Federal Family Education Loan Program: Statutory and Regulatory Changes Could Avert Billions in Unnecessary Federal Subsidy Payments Page: 4 of 49
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GAO
Accountability * Integrity * Reliability
United States Government Accountability Office
Washington, DC 20548
September 20, 2004
The Honorable Dale E. Kildee
Ranking Minority Member, Subcommittee on
21st Century Competitiveness
Committee on Education and the Workforce
House of Representatives
The Honorable Chris Van Hollen
House of Representatives
Under the Federal Family Education Loan Program (FFELP), lenders-
including banks, state agencies and other nonprofit and for-profit
organizations-annually make, or originate, billions of dollars in loans to
help students and families finance postsecondary education costs. To
encourage lenders to make loans, the federal government guarantees
lenders repayment and a statutorily specified rate of return-called lender
yield-on the loans they hold. Lender yields as well as the interest rates
paid by borrowers are typically tied to, and vary with, money market
financial instruments, such as the 91-day Treasury bill. When the interest
rate paid by borrowers is less than the guaranteed lender yield, the
government pays lenders the difference-a subsidy called special
allowance payments. In exercising its oversight of the FFELP, Congress
has periodically changed the formula for lender yields to better reflect
market interest rates, federal budget constraints, or the costs incurred by
lenders to finance loans. To finance loans, some lenders, specifically state
agencies and state-designated authorities, may issue tax-exempt bonds to
raise capital to make or purchase loans, thereby providing other lenders
with more funds to make more loans. Investors who buy these bonds
receive interest income that is exempt from federal taxation. Because
these investors do not pay taxes on their interest earnings, they are willing
to accept a lower pretax rate of return on their investment, which lowers
the financing costs for agencies and authorities issuing the bonds. As
student loan borrowers repay their loans, loan holders use the money to
repay, in turn, bond investors.
Concerned that the lender yield for loans financed with tax-exempt bonds
did not adequately reflect the lower costs associated with tax-exempt
financing, Congress reduced the yield in passing the Education
Amendments of 1980. To do so, Congress reduced the special allowance
payments to be paid on loans financed with tax-exempt bonds to one-halfGAO-04-1070 Federal Family Education Loan Program
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United States. Government Accountability Office. Federal Family Education Loan Program: Statutory and Regulatory Changes Could Avert Billions in Unnecessary Federal Subsidy Payments, report, September 20, 2004; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc296533/m1/4/: accessed March 28, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.