Consolidation Loan Borrower Interest Rates.

GAO-05-389R February 25, 2005

This letter responds to a question from the Chairman, House Committee on Education and the Workforce, related to the recommendation we made in our October 31, 2003, report Student Loan Programs: As Federal Costs of Loan Consolidation Rise, Other Options Should Be Examined (GAO-04-101), which we completed at the Chairman's request. We reported that then recent trends in interest rates and consolidation loan volumes had affected the federal costs of consolidations in the Department of Education's two major student loan programs--the Federal Family Education Loan Program (FFELP) and the William D. Ford Federal Direct Loan Program (FDLP)--in different ways, but in the aggregate, estimated federal subsidy costs for consolidation loans had increased. In light of these increased costs, we recommended in our report that the Secretary of Education assess the advantages of consolidation loans for borrowers and identify options for reducing federal costs, taking into consideration how best to distribute program costs among borrowers, lenders, and the taxpayers. Among the options we suggested for the Secretary's consideration was changing the borrower interest rate on consolidation loans from a fixed to a variable rate. Given that some time has passed since we issued our report, the Chairman asked for our perspective on whether economic circumstances--such as current and projected interest rates--are such that a variable interest rate remains a viable option for reducing federal costs of student consolidation loans. On the basis of the information discussed below, we believe a variable interest rate remains a viable option for reducing federal costs.

The Department of Education's proposal to change from a fixed to a variable rate the interest charged to borrowers on consolidation loans, as well as its other consolidation loan reform proposals included in the President's Budget for Fiscal Year 2006, is consistent with the recommendation we made in our October 31, 2003, report that the Secretary of Education identify options for reducing federal costs.