Student Consolidation Loans:

Further Analysis Could Lead to Enhanced Default Assumptions for Budgetary Cost Estimates

GAO-04-843: Published: Aug 20, 2004. Publicly Released: Aug 20, 2004.

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The number of borrowers consolidating their federal student loans has increased substantially in recent years, with the total amount of loans being consolidated rising from $13 billion in fiscal year 1999 to over $41 billion in fiscal year 2003. This increase in consolidation loan volume and recent interest rate trends have increased the overall estimated long-term cost to the federal government of providing consolidation loans under the Department of Education's (Education) two major student loan programs--the Federal Family Education Loan Program (FFELP) and the William D. Ford Federal Direct Loan Program (FDLP). GAO is providing information on (1) the differences that exist between FFELP and FDLP consolidation loans and borrowers, (2) the extent to which borrowers with student loans under one program obtain consolidation loans under the other, and (3) how FFELP and FDLP borrower and loan characteristics and the movement of loans between the two programs are incorporated into Education's budgetary cost estimates for consolidation loans.

On average, during the 1995-to-2003 period, FFELP consolidation loan borrowers had higher levels of consolidation loan debt than FDLP consolidation loan borrowers. FFELP borrowers were also more likely than FDLP consolidation borrowers to have attended a 4-year school versus a 2-year or proprietary school. As a group, FFELP borrowers were less likely to default on a student loan prior to consolidation than FDLP borrowers. However, both FFELP and FDLP borrowers who had defaulted prior to consolidation were more likely to default on their consolidation loan than those who did not default prior to consolidation. Over the 1998-to-2002 period, an increasing share of both FFELP and FDLP underlying loan volume was consolidated into FFELP, while a decreasing share of underlying loan volume was consolidated into FDLP. Defaulted loans, however, whether from FFELP or FDLP, were much more likely to be consolidated into FDLP. In general, Education incorporates borrower and loan characteristics and movement of loans between programs into its budgetary cost estimates by (1) grouping loans with similar characteristics in risk categories, (2) forecasting loan volume for each risk category, and (3) applying various assumptions to each risk category based on historical and other economic data. Education incorporates the default history of borrowers into its cost estimates by grouping consolidation loans with underlying defaulted loans in a risk category and applying higher default rate assumptions to loans in this category. However, Education has not analyzed whether borrowers with an underlying defaulted loan will default on their consolidation loans at different rates based on the type of school attended. Education does incorporate assumptions based on variations in default rates by school type, but only for nonconsolidation loans. Our analysis demonstrates that the extent to which borrowers with an underlying defaulted loan default on their consolidation loan varies according to the type of school they attended.

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 better reflect the impact of consolidation loans on Education's budgetary cost estimates, the Secretary of Education should direct Education's Director, Budget Service, to consider the type of schools consolidation borrowers attended in developing the risk categories for the department's budgetary cost estimates. Education could use the credit reform working group as a vehicle to help the Director, Budget Service, monitor this effort and assess the impact of including the type of schools borrowers attended in the assumptions Education uses to develop its budgetary cost estimates.

    Agency Affected: Department of Education

    Status: Closed - Implemented

    Comments: The Department's Corrective Action Plan dated July 19, 2006, stated that the Department will analyze whether the assumptions used should be revised and share such analysis with appropriate Departmental management on consolidation loans along with a recommendation as to whether the assumptions used should be changed. If the assumptions are not revised, supplemental information, breaking out consolidation loans by type of school attended, will be shared in the supporting materials associated with the President's Budget. During an interview with an Education official in April 2005, he noted that the Department has commenced work on developing risk categories that would consider the type of school consolidation borrowers attended as GAO recommended. The new risk categories will most likely be included in the President's FY 2007 budget cost estimates.

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