Department of Education:

Key Aspects of the Federal Direct Loan Program's Cost Estimates

GAO-01-197: Published: Jan 12, 2001. Publicly Released: Jan 12, 2001.

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The Department of Education runs two major federal student loan programs, the William D. Ford Federal Direct Loan Program (FDLP) and the Federal Family Education Loan Program (FFELP). Under FDLP, students or their parents borrow money directly from the federal government through the schools the students attend. Under FFELP, money is borrowed from private lenders, and the federal government guarantees repayment if the borrowers default. GAO investigated concerns about Education's reliance on estimates to project FDLP costs and a lack of historical information on which to base those estimates. GAO found that developing a reasonable estimate of subsidy cost for loan programs is complex. Many assumptions must be taken into account and projections must be made for the life of the loans. Because FDLP's subsidy costs are determined largely by interest rates and interest rate fluctuations cannot be predicted with any certainty, it is unclear whether the current trend in negative subsidy costs for FDLP will continue. In addition, other factors, such as origination fees paid by borrowers, defaults, subsequent collections on defaulted loans and timing of loan repayments, affect the subsidy cost of FDLP. Although Education is able to estimate origination fees close to the actual amounts in the financial system, other key cash flows varied significantly. Also, Education's current model for estimating FDLP subsidy costs does not directly take into account key factors, such as prepayments and consolidations.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In response to GAO's recommendation, Education has begun to prepare interest rate reestimates. For budget purposes, Education has prepared interest rate reestimates since the submission of its fiscal year 2002 budget. For financial statement purposes, Education first prepared interest rate reestimates for its fiscal year 2001 financial statements. These new procedures are in accordance with budget and accounting guidance and isolate the effect on FDLP costs of interest rate changes while loans disburse. Education advised that it would be able to isolate the effects of post disbursement interest rate changes as part of its note disclosures on technical reestimates starting with the fiscal year 2004 financial statements.

    Recommendation: To provide more meaningful cost estimation information that can be effectively used by Congress and program decisionmakers to make timely and well-informed judgments about FDLP, the Secretary of Education should charge the Budget Director to develop and implement a plan to prepare interest rate reestimates to isolate the effects on subsidy costs of changes in interest rates versus changes in other assumptions.

    Agency Affected: Department of Education

  2. Status: Closed - Implemented

    Comments: Since GAO made its recommendation, Education hired a contractor to develop a process to use data from the National Student Loan Data System to link consolidated loans with the paid-off underlying loans. This linking allowed Education to analyze the payoff patterns of underlying loans due to consolidation and to develop prepayment assumptions that directly factor consolidations into the model. Education analyzed the prepayment assumptions and determined that consolidations can either increase or decrease the subsidy cost of the underlying loans, depending on the interest rate environment.

    Recommendation: To provide more meaningful cost estimation information that can be effectively used by Congress and program decisionmakers to make timely and well-informed judgments about FDLP, the Secretary of Education should charge the Budget Director to perform an analysis of the effects of consolidations on FDLP subsidy costs and develop an approach to directly factor consolidations into the cash flow model.

    Agency Affected: Department of Education

  3. Status: Closed - Implemented

    Comments: The Department of Education formed a credit reform working group that meets regularly to identify opportunities to improve the subsidy estimation process. This working group formed an analytical tools subgroup that was specifically tasked to develop and formalize methods to analyze subsidy cost estimates. This subgroup formalized the procedures used to prepare and document comparisons of estimated and actual cash flows, referred to as the "backcast analysis." Education continues to perform the backcast analysis at the program level (activity by fiscal year for all cohorts combined) for the Federal Direct Loan Program (FDLP). While this analysis is at the program level, rather than the cohort level, it has allowed Education to (1) identify significant differences in total; (2) research significant differences, which may be done at the cohort level; (3) determine the need for cash flow revisions; and (4) assess whether, over time, projected loan performance is reasonably predictive of actual loan performance. Education officials agreed that periodically performing a cohort analysis will be beneficial and new systems are being implemented that will more readily facilitate cohort level analyses.

    Recommendation: To provide more meaningful cost estimation information that can be effectively used by Congress and program decisionmakers to make timely and well-informed judgments about FDLP, the Secretary of Education should charge the Budget Director to develop and implement a method of routinely comparing FDLP's estimated and actual cash flows, including (1) identifying significant differences in total and by cohort, (2) researching significant differences to determine the specific cause, (3) determining any revisions needed in the cash flow model to ensure that it reasonably predicts future borrower behavior, and (4) determining whether, over time, project loan performance is reasonably predictive of actual loan performance.

    Agency Affected: Department of Education

  4. Status: Closed - Implemented

    Comments: The Department of Education formed a credit reform working group, which meets regularly to identify opportunities to improve the subsidy estimation process. This working group formed an analytical tools subgroup that was specifically tasked to develop and formalize methods to analyze subsidy cost estimates. This subgroup formalized the procedures used to prepare and document sensitivity analysis for the Federal Direct Loan Program (FDLP) and the guaranteed loan program. These analyses are prepared annually and subjected to audit by Education's financial statement auditor and, on an as-needed basis, in response to specific requests or when changes are made to the model.

    Recommendation: To provide more meaningful cost estimation information that can be effectively used by Congress and program decisionmakers to make timely and well-informed judgments about FDLP, the Secretary of Education should charge the Budget Director to formalize and document the sensitivity analysis of assumptions included in the FDLP cash flow model to ensure that all key assumptions used in the cash flow model have been identified and to determine the sensitivity of FDLP subsidy costs to changes in these assumptions.

    Agency Affected: Department of Education

  5. Status: Closed - Implemented

    Comments: The Department of Education has implemented a new system, the Credit Management Data Mart, which has loan-level financial data and demographic information for the Federal Direct Loan Program borrowers. As a result, Education is now able to readily acquire data on the same basis as the cash flow model--by loan profile, cohort, and key assumption.

    Recommendation: To provide more meaningful cost estimation information that can be effectively used by Congress and program decisionmakers to make timely and well-informed judgments about FDLP, the Secretary of Education should charge the Budget Director to develop and implement a method to acquire actual cash flow data on the same basis as the cash flow model--by loan profile, cohort, and key assumption--to facilitate a detailed comparison of estimated to actual cash flows.

    Agency Affected: Department of Education

  6. Status: Closed - Implemented

    Comments: Education's Office of Federal Student Aid (FSA) implemented an activity-based cost (ABC) model that traces costs to business processes and services produced. The model design defines and computes total cost for both direct and indirect business processes, enabling the costing of both direct and fully allocated costs of outputs. The costs considered include expenses recorded in the general ledger, allocated overhead, and capital projects. These costs incorporate system upgrades and because Education updates the ABC model annually, any cost savings resulting from system upgrades would be taken into account. The model structure allows the users to see costs reported in several ways, meeting the needs of all users of the system without significant compromise. For the fiscal year 2006 President's Budget, Education reported administrative cost estimates, which were similar to subsidy cost estimates, for its student loan programs. This improved the information available to decision makers.

    Recommendation: To provide more meaningful cost estimation information that can be effectively used by Congress and program decisionmakers to make timely and well-informed judgments about FDLP, the Secretary of Education should charge the Budget Director to refine the administrative cost modeling so that the costs of computer system upgrades are incorporated, as well as the cost savings that would result from these upgrades.

    Agency Affected: Department of Education

 

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