Consolidated Student Loans:

Borrowers Benefit but Costs to Them and the Government Grow

HRD-90-8: Published: Jun 15, 1990. Publicly Released: Jun 15, 1990.

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Linda G. Morra
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Pursuant to a congressional request, GAO reviewed the impact of the student loan consolidation program under the Higher Education Amendments of 1986.

GAO found that: (1) annual student loan default costs increased from $235 million in fiscal year 1981 to nearly $1.4 billion in 1986; (2) the loan consolidation program provides assistance to borrowers needing help repaying their student loans; (3) longer repayment terms made it easier for borrowers to repay their student loans by reducing their monthly payments; and (4) graduated repayment plans reduced the borrower's monthly payments by allowing the borrower to make only interest payments. GAO also found that: (1) longer repayment terms made consolidated loans more expensive for the federal government to subsidize; (2) the consolidation of certain kinds of loans, normally unsubsidized during their repayment, increased the subsidized loan portfolio; and (3) graduated repayment plans generally added to the government's costs, since the loans' principal balances remained higher for longer periods.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: Congress adopted part (3) of the recommendation in the Higher Education Amendments of 1992, Public Law 102-325. The other two parts were not adopted and it is unlikely Congress will adopt them in the forseeable future.

    Matter: If Congress wishes to retain and reauthorize the program and maintain the benefits to students with loan consolidations, while reducing program costs, it may wish to consider: (1) charging consolidated loan borrowers a loan origination fee; (2) increasing the minimum interest rate on consolidated loans; or (3) reducing the lenders' special allowance payment rate.


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