New Report Echoes Uncertainty About True Costs of Government-Run Direct Student Loan Program 

WASHINGTON, D.C. – Congressional leaders today expressed disappointment over the lack of new information available to assess and compare the costs of the federal student loan programs.  Higher education leaders in the House and Senate asked the Government Accountability Office (GAO) more than a year ago to identify and address challenges to accurately assessing program costs in the Federal Family Education Loan (FFEL) program and the Direct Loan (DL) program.  The GAO’s report, Federal Student Loans: Challenges in Estimating Federal Subsidy Costs, reiterates numerous factors that make it difficult for policymakers to compare the costs of the two programs, yet it fails to quantify those factors or make any policy recommendations on how to better assess costs on behalf of taxpayers.

“More than a year ago, we asked the GAO to help explain why federal budget scorekeeping rules are unable to provide a clear picture of what the student loan programs really cost American taxpayers.  The GAO told us what we already knew; federal budget rules make it virtually impossible to accurately assess the cost of the student loan programs,” said Education & the Workforce Committee Chairman John Boehner (R-OH).  “While the report does identify many of the same factors that previous analyses have found to bias scorekeeping in favor of Direct Lending, it stops short of quantifying these variables, leaving unanswered questions about the extent to which cost estimates are skewed.”

GAO: COST ESTIMATES INACCURATE, TRUE COSTS UNKNOWN

The GAO identified the following challenges in providing an accurate comparison of student loan program costs:

• “Significant re-estimates of subsidy costs over the past 10 years illustrate the challenges of estimating the lifetime costs of loans.”

• “Certain federal costs and revenues associated with the student loan programs are not included in subsidy cost estimates, such as federal administrative expenses, some costs of risk associated with lending money over time, and federal tax revenues generated by both student loan programs.”

• “Estimating the amount of federal tax revenues generated by the loan programs would be challenging.  Calculations of total federal costs would be enhanced were these additional costs and revenues considered, though doing so may require complex methodologies and/or data that are not currently readily available.”

• “[I]f current assumptions correctly predict future loan performance and economic conditions, the originally estimated gain to the government from FDLP loans made in fiscal years 1994 to 2004 will not materialize, and instead these loans will result in a net cost to the government.  In reality, however, subsidy cost estimates of FFELP and FDLP loans made in fiscal years 1994 and 2004 will continue to change as future re-estimates incorporate actual experience and new interest rate forecasts.”

• “While subsidy cost estimates may include many of the federal costs associated with FFELP and FDLP loans, they do not capture all federal costs and revenues associated with the loan programs.  Consideration of all federal costs and revenues of the loan programs would be an important component of a broader assessment of the costs and benefits of the two programs.”

“[I]t is important for policymakers to understand how credit reform subsidy cost estimates are developed and to recognize that such estimates will change in the future.  Decisions made in the short-term on the basis of these estimates can have long-term repercussions for the fiscal condition of the nation,” the GAO noted in its concluding observations.

QUESTIONS REMAIN UNANSWERED: REPORT GETS AN ‘INCOMPLETE’

The GAO report does not include recommendations about what steps could be taken to modify scorekeeping rules in order to resolve some of the uncertainty surrounding cost estimates.  In requesting the report, House and Senate leaders sought an analysis of the factors identified by GAO and others that limit the accuracy of cost estimates in hopes that budget estimates could be refined or, at a minimum, policy changes could be better understood within the scope of cost uncertainty and volatility.

“This report reinforces my belief that federal accounting rules that apply to student loan programs don’t always accurately capture the true costs of the Direct Lending program.  It also helps explain why the Direct Loan program has accrued a deficit over time, rather than achieving its projected savings,” said Senate Health, Education, Labor, and Pensions Committee Chairman Mike Enzi (R-WY).

“Given the uncertainty identified by the GAO, it’s no surprise the report doesn’t include any specific recommendations,” said Government Reform Committee Chairman Tom Davis (R-VA).  “Until we get answers, it would be irresponsible for policymakers to promote one program over the other when so many schools have continued to identify competition as the key benefit that comes from maintaining two loan programs.”

“We appreciate the GAO’s efforts to shed some light on the discrepancies between budget projections and the true costs of the federal student loan programs,” said 21st Century Competitiveness Subcommittee Chairman Howard P. “Buck” McKeon (R-CA).  “If this report told us anything, it’s that we just don’t know how much these programs will ultimately cost taxpayers.  As the GAO made clear, the true costs won’t be known for another two decades, until at least one Direct Loan cohort is complete.”

“The GAO verifies what I have been saying for years – the official scorekeeping rules for the student loan programs are unreliable because they omit important cost factors like interest rate risk and volatility, administrative expenses, and tax revenues.  This lack of accurate accounting further confirms that making policy decisions, like an expansion of direct lending, based on unreliable data would be fundamentally bad public policy,” said Rep. Pete Hoekstra (R-MI), chairman of the Select Committee on Intelligence and former chairman of the Select Education Subcommittee.

REPUBLICAN REDUCTIONS TO LENDER SUBSIDIES NOT INCLUDED IN ANALYSIS

While the GAO report does republish previously available information on subsidy estimates and re-estimates to help illustrate the challenges inherent to projecting and comparing program costs, the analysis does not take into account reforms proposed by Republicans to reduce subsidies paid to lenders in the federally-guaranteed loan program.

The GAO report identified special allowance payments (SAP) as a subsidy that differentiates federal costs between the private sector-based guaranteed loan program and the Direct Loan program.  However, the analysis does not take into account changes proposed by both House and Senate Republicans to eliminate so-called “negative SAP” or floor income, subsidies lenders may currently collect above the guaranteed minimum rate of return.  By eliminating these excess subsidies in the guaranteed loan program and implementing sound interest rate policies, Republicans will save billions for taxpayers while maintaining the competitive balance between the two programs.

The GAO report Federal Student Loans: Challenges in Estimating Federal Subsidy Costs is available here and will be available on the GAO website at http://www.gao.gov.    

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