Federal Student Loans: Program Data and Default Statistics

Federal Student Loans: Program Data and Default Statistics

Order Code RL30048
Report for Congress
Received through the CRS Web
Federal Student Loans:
Program Data and Default Statistics
Updated September 23, 2002
Adam Stoll
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

Federal Student Loans:
Program Data and Default Statistics
Summary
Title IV of the Higher Education Act (HEA) authorizes the major federal student
aid programs, including the student loan programs, which are the largest source of
federal aid for students. In FY2001, the Federal Family Education Loan (FFEL)
program and the William D. Ford Direct Loan (DL) program supported an estimated
$35.3 billion in new loan volume. Several types of student loans are available
through these programs: federal need-based subsidized Stafford loans (under which
the government pays the interest while the borrower is in school, a grace period or
deferment); unsubsidized Stafford loans; federal PLUS loans (for parents of
undergraduate students); and Federal Consolidation loans.
Overall, student loan volume has been increasing in recent years — from
approximately $22 billion in FY1994 to $35 billion in FY2001. The number of loans
being made has increased over the same period, going from 6,483,000 to 9,118,000.
The average amount that individual students are borrowing in any given year has not
increased as dramatically.
The FFEL and DL programs are entitlements; funding is provided for these
programs on a permanent indefinite basis, not subject to appropriations. The fiscal
year cost estimates for both programs, under terms of the Credit Reform Act of 1990,
are calculated by determining the net present value of the costs to the government
over their lifetime of new loans disbursed in the given fiscal year, and can be
expressed as a federal subsidy rate. Subsidy rate estimates are likely to vary annually
based on interest rate forecasts and technical assumptions.
An important component of federal costs are defaults. Program cost estimates
for budget purposes for a given fiscal year use an estimate of lifetime dollar default
rates, calculated as the percent of dollar volume of loans disbursed in a given year
that ever default; for FY2001 the rate was approximately 14.3%. A different default
rate measure, used to determine institutional eligibility, is based on the percentage
of borrowers who default in the first 2 years after leaving school; this cohort default
rate peaked at 22% in FY1990, but has since declined significantly to 5.9% for the
FY2000 cohort.

Contents
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Basic Program Data on Loan Volume and Costs . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Loans Disbursed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Federal Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Default Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Default Costs and Collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Default Rate Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
List of Tables
Table 1. Loans Disbursed, FY1994-FY2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Table 2. Number of Loans Disbursed, FY1994-FY2001 . . . . . . . . . . . . . . . . . . . 4
Table 3. Average Loan Size, FY1994-FY2001 . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Table 4. FFEL and DL Federal Outlays and Receipts, FY1994-FY2000 . . . . . . . 7
Table 5. FFEL and DL Administrative Accounts, FY1994-FY2001 . . . . . . . . . . 7
Table 6. Types of Institutions Subject to Sanction Due to Three Years of
High Cohort Default Rates, Fiscal Years 1991-2000 . . . . . . . . . . . . . . . . . 10
Table 7. Student Loan Cohort Default Rates (%), FY1988-FY2000 . . . . . . . . . 11

Federal Student Loans:
Program Data and Default Statistics
Overview
Programs
The Higher Education Act of 1965 (HEA) was reauthorized during the second
session of the 105th Congress. Title IV of the act includes the major federal student
aid programs, including the student loan programs, which are the largest source of
aid for students.1 In FY2001, the Federal Family Education Loan (FFEL) program
and the William D. Ford Direct Loan (DL) program supported an estimated $35.3
billion in new loan volume.
The Federal Family Education Loan program, authorized by Part B of Title IV
of the HEA, insures and subsidizes loans private lenders make to students or their
parents to help them meet the costs of postsecondary education. Several types of
FFEL program loans are available: federal need-based subsidized Stafford loans
(under which the government pays the interest while the borrower is in school, a
grace period or deferment); unsubsidized Stafford loans; federal PLUS loans (for
parents of undergraduate students); and Federal Consolidation loans. A common
feature of all these loans is that the federal government guarantees lenders against
loss through borrower default, or death, permanent disability, or, in limited instances,
bankruptcy. Lenders are also provided an interest subsidy (the special allowance) to
insure a sufficient return given financial market conditions. In addition to the private
lenders who provide the capital in the FFEL programs, other important players
include the secondary markets that buy loans from lenders and provide liquidity in
the program, and the state or national nonprofit guaranty agencies that primarily
insure lenders against borrower default and provide other administrative services.
In 1993, a new Direct Loan program, authorized under Part D of the HEA, was
established; originally intended to gradually expand and replace the FFEL program,
it now competes with the FFEL program for student loan business. Unlike FFEL,
Direct Loans are made by the federal government to students through their schools,
thus eliminating the need for private capital and the guaranty agencies. Schools may
serve as direct loan originators or the loans may be originated as well as serviced by
1For details of the changes to the loan programs made by the HEA amendments of 1998
(P.L. 105-244), see: CRS Report 98-291, Student Loans: 1998 Amendments, by Margot A.
Schenet.

