Long-Term Cost Implications of Rural Electrification Administration Direct and Guaranteed Loan Programs

PAD-80-19: Published: Dec 31, 1979. Publicly Released: Jan 21, 1980.

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GAO projected the long-term costs of the Rural Electrification Administration (REA) loan programs. REA programs grant both direct and guaranteed loans. Direct loans are made by the Federal Government at lower than private lender interest rates. Guaranteed loans are those made by private lenders at lower than normal interest rates. If the interest rates or the fee required on guaranteed loans is not high enough to cover costs, the Government incurs the losses. The GAO review did not evaluate program benefits, management, or effectiveness. It merely identified and estimated the various cost elements in the loan programs using a money cost rather than opportunity cost concept. Direct loans incur interest, default, delinquency, and administration costs. Only administrative costs are incurred with guaranteed loans.

The direct interest subsidy accounted for 99 percent of the total costs of the direct loan programs. Administrative costs accounted for about 1 percent of the direct loan costs and all of the guaranteed loan costs. Default and delinquency costs appeared to be minor cost considerations in all of the programs. Costs were estimated for the next 35 years on the basis of a one-time increase of $10 million for each program. The 2 percent insured loan programs will result in costs of about $17 million, and costs for the 5 percent insured loan programs will be about $10 million. On a per-dollar-program basis, the guaranteed loan programs were the least costly because their costs were solely for administrative review, approval, and servicing. Total costs of these programs, as a percentage of loan value, were about 0.45 percent.

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