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GAO-05-389R 1 (2005-02-25)

handle is hein.gao/gaocrptarkt0001 and id is 1 raw text is: SGAO Accountability * Integrity Reliability United States Government Accountability Office Washington, DC 20548 February 25, 2005 The Honorable John A. Boehner Chairman Committee on Education and the Workforce House of Representatives Subject: Consolidation Loan Borrower Interest Rates This letter responds to your question related to the recommendation we made in our October 31, 2003, report Student Loan Programs: As Federal Costs of Loan Consolidation Rise, Other Options Should Be Examined (GAO-04-101), which we completed at your request. As you know, we reported that then recent trends in interest rates and consolidation loan volumes had affected the federal costs of consolidations in the Department of Education's two major student loan programs- the Federal Family Education Loan Program (FFELP) and the William D. Ford Federal Direct Loan Program (FDLP)-in different ways, but in the aggregate, estimated federal subsidy costs' for consolidation loans had increased. In light of these increased costs, we recommended in our report that the Secretary of Education assess the advantages of consolidation loans for borrowers and identify options for reducing federal costs, taking into consideration how best to distribute program costs among borrowers, lenders, and the taxpayers. Among the options we suggested for the Secretary's consideration was changing the borrower interest rate on consolidation loans from a fixed to a variable rate.2 Given that some time has passed since we issued our report, you asked for our perspective on whether economic circumstances-such as current and projected interest rates--are such that a variable interest rate remains a viable option for reducing federal costs of student consolidation loans. On the basis of the information discussed below, we believe a variable interest rate remains a viable option for reducing federal costs. VARIABLE BORROWER INTEREST RATE FOR CONSOLIDATION LOANS IS A VIABLE OPTION FOR REDUCING FEDERAL SUBSIDY COSTS Changes in market interest rates affect the costs of the FFELP and FDLP in different ways due to differences between how the programs operate. Under FFELP, private lenders make loans to students, with Education guaranteeing the lenders loan repayment and a rate of return on the loans they make. Under FDLP, the federal government makes loans to students using federal funds. A change in the borrower interest rate on consolidation loans from a fixed to a variable rate would affect ' Subsidy costs are the net present value of cash flows to and from the government, excluding administration costs, that result from providing loans to borrowers. 2 The borrower interest rate on consolidation loans is currently calculated as 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. GAO-05-389R Student Consolidation Loans

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