CRS-2
contractors working for the U.S. Department of Education (ED). Loan terms and
conditions for Direct Loans are generally the same as those in the FFEL programs.2
This report presents program data on loan volume and costs, and statistics on
loan default rates and trends.3 It will be updated regularly as new data become
available.
Basic Program Data on Loan Volume and Costs
Loans Disbursed
This section summarizes some major program indicators; the data are from The
Budget of the U.S. Government, Appendix, Fiscal Years 1996, 1997, 1998, 1999,
2000, 2001, 2002, 2003. The following tables provide information on loan volume,
number of loans, and the average loan size based on the amount of loan principal
actually disbursed in a given fiscal year. Fiscal year data spans parts of 2 academic
years; for example, FY2001 includes parts of academic years 2000-2001 and 2001-
2002.
It should be noted that the decline in FFEL volume and number of loans that
occurred immediately after FY1994 reflects the phase-in of the DL program. DL
volume, after initially increasing rapidly, has remained at close to one-third of total
loan volume from FY1997 through FY2001, while dollar volume in both programs
increased. Overall, combined FFEL and DL volume increased from $22.2 billion in
FY1994 to $35.3 billion in FY2001, an increase of 59% over that time period. The
combined number of loans increased from 6,483,000 in FY1994 to 9,118,000 in
FY2000. In recent years, the average Stafford loan amounts have increased steadily
but not dramatically; major increases in the average amount took place immediately
following the 1992 HEA amendments, which raised loan limits. Increased loan
volume is primarily due to an increase in the number of loans being taken out, not to
large increases in the size of individual loans.
The balance of all outstanding FFEL loans at the end of FY2001 was
approximately $179 billion. Approximately $59 billion in DL loans were
outstanding at the end of FY2001.
2There are some differences in the repayment plans, loan consolidation options and borrower
discounts available in each program. For details on the loan terms and conditions in the
FFEL and DL programs see: CRS Report RL30655, Federal Student Loans: Terms and
Conditions for Borrowers, by Adam Stoll.
3This report does not include information on a separate, small loan program also authorized
under Title IV of the HEA, the Federal Perkins Loan program.

CRS-3
Table 1. Loans Disbursed, FY1994-FY2001
(in billions)
Loan type
FY1994
FY1995
FY1996
FY1997
FY1998
FY1999
FY2000
FY2001
FFEL:
Stafford subsidized
13.679
11.086
9.792
10.699
10.762
10.427
11.259
11.882
Stafford unsubsidized
4.410
5.989
5.489
6.755
7.292
7.771
9.126
10.114
PLUS
1.605
1.445
1.430
1.708
1.949
1.908
2.326
2.667
Subtotal
21.430
18.519
16.711
19.162
20.003
20.106
22.711
24.694
DL:
Stafford subsidized
0.568
3.181
5.028
5.701
5.842
5.318
5.366
5.388
Stafford unsubsidized
0.187
1.499
2.529
3.242
3.501
3.437
3.807
3.986
PLUS
0.058
0.480
0.799
0.895
1.057
1.198
1.175
1.261
Subtotal
0.813
5.161
8.357
9.838
10.400
9.953
10.348
10.635
FFEL and DL total:
New loans
22.243
23.680
25.068
29.000
30.403
30.059
33.059
35.329
Consolidation:
FFEL
1.784
3.117
4.266
3.836
3.234
4.720
5.695
9.255
DL
0.0
0.329
0.803
1.333
2.431
8.006
5.369
7.760

