reform complement one another 

in the aggregate, with the focus on origination fulfilling the mandate of the student lending program by ensuring the completion of a 

quality education. 

Cost 

• Would allow borrowers with certain types of student loans issued before 2010 to refinance at lower interest rates offered to new

borrowers as of July 2013. 

Repayment and Servicing

• Income-based repayment: Several income-driven plans exist that focus on capping repayments at a percentage of discretionary income 

(e.g., 10%) and forgiving remaining balances after a period of qualifying payments (e.g., 20 years).

• Forgiveness: The Public Service Loan Forgiveness program allows individuals working in full-time public service jobs to qualify for 

forgiveness for the remaining balance of their federal direct loans after making 120 qualifying payments after October 1, 2007. The first 

forgiveness of loan balances will not be granted until October 2017. 

• Servicing: Continued reform by the federal loan service providers to take advantage of income-based repayment programs as well as 

minimize defaults and delinquencies.

Volume and Pace of Origination

• Risk sharing:

— Would develop a college ratings system that takes into account both affordability and outcomes. 

— The Department of Education recently finalized plans for a “gainful employment rule” that would put career training programs at risk

of losing their ability to participate in taxpayer-funded federal student aid programs if the estimated annual loan payment of a typical 

graduate exceeds 20% of his or her discretionary income or 8% of his or her total earnings.

• CFPB: The CFPB’s student loan ombudsman has implemented numerous programs to enhance financial literacy for students, parents 

and universities; increase transparency about student loan practices; analyze trends in the market; and make policy recommendations 

for a variety of areas, especially improvements in loan servicing.

Other

• Market segmentation: The federal program, which represents >85% of the market, uses the same terms for all borrowers. Programs 

are developed with no ability to create tools that meet the specific needs of different types of borrowers. Market segmentation could 

help facilitate the development of loan products and loan terms to do so, for example through public-private partnerships.

Source: White House, Department of Education, Congressional Budget Office, Consumer Financial Protection Bureau.
28

Section 6: Main Risks Associated with Student Lending, 

Including the Funding Implications for Treasury Under the 

Status Quo Versus Alternate Potential Scenarios
29

Direct Loan Accounts Are Expected to Continue to Grow and 

Represent a Growing Portion of the Federal Debt Held by Taxpayers

Source: Office of Management and Budget: Budget of the United States Government, Fiscal year 2015.

U.S. Total Debt Held by the Public and Total Debt Held by Public Net of Direct Loan Accounts: FY2013 – FY2024

$Trillion %

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

$0

$4

$8

$12

$16

$20

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Federal Debt Held by the Public ($Tr)

Federal Debt Held by the Public Net of Direct Loan Accounts ($Tr)

Direct Loan Accounts as a % of Federal Debt Held by the Public
30

Direct Lending Expected to Expand Significantly

• Primary drivers of direct lending growth are demographics (population aged 16y-24y), unemployment and underemployment (U-6).

• Demographics hold down direct loan growth as the baby-boom ‘echo’ ages.

• As the labor market improves, growth should decelerate from a peak of 67% year-over-year growth in 2011 to 5% year-overyear growth in 2024 (net of amortization)

• Panel 1 plots the unemployment rate along with our model-based forecast of the growth rate of loan financing.

• Panel 2 shows that although the growth rate of loan financing is expected to slow significantly, the level of direct lending may still 

double over the next 10 years.

• Such forecasts are highly uncertain and depend on modeling choices and variables that we can know little about, such as recession 

odds (upside risk), regulatory action (downside risk), and inflation in education (two-way risk).

Federal Direct Loan Financing and the Unemployment Rate

$0

$300

$600

$900

$1,200

$1,500

$1,800

2000 2005 2010 2015 2020 2025

Billions, Current $

Actual Forecast

Federal Direct Loan Financing, End FY Level

3%

4%

5%

6%

7%

8%

9%

10%

0%

10%

20%

30%

40%

50%

60%

70%

2000 2005 2010 2015 2020 2025

Unemployment Rate

YoY Change (%)

Actual Forecast

Federal Direct Loan Financing, FY Growth

Unemployment Rate, End FY
31

Cost of Dealing with Legacy Debt: Maturity Extension

• Regardless of the pace of new lending, existing direct loans are of questionable creditworthiness

• As of FY Q3:2014, 37.6% of Federal direct loan balances were tied up with borrowers who were delinquent, in default or in 

similar categories including forbearance, deferment, non-defaulted bankruptcy or disability (hereinafter called “delinquency 

and default rate” for simplicity)

• In the same period, 37.5% of indirect (FFELP) loan balances were in default, forbearance, deferment, non-defaulted 

bankruptcy or disability

• While fixed-rate student debt is insulated from interest rate risk, given the consequences of default discussed earlier, political 

pressure may nevertheless mount to forgive or extend student debt

• Debt forgiveness would reduce direct lending balances, while incurring a current-year expense for the Department of 

Education

• Maturity extension would cost less upfront to the taxpayer than debt forgiveness and provide some breathing room for at-risk 

borrowers. However, by keeping loans on the balance sheet for longer, maturity extension would increase direct lending 

balances at the Treasury.

