Under the Direct Loan program, Education issues three main types of loans—Subsidized Stafford, Unsubsidized Stafford, and PLUS Loans. Subsidized Stafford Loans are available only to undergraduate student borrowers with demonstrated financial need. The government subsidizes these loans by not charging borrowers for the interest that accrues while they are still in school and during a 6-month grace period after leaving school. Unsubsidized Stafford Loans are available to both undergraduate and graduate student borrowers, irrespective of financial need. Borrowers are responsible for paying all interest from disbursement to final payoff of the loan. Finally, PLUS Loans are available to graduate students and parents of dependent undergraduates, who must pay all interest on these loans as well. Borrower Rate: The interest rate charged to federal student loan recipients. rates and caps vary by loan type and borrower characteristics, as seen in table 1 below. Undergraduate student borrowers pay the lowest interest rate, with graduate student and parent borrowers paying somewhat higher rates. There are a variety of repayment plan options available to eligible student loan borrowers. Under the standard repayment plan, borrowers typically repay loans over a period of up to 10 years. Key features of other plans are extended repayment periods and repayment amounts that are linked to borrowers’ income. For instance, under the income-contingent repayment plan, repayment amounts are calculated annually based on the borrower’s adjusted gross income, family size, and total Direct Loan amount. Repayment periods under these plans may be up to 25 years. By extending their repayment periods, borrowers may lower their monthly payments, but may pay more in interest over time. The Direct Loan program has two main categories of costs: administrative costs and subsidy costs. See table 2 below for selected elements of these two types of costs. Some subsidy elements (like government borrowing costs) raise subsidy costs, while others (like borrower principal repayments) lower them. The funding for Direct Loan administration is generally discretionary, meaning that Congress periodically appropriates the level of funding it deems appropriate. The funding for subsidy costs, on the other hand, is mandatory, meaning that funds are not appropriated annually. Instead, Congress has enacted permanent statutory authority to appropriate funding for loans to eligible borrowers. The majority of the Direct Loan program’s administrative costs are funded by discretionary appropriations to Education’s Student Aid Administration account. The Student Aid Administration account provides funds to administer the Direct Loan program as well as other federal student aid programs including the Federal Family Education Loan Program. Administrative costs support activities such as educating students and families about how to obtain loans; processing loan applications; disbursing loans; administering existing guaranteed loans; servicing loan accounts; and taking action to prevent fraud, waste, and abuse. Costs to manage and collect payments on defaulted loans are also included in administrative costs. Administrative Costs: Loan program expenses that are excluded from subsidy cost calculations, such as costs related to processing loan applications or servicing existing loans. Education uses an activity-based costing model that tracks administrative cost by processes, such as application processing or loan servicing. In the model, Education calculates the full administrative cost of each process by first identifying its direct costs (or costs that can be tied to that specific process) and then allocating additional indirect costs, such as rent, equipment, and maintenance, to each process based on formulas intended to reflect how many indirect resources each process uses. Costs that include direct and indirect costs are called full costs. Education uses both full and direct costs to generate costs per unit, such as cost per application processed or borrower serviced. As required by the Federal Credit Reform Act of 1990 (FCRA), Education estimates loan subsidy costs annually for inclusion in the President’s budget. For Direct Loans, subsidy costs represent the estimated long- term cost to the government of extending credit over the life of the loan, excluding administration costs. Subsidy cost estimates that are recorded in a given year are calculated based on the net present value of lifetime estimated cash flows to and from the government that result from providing these loans to borrowers. For Direct Loans, cash flows from the government include loan disbursements and cash flows to the government include repayments of loan principal, interest and fee payments, and recoveries on defaulted loans. The Federal Credit Reform Act of 1990 (FCRA) was intended to improve the measurement of the budgetary costs of federal credit programs. Prior to the implementation of FCRA, credit programs were reported in the budget on a cash basis. Thus, loan guarantees appeared to be free in the budget year of the guarantee, while direct loans appeared to be as costly as grants. As a result, costs were distorted and credit programs could not be compared meaningfully with other non-credit programs