CRS-4
Table 2. Number of Loans Disbursed, FY1994-FY2001
(in thousands)
Loan type
FY1994
FY1995
FY1996
FY1997
FY1998
FY1999
FY2000
FY2001
FFEL:
Stafford subsidized
4,191
3,392
2,871
3,150
3,169
3,091
3,293
3,505
Stafford unsubsidized
1,227
1,673
1,525
1,799
1,904
1,970
2,244
2,488
PLUS
325
267
247
276
305
293
342
362
Subtotal
6,257
5,332
4,643
5,225
5,378
5,354
5,879
6,355
DL:
Stafford subsidized
168
824
1,551
1,732
1,787
1,659
1,552
1,543
Stafford unsubsidized
46
393
775
979
1,059
1,027
1,010
1,042
PLUS
12
81
142
153
171
205
177
178
Subtotal
226
1,298
2,468
2,864
3,018
2,891
2,739
2,763
FFEL and DL total:
New loans
6,483
6,630
7,111
8,089
8,396
8,245
8,618
9,118
Consolidation:
FFEL
94
208
281
195
194
266
298
315
DL
0
32
83
85
107
412
272
370
It should be noted that Table 2 reflects the number of loans, not borrowers, in a given year. A student could borrow more than one loan
during the year, although that is not generally the case.

CRS-5
Table 3. Average Loan Size, FY1994-FY2001
(in whole dollars)
Loan type
FY1994
FY1995
FY1996
FY1997
FY1998
FY1999
FY2000
FY2001
FFEL:
Stafford subsidized
3,264
3,268
3,411
3,397
3,396
3,373
3,419
3,390
Stafford unsubsidized
3,592
3,581
3,598
3,755
3,830
3,945
4,066
4,077
PLUS
4,934
5,409
5,788
6,182
6,395
6,522
6,811
7,359
Consolidation
19,061
15,005
15,180
19,678
16,643
17,754
19,122
29,378
DL:
Stafford subsidized
3,387
3,862
3,242
3,291
3,269
3,206
3,457
3,491
Stafford unsubsidized
4,110
3,814
3,262
3,310
3,306
3,346
3,771
3,824
PLUS
4,935
5,910
5,823
5,865
6,174
5,837
6,643
7,097
Consolidation
0
10,281
9,716
15,754
22,772
19,449
19,747
20,976

CRS-6
Federal Costs
The FFEL and DL programs are entitlements; funding is provided for these
programs on a permanent indefinite basis, not subject to appropriations. The fiscal
year cost estimates for both programs, under terms of the Credit Reform Act of 1990,
are calculated by determining the net present value of the costs to the government
over the lifetime of new loans disbursed in the given fiscal year, and can be expressed
as a federal subsidy rate. In calculating the subsidy rates for the two programs, the
main cost components are the interest benefits to students in the subsidized Stafford
program, the special allowance payments to lenders, and defaults. Subsidy rate
calculations are dependent on interest rate forecasts over the life of the loans, and
therefore can vary significantly depending on these forecasts.
Because budget scoring rules treat lending risks as well as administrative costs
for loan servicing and collections for DL differently from FFEL, comparisons of
costs and subsidy rates between the two programs cannot easily be made. Under
FFEL, the subsidy costs include per loan administrative costs borne by lenders and
guaranty agencies (primarily for servicing and collections) over the lifetime of the
loans, because these costs are financed through the payments to lenders and guaranty
agencies, lender profits, and retention of default collections. In the DL program,
these costs are a component of federal administration, and, as such, are estimated on
an annual cash basis, rather than as part of the subsidy rate reflecting costs over the
life of the loan. In March 2002, the Congressional Budget Office (CBO) estimated
the combined subsidy rate for new loans in both programs disbursed in FY2001 as
5.16%. In other words, for each new dollar loaned in FY2001, the federal
government will pay, on average, 5 cents. CBO estimates of the subsidy rates for
FY2001 for the FFEL and DL programs (not adjusted for differences in the treatment
of administrative costs) are 9.37% and -4.69%, respectively. Other rates would apply
using different forecasts. For example, ED’s projections of the actual subsidy rates
for FY2001 loans for the FFEL and DL programs (not adjusted for differences in the
treatment of administrative costs) are 8.84% and -4.47%, respectively.
Annual program expenditures, in contrast, reflect actual federal outlays for loans
made across any number of fiscal years. The most recent expenditure data are
reported in the Federal Student Loans Program FY 1997-2000 Data Book, produced
by ED. As noted above, the main components of annual FFEL federal expenditures
are the in-school, grace period and deferment interest payments to lenders on behalf
of borrowers of subsidized loans, special allowance payments to lenders, and
reimbursements to guaranty agencies for losses due to borrower defaults; guaranty
agencies also receive allowances from the federal government for administrative
expenses. In the DL program, the main components of annual federal costs are the
foregone interest payments for subsidized loans; defaults; and administrative costs
of contracts for loan origination, servicing and collections.
In both programs, there are certain annual revenues that offset some of these
costs, including fees that students or parents pay when borrowing, and collections on
defaulted loans. In the FFEL program, other offsets include fees that are assessed on
lenders/loan holders, guaranty agencies, and the Student Loan Marketing Association
(Sallie Mae), currently the largest secondary market purchaser of FFEL program
loans. Table 4, below, provides a summary of some of these annual cash flows for