• Alternative scenario: all borrowers who are in default, delinquency, or similar categories are allowed to defer payment for 10 years, at 

which point the remaining balance becomes a 10-year loan

• Assume in alternative (1) current delinquency and default rate, and in alternative (2) that the rate increases by 10pp (i.e.,

37.6% to 47.6%)

• With maturity extension, total direct lending balances at the end FY2024 will be higher than the base case by +$220 billion with

delinquency and default unchanged, and +$280 billion if delinquency and default increases 10pp to 47.6%

• Balances affected more by maturity extension than by further erosion in creditworthiness

• We can consider a similar thought experiment for the contingent liability of the outstanding stock of indirect lending. Take the stock of 

FFELP loan balances ($402.5 bn as of FY Q3:2014) and multiply by the delinquency and default rate (37.5%). Then the contingent 

liability is $150.7 billion, if the Federal government is assumed to be the ultimate backstop for indirect loans.

• These calculations do not provide a complete cost/benefit analysis of maturity extension. This exercise quantifies the potential 

consequences of such a re-profiling of debt in terms of the consequences for Treasury’s debt management. A holistic assessment of 

such a program would have to consider the benefits of doing so, which could well be economically significant. 
32

Cost of Dealing with Legacy Debt: Maturity Extension

$0

$500

$1,000

$1,500

$2,000

$2,500

2000 2005 2010 2015 2020 2025

Billions, Current $

Federal Direct Loan Financing: Alternative Scenarios

Actual Forecast

Federal Direct Loan Financing: Base Scenario

Alternative 1: Extensionwith Delinquency and Default at Current Level

Alternative 2: Extension with Delinquency and Default +10pp

Alt 1: +$220 billion

Alt 2: +$280 billion
33

Appendix
34

For Illustrative Purposes Only: Alternative Paths of Loan Balances

• Higher Unemployment and Underemployment: Given the relationship between employment conditions and loan growth, a higher 

unemployment or underemployment (U-6) rate would be likely to cause lending to grow substantially more than the base case.

• Specifically, if the unemployment rate were to edge up after reaching a trough in two years and the gap between U-6 and 

unemployment remains as wide as it is today – in excess of historical norms – the size of the program would be expected to 

reach roughly $3.3 trillion in 2024, $1.7 trillion more than in the base case.

• Fewer loans are disbursed: The CBO expects the number of new loans to grow at roughly 2% annually, even in years when the 16-

24 year-old population is expected to decline, consistent with the base case presented here. While the number of loans is unlikely to 

turn negative due to increasing demand for years of higher education and cost, the pace may slow further than expected.

 

• The effect of a slower pace of loan disbursements is likely to be small: if the rate of growth in the number of loans were to fall 

to 1%, the reduction in total balances would be expected only to amount to $68 billion less over ten years than the base case. 

• The CBO’s and our base case already assumes nominal growth in the average size of each loan to undershoot expected 

long-run inflation, so slower growth is unlikely to come from a deceleration in the cost of education – it is already baked into

the model.

• Under the program’s current parameters, it is much easier to envision an upward surprise in lending relative to the base case

than a downward surprise.

• Government ends unsubsidized lending: Roughly half of current lending is classified as “unsubsidized”. In theory, an 

“unsubsidized” product should be delivered at roughly the same price by the private sector, as any subsidy should be equal to the 

difference between the market’s price and the government’s price. Regardless of whether or not this concept is true in practice, it 

could serve as a rationale to reduce the government’s obligations in student lending by discontinuing unsubsidized lending. Doing so 

would have a large impact on lending balances.

• If the Federal government were to stop making “unsubsidized” loans, growth in direct student lending over the next ten years 

would be reduced by an estimated $458 billion, roughly 55% of total growth in the base case.
35

For Illustrative Purposes Only: Alternative Paths of Loan Balances 

(Continued)

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

2000 2005 2010 2015 2020 2025

Billions, Current $

Actual Forecast

Federal Direct Loan Financing: Base Scenario

Federal Direct Loan Financing: Scenario with Higher Unemployment and Underemployment

Federal Direct Loan Financing: Scenario with Fewer Loans Disbursed

Federal Direct Loan Financing: Scenario without Unsubsidized Lending
36

Types of U.S. Federal Student Loans

• Direct, Subsidized Loans. Loan is directly administered by the Federal government and offered only to undergraduate students based 

on financial need. Interest does not accumulate while the borrower remains in school. The interest rate (2014-15) is 4.66% and the 

maximum loan balance is $23,000.