and with each other. FCRA recognized that the true cost of a loan or guarantee is not captured by its cash flows in any one year, but by the net value of its cash flows over the life of the loan. This value is known as the “subsidy cost”—that is, the estimated long-term cost to the government of a direct loan or loan guarantee, calculated in current dollars, excluding administrative costs. Administrative costs remain on a cash basis and are excluded from subsidy calculations. Subsidy costs are influenced by a variety of variables, including government borrowing costs, the interest rate charged to student loan recipients, how quickly those recipients repay their loans, and how many ultimately default. A positive subsidy cost estimate indicates that the government anticipates a net cost, while a negative subsidy cost estimate indicates that the government anticipates generating net subsidy income, not counting administrative costs. To determine the overall cost of the Direct Loan program, both subsidy and administrative costs must be considered. For the government to break even on Direct Loans, net subsidy income should be equal to administrative costs. Subsidy Cost: The estimated long-term cost to the government of providing a loan, expressed in current dollars, and excluding administrative costs. Education calculates subsidy costs separately for each group of loans made in a particular fiscal year—referred to as a loan cohort. To estimate subsidy costs, Education has developed a Student Loan Model that contains a variety of assumptions. These assumptions are reflected through variables such as how quickly borrowers will repay their loans (and, thus, how much interest the government will collect), how many borrowers will default, and how successful default collection activities will be. Education annually reestimates subsidy costs for each loan cohort until all loans in the cohort have been repaid, which may take decades. Reestimates take into account actual loan performance as well as changes in assumptions about future performance, such as how many borrowers will default, or how many will participate in extended repayment plans. Reestimates may result in increases or decreases in subsidy cost estimates. Loan Cohort: A group of loans made in a particular fiscal year. In addition to Education’s subsidy cost estimates, CBO also estimates subsidy costs to identify the financial impact of legislation and inform budget projections, among other purposes. CBO and Education both estimate subsidy costs for the Direct Loan program following the requirements of FCRA; however, they use different estimation methodologies and assumptions. Officials from both organizations pointed to a number of key areas where their assumptions differed. See table 3 for examples of key differences. Officials cited a number of reasons for differences in these particular assumptions, including differences in economic forecasts and professional judgment when developing forecasting methodologies. Because of such differences, CBO and Education’s cost estimates for the program are not comparable. The Department of Education reported that full administrative costs (i.e. costs incorporating both direct and indirect administrative costs) for the Direct Loan program increased by $550 million from fiscal year 2007 to fiscal year 2012, to total $864 million in fiscal year 2012. These Direct Loan administrative costs represent 65 percent of the $1.3 billion in new budget authority made available to the Student Aid Administration account in fiscal year 2012, while administrative costs for other loan, grant, and loan guarantee programs and activities made up the Loan servicing, which includes activities related to remainder.processing loan payments and maintaining borrower information, is the largest category of reported administrative costs, comprising 63 percent of total administrative costs in fiscal year 2012. Figure 1 below shows total Direct Loan Program costs by category from fiscal year 2007 to fiscal year 2012. Total Direct Loan administrative costs reported by the Department of Education rose from $314 million to $864 million—a 175 percent increase—from fiscal year 2007 to fiscal year 2012. Loan servicing costs showed the greatest dollar increase at over $300 million (152 percent) during that time period. Although other categories—application processing, school oversight and monitoring, and originations and disbursements—showed smaller dollar increases, the percentage growth of these categories ranged from about 270 percent to about 440 percent. Only default collections, including the management and collection of defaulted loans and assistance to defaulted borrowers, stayed generally flat in total dollars. Education officials stated that total administrative costs are largely driven by loan volume and the number of borrowers and, therefore, costs have increased as the number of Direct Loans has increased. The reported number of outstanding Direct Loans increased over 300 percent, from 19 million to over 88 million, from fiscal year 2007 through fiscal year 2012. As shown in figure 2 below, the largest loan volume increases were in Subsidized and Unsubsidized Stafford loans. Several factors contributed to the increase in the number of Direct Loans.