Guaranteed Student Loans:

Profits of Secondary Market Lenders Vary Widely

HRD-90-130BR: Published: Sep 28, 1990. Publicly Released: Sep 28, 1990.

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Pursuant to a congressional request, GAO reviewed the activities of secondary market lenders that purchase loans made under the Department of Education's Stafford Student Loan Program to determine the: (1) lenders' rates of return or profitability on Stafford loans during fiscal years 1985 through 1988; (2) reasons for varying levels of profitability among those lenders; and (3) effects of the 1986 subsidy reductions on profitability.

GAO found that: (1) secondary market lenders' net rates of return varied within a range of 4.26 percentage points of outstanding loans; (2) financing costs accounted for 76 percent of total costs in 1988; (3) the effect of the subsidy reduction on the institutions' profitability was minor compared to the effect of variations in financing, servicing, and other costs; (4) the maximum reduction in overall profitability for any institution was 0.1 percent of outstanding loans in 1988; (5) purchasers of Stafford loans financed with tax-exempt funds could earn more revenue than purchasers of loans financed with taxable funds; and (6) eliminating the 9.5-percent revenue floor and reducing the subsidy rate factor on tax-exempt financed loans would help to reduce federal interest subsidies.

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