Alternative Market Mechanisms for the Student Loan Program

GAO-02-84SP: Published: Dec 18, 2001. Publicly Released: Dec 18, 2001.

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This report reflects the results of a collaborative effort between GAO and representatives of the Secretary of Education. As required by the Higher Education Amendments of 1998, GAO formed a study group to identify and evaluate a means of establishing a market mechanism for the delivery of student loans. This study group consisted of representatives of the Department of the Treasury, Office of Management and Budget, Congressional Budget Office, entities making Federal Family Education Loan Program (FFELP) loans and other entities in the financial services community, and other participants in the student loan market. The group met as a whole four times before the public release of a draft of this report, and various group members corresponded with GAO and Education between group meetings as well. The mandate called for the evaluation of at least three different market mechanisms relative to 13 criteria. In consultation with the study group, GAO selected five general models for further evaluation--adjustments to the current system and four additional market mechanism models. Adjustments to the current system, in which information would be collected from current market transactions for use in determining the appropriate level of lender yield and which Congress or some independent entity would still set through statute or regulation, would involve the least change from the current FFELP. The loan origination rights auction model would involve lenders bidding for the right to originate loans. In the loan sale model, the government or a government-designated entity would originate loans. Private lenders would then bid in an auction to purchase these loans after after they have been originated. The federal funding model affords lenders the opportunity to borrow funds from the federal government to make FFELP loans at a predetermined interest rate or at an interest rate determined by some type of bidding process. Lastly, the market-set rate model allows lenders and borrowers to negotiate their own interest rates and perhaps other loan terms.

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