Question
Education > College Education > Federal Student Loan
Eliminate subsidies to private banks under the Federal student loan program
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Background
In fiscal year 2004, the federal government made or guaranteed about $84 billion in loans to assist students in paying for their postsecondary education under title IV of the Higher Education Act (HEA), as amended. Federal student loans are primarily administered through two programs: the Federal Family Education Loan Program (FFELP) and the William D. Ford Direct Loan Program (FDLP). The federal government's role in financing and administering loans for these two programs differs significantly.
Under FFELP, private lenders, such as banks, fund the loans, and the federal government guarantees FFELP lenders a minimum yield on the loans they make and repayment if borrowers default. When the interest rate paid by borrowers is lower than the minimum yield guaranteed to lenders, the government pays lenders the difference--a subsidy called special allowance payments (SAP). Additionally, state-designated guaranty agencies receive federal funding to perform a variety of administrative functions in FFELP and also work with lenders and borrowers to prevent loan defaults and collect on the loans after default. Under FDLP, the U.S. Treasury funds the loans, which are originated through participating schools. The Department of Education contracts with private-sector firms to provide administrative functions for its student loan programs.
[Government Accountability Office - http://www.gao.gov/htext/d05874.html]
Under FFELP, private lenders, such as banks, fund the loans, and the federal government guarantees FFELP lenders a minimum yield on the loans they make and repayment if borrowers default. When the interest rate paid by borrowers is lower than the minimum yield guaranteed to lenders, the government pays lenders the difference--a subsidy called special allowance payments (SAP). Additionally, state-designated guaranty agencies receive federal funding to perform a variety of administrative functions in FFELP and also work with lenders and borrowers to prevent loan defaults and collect on the loans after default. Under FDLP, the U.S. Treasury funds the loans, which are originated through participating schools. The Department of Education contracts with private-sector firms to provide administrative functions for its student loan programs.
[Government Accountability Office - http://www.gao.gov/htext/d05874.html]
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