Student Loan Consolidation Policy and Cost Implications

1
Student Loan ConsolidationPolicy and Cost
Implications

• Sarah E. Ducich
• Senior Director, Government Industry Relations
• Sallie Mae

2
Consolidation Volume andConsolidation Interest
Rate
?
3
Factors in Volume Growth

• 1998 HEA Changes
• More favorable interest rate formula
• Revised single holder rule
• Increase in average indebtedness
• Recent interest rate environment

4
Interest Rate Formula

• Stafford before 7/1/98 T-bill plus 3.1
• Stafford after 7/1/98 T-bill plus 2.3
• PLUS T-bill plus 3.1
• Consolidation Fixed Weighted
  average rounded to nearest 1/8th

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Treasury Bill Rates
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Todays Consolidation Rates Are Below Treasurys
Own Cost of Funds
Source Treasury rates from Federal Reserve and
from Department of Treasury, Average for July 21
to 24, 2003.
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2003-04 Consolidation Rate
Lender Rate minus 1.05 Holder Fee
CBO forecast
Consolidation Rate
In-School Consolidation Rate
Academic Year
8
2003-04 Consolidation Rate
Lender Rate minus 1.05 Holder Fee
CBO forecast
June Blue Chip forecast
Consolidation Rate
In-School Consolidation Rate
Academic Year
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Higher Balances Pay Off Over Longer Terms
30 years
25 years
20 years
15 years
10 years
10
Borrower Repayment Subsidies
Average College Graduate
Average Professional School Graduate
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Added Cost to FFELP of Below-Market Rate
Consolidation
(cash cost under various interest rate and volume
assumptions)
Estimates based on March 03 CBO projection of
interest rates cash cost is the cost incurred by
federal government to finance the program
although off-budget, the cash cost must be funded
through federal borrowing
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Repayment Subsidies Will Drive Up FFELP Costs
13
Loan Consolidation Borrowers by Length of
Repayment Period
of total consolidation borrowers
Only 20 of consolidation borrowers have balances
greater than 40,000...
10-12 yrs.
Source Sallie Mae consolidations, January to
June 2003
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Volume of Loan Consolidations by Length of
Repayment Period
of total consolidation volume
yet, nearly 80 of consolidation loan volume
will be repaid over 20 years or more. 50 of
loan consolidation volume will be repaid over 25
years or more.
10-12 yrs.
Source Sallie Mae consolidations, January to
June 2003
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Who Benefits Most From Loan Consolidation?
Average Repayment Subsidy by Length of Repayment
Period
30 years
Taxpayer subsidies increase exponentially for
those who borrow the most money and extend their
repayment period the longest.
25 years
20 yrs.
15 yrs.
10-12 yrs.
Source Sallie Mae consolidations, January to
June 2003 average balances by consolidation
tier used to calculate average repayment subsidy
over the life of the loan projections based on
3.5 interest rate for consolidation loans and
CBO interest rate forecast for lender payments
16
Aggregate Borrowing Stafford Limits
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Where Are Taxpayer Dollars Going?
Source Expected government subsidy by amount
consolidated, over life of loan distribution of
subsidies based on distribution of Sallie Mae
consolidations (1/03 to 6/03) subsidies
estimated on net present value basis, using CBO
interest rate forecast.
18
Federal Budget Impact
Source Federal budget estimates represent
lifetime cost to the government of loans made
during each academic year cost calculated based
on June 2003 Blue Chip interest rate forecast and
CBO long-term interest rate forecast Volume
based on estimate of actual for 02/03 (40
billion), same volume in 03/04, 12 billion in
04/05