Department of Education's Federal Direct Loan Program:

Status of Recommendations to Improve Cost Estimates and Presentation of Updated Cash Flow Information

GAO-04-567R: Published: Mar 29, 2004. Publicly Released: Mar 29, 2004.

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Under the Department of Education's Federal Direct Loan Program (FDLP), students or their parents borrow money directly from the federal government through the vocational, undergraduate, or graduate schools that students attend. FDLP offers four loan types, including consolidation loans, which allow borrowers to combine multiple loans, possibly from different federal student loan programs, into a single loan with one monthly payment and a fixed borrower interest rate. The other three FDLP loan types provide variable borrower interest rates. The reported outstanding gross balance of FDLP loans to borrowers was $84.5 billion as of September 30, 2003, and the related allowance for subsidy--or the cost Education expected to incur on the outstanding loans--was $657 million. The key driver of the FDLP cost to the government is the difference between the borrower interest rate and Education's financing cost or borrowing rate from Treasury. Because of concerns about Education's reliance on estimates to project FDLP costs and a lack of historical information on which to base those estimates, the House Committee on the Budget previously asked us to review key aspects of Education's cost estimates for FDLP. Our January 2001 report identified the need for Education to improve its cost estimation process to provide more meaningful information. Recently, at the request of the Committee's Chairman, we assessed Education's progress in addressing our January 2001 recommendations and we updated certain cash flow information related to FDLP. This letter summarizes the information provided during our briefing on February 18, 2004.

In January 2001, we reported on several key aspects of Education's cost estimates for FDLP, including its financing and cash flows. Our work identified the need for Education to make a number of improvements to provide Congress and program decision makers with more meaningful cost estimate information upon which to make timely and well-informed judgments concerning FDLP. As a result, we made five recommendations for Education to improve its subsidy cost estimate information. Since our last report, we found that Education has taken actions that substantially addressed three of our five prior recommendations. To address our recommendation to develop a method to acquire actual FDLP cash flow data on the same basis as the cash flow model, Education implemented a data system to readily acquire such FDLP actual data that could be used to facilitate a detailed comparison of estimated and actual loan performance. To address our recommendation to develop an approach to directly factor consolidations into the cash flow model, Education conducted an analysis of loan payoff patterns resulting from consolidations and used this analysis to develop prepayment assumptions that directly factor consolidations into the cash flow model. To address our recommendation to prepare interest rate reestimates, Education implemented procedures to prepare interest rate reestimates for its budget submissions and financial statements. While Education made important improvements to its cost estimate information, it has not taken action to fully resolve our recommendations to (1) formalize sensitivity analysis of its cash flow model assumptions to ensure that the most significant assumptions are identified, or (2) develop and implement a method of comparing detailed estimated and actual cash flows to more thoroughly assess loan performance estimates over time. Education officials agreed that additional procedures related to sensitivity analysis and comparing estimated and actual loan performance would be beneficial. We updated FDLP cash flow information presented in our 2001 report. Amounts borrowed from Treasury totalled $137 billion from fiscal years 1995 through 2003, of which about $92 billion was outstanding as of September 30, 2003. Appropriations received, which are meant to cover the estimated subsidy cost of the program, totalled about $2.7 billion for loans approved during fiscal years 1995 through 2003. From fiscal years 1995 through 2003, total cash outflows exceeded total cash inflows by about $10.7 billion, mainly because interest Education paid to Treasury was significantly greater than interest receipts from borrowers. Over this same period, FDLP's actual key cash flows (principal receipts, interest receipts, origination fees, and collections on defaults) were less than estimated by about $4.2 billion. Over the course of our work, we noted that Education did not disclose in its fiscal year 2003 financial statements an explanation of significant factors affecting a reestimate of about $5.1 billion, as required by Statement of Federal Financial Accounting Standards No. 18. While this information was available, agency officials told us that it was not included in the financial statement disclosures because the disclosures were already very lengthy.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendation for Executive Action

    Recommendation: To provide more meaningful cost estimate information that can be effectively used by Congress and program decision makers to make timely and well-informed judgments about FDLP, the Department of Education's Chief Financial Officer should provide additional financial statement disclosures that explain the significant factors, including the effect of changes in borrower interest rates, contributing to reestimates of FDLP, as required by established accounting guidance.

    Agency Affected: Department of Education: Office of the Chief Financial and Chief Information Officer

    Status: Closed - Implemented

    Comments: The Department of Education provided additional disclosures explaining the significant factors contributing to the reestimates of its direct loan program, including the effect of changes in borrower interest rates, as required by established accounting guidance in its fiscal year 2004 financial statements.

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