• Direct, Unsubsidized Loans. Loan is directly administered by the Federal government and offered to both undergraduate and graduate 

students regardless of need. Interest accumulates while the borrower remains in school. The 2014-15 interest rate for undergraduates 

is 4.66% and for graduate students is 6.21%. For undergraduate students, the maximum loan balance is $31,000 for dependent 

students (i.e. supported by parents) and the maximum combined balance of subsidized and unsubsidized Federal loans is $57,500 for 

independent students. Graduate and professional students have a hard cap of $138,500 balance.

• Direct PLUS Loans. Loan is directly administered by the Federal government and offered to graduate students and the parents of 

undergraduate students up to the cost of tuition and living expenses, at an interest rate (2014-15) of 7.21%.

• Perkins Loans. Loan is administered by the IHE/university. Interest does not accumulate while the borrower remains in school. The 

2014-15 rate is 5.0%. The aggregate limit is $27,500 for undergraduate and $60,000 for graduate students (inclusive of the $27,500 as 

an undergraduate).
37

Terms of U.S. Federal Student Loans

• Pay rate – Interest rates are fixed over the life of the loan, but are based upon the UST10y rate and a fixed spread – 205bp for 

undergraduate loans, 360bp for graduate loans and 460bp for PLUS loans. The rates are capped at 8.25% (undergraduate), 9.50%

(graduate) and 10.50% (PLUS).

• Maturity – The maturity of student loans is typically 10y but can extend to 25y.

• Repayment – For the most part, Federal student loans are similar to auto loans, with a fixed monthly payment of principal and interest 

over a ten year term.

— However, the repayment of Federal student loans can be tied to the borrower’s discretionary income for the term of the loan. At

present, 11% of Federal student loans are structured this way. The borrower’s discretionary income is the reported taxable income 

less 150% of the Federal poverty guideline for the household size. The paydown rate can be 10% to 15% (in some cases 20%) of

the calculated discretionary income, determined at the time of the loan agreement. Upon maturity (either 20y or 25y), any remaining 

balance of the loan is forgiven (although the forgiven balance does count as taxable income). If the borrower’s discretionary income 

increases, the monthly loan payment will never be more than the standard payment under a 10y amortization.

— For example, the 2014 Federal poverty threshold for a household of one person is $11,670. For an individual earning $30,000 after 

graduation and a loan paydown rate of 10% of discretionary income, the monthly payment would be $104 ($30,000 less 

1.5*$11,670 = $1,250 / 12 = $104).

— Various amendments over the years have allowed forgiveness of Federal student loans if you work for a qualifying non-profit 

agency or government agency for ten years.
38

Definitions for Direct Loan and Federal Family Education Loan 

Portfolio by Loan Status

Source: Department of Education, National Student Loan Data System.

Field Name Definition

In-School Includes loans that have never entered repayment as a result of the borrower's enrollment in school.

Grace Includes loans that have entered a six-month grace period after the borrower is no longer enrolled in 

school at least half-time. Borrowers are not expected to make payments during grace.

Repayment Includes loans that are in an active repayment status.

Deferment Includes loans in which payments have been postponed as a result of certain circumstances such as 

returning to school, military service, or economic hardship.

Forbearance Includes loans in which payments have been temporarily suspended or reduced as a result of certain 

types of financial hardships. 

Default Includes loans that are more than 360 days delinquent. 

Other Includes loans that are in non-defaulted bankruptcy and in a disability status.

Dollars Outstanding Includes the outstanding principal and interest balance of loans in the specified status.

Recipients Includes the number of recipients in the specified loan status. The recipient is the student that benefits 

from the federal student loan. In most cases, the recipient is the borrower, but in parent PLUS loans, 

the parent is the borrower and their child is the recipient.
39

FCRA Versus Fair Value Accounting: $223 Billion Differential

Estimated Total Budgetary Costs Under FCRA and Fair Value: 2015 to 2024

Budget savings

under current approach

Cost to taxpayers under 

“more comprehensive” 

fair-value approach

Source: Congressional Budget Office, “Fair-Value Estimates of the Cost of Selected Federal Credit Programs for 2015 to 2024” (May 2014).

Estimated Budgetary Costs of Selected Federal Credit Programs Under FCRA ($Bn)