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A Methodology for Estimating Costs and Subsidies From Federal Credit Assistance Programs

PAD-79-5 Published: Jul 17, 1979. Publicly Released: Jul 17, 1979.
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Highlights

Federal credit programs have grown rapidly in recent years. Loans and guarantees totalled $313.9 billion in fiscal year 1978. Between 1965 and 1975 these programs grew by nearly 90 percent, from $124 billion in outstanding loans in 1965 to $233 in 1975. The main objective of these programs is to reallocate economic resources to help develop or expand activities such as education, home building, small business, U.S. exports, and energy resource development. While lower interest rates are the main benefit to borrowers, other concessions include lower collateral requirements and longer maturities. GAO attempted to: (1) develop concepts necessary for estimating the costs to taxpayers and the subsidies to assisted borrowers; and (2) estimate those costs and subsidies from the latest available data. There is a tendency to assume that direct and guaranteed loans cost nothing if there is no default. However, the actual subsidy value of a loan is far less than the loan's face value, a fact that may be overlooked in comparing loans to direct subsidies. GAO identifies and estimates the components of cost and subsidy and sums them to derive an estimated difference between commercial interest rates and rates to borrowers with federal credit assistance. The principal advantage of this technique is that it is not necessary to know what commercial interest rates would be to derive differences. The data provides some confirmation that nonhousing loans are more risky than housing loans. During the 1965-75 period, risk premiums averaged 24 basis points for nonhousing loans as compared to an average of 9 basis points on all loans. The patterns tend to indicate that guaranteed loans are increasingly used to finance activities that are not only more risky than housing loans but also may be more risky than activities financed by direct loans.

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Cost analysisFederal aid programsFederal credit unionsGovernment guaranteed loansLending institutionsLoan interest ratesSubsidiesLoan guaranteesInterest ratesDirect loans