Student Loan Cost Estimates
Both the Congressional Budget Office (CBO) and the Office of Management and Budget (OMB) estimate and report the cost of new federal student loans that are expected to be made in the current and future years. Rules in the Federal Credit Reform Act govern how the budget agencies estimate and present loan costs, although the rules allow for flexibility and differing assumptions in producing cost estimates. In the most basic terms, the process includes two components: subsidy rates and loan volume.
How Loan Costs are Calculated
Loan cost estimates are calculated by first determining the average subsidy rate for all loans in the two federal loan programs – Direct Loans and the Federal Family Education Loan Program (FFEL). The subsidy rate represents the lifetime cost to the federal government of the loan, discounted to account for the time value of money. The subsidy rates are intended to reflect such costs as the below-market interest rates charged to borrowers, loan forgiveness programs, the expected losses the government might incur when borrowers fail to repay loans, and payments made to private lenders who make federal student loans. The subsidy rates for the loans are presented as a percentage of the value of all the underlying loans that will be made. Most of the administrative costs that the federal government incurs for the loan programs are excluded from the subsidy amounts, a practice required by cost estimate rules.
The next step in determining student loan costs is to apply the subsidy rate to the total volume of loans that will be originated in a given year. Both CBO and OMB must estimate the number and value of loans that are likely to be originated in a future year. The total federal cost can then be determined by multiplying the subsidy rate by the total value of the loans that will be made. The table below details the average subsidy rates, total loan volume, and total loan costs estimated for loans made in 2007 as reported by CBO and OMB.
Student loan costs reported by OMB and CBO have fueled an ongoing public policy debate about the two federal student loan programs – Direct Loans and the Federal Family Education Loans (FFEL). Borrowers receive the same federal student loan, be it a Stafford loan or a PLUS loan, through either the Direct Loan program or the FFEL program, which have different administrative structures. (An explanation of the two administrative structures is availalbe on the Student Loan Subsidy Structure page.) By law, both the Direct Loan program and the FFEL program are required to provide essentially the same benefits to borrowers, such as interest rates, repayment terms, and borrowing limits.
As can be seen from the table above, budget agencies report that one loan program costs the federal government less than the other for delivering the same federal student loan. The cost differences have led some to argue that the rules and techniques used to estimate student loan costs produce inaccurate results. Others have argued that the cost differences should prompt policy makers to reduce costs in the more expensive program, or eliminate the higher cost program altogether.