CRS-7
FFEL and DL programs for FY1994-FY2000; it does not include annual DL
administrative or default costs.
Table 4. FFEL and DL Federal Outlays and Receipts,
FY1994-FY2000
(in millions)
FY1994
FY1995
FY1996
FY1997
FY1998
FY1999
FY2000
FFEL:
Outlays
5,148
5,667
6,392
6,430
6,281
5,787
6,479
Receipts
2,517
3,083
3,295
2,770
3,221
3,851
3,899
DL:
Costs
29
397
763
1,742
2,334
3,646
4,520
Inflows
15
125
644
1,322
2,729
7,040
6,315
There are also two administrative accounts for the two programs that are
included in annual appropriations, but that are only partially reflected in the above
table; a discretionary administrative account for FFEL program administration by ED
(not included above), and a capped entitlement account authorized by Section 458 of
the HEA for administrative costs in the DL program (only the portion of these funds
used to pay guaranty agency expense allowances in the FFEL program are counted
in the table above, as part of FFEL outlays). Table 5 presents the appropriations for
these two accounts for FY1994 through FY2001.
Table 5. FFEL and DL Administrative Accounts, FY1994-FY2001
(in thousands)
FY1994
FY1995
FY1996
FY1997
FY1998
FY1999
FY2000
FY2001
FFEL program administration
69,966
62,096
29,977
46,482
46,482
46,482
48,000
48,000
DL Section 458: (total)
260,000
283,564
435,652
491,000
507,000
617,000
735,000
770,000
Guaranty agency payment
n.a.
n.a.
167,040
150,419
170,000
177,000
180,000
180,000

CRS-8
Default Statistics
The 1998 HEA amendments changed the definition of default for individual
borrowers. For loans that became delinquent prior to the date of enactment (October
1, 1998), a defaulted loan is one on which the borrower has not made required
payments for at least 180 days. For loans, for which the first day of delinquency
occurs on or after October 1, 1998, default occurs after 270 days of delinquency. In
the FFEL program, when a borrower defaults, the guaranty agency insuring the loan
pays the lender the principal and interest due; the guarantor is subsequently
reimbursed for most of these costs by the federal government under its reinsurance
agreement. The guaranty agency then pursues efforts to collect on the loan, which
may include administrative wage garnishment or litigation. In the DL program, it is
ED that pursues collection efforts once a borrower has defaulted.
Default Costs and Collections
Annual federal default costs in the FFEL program reached an all time high of
$3.3 billion in FY1991. Contributing to this level was the significant rise in FFEL
borrowing in the 1980s, increasing the loan volume in repayment exposed to default.
Another factor was increased program participation by borrowers at high risk of
default: students attending proprietary schools with short-term programs. Federal
laws limiting the participation of schools with high default rates in the loan programs
(see below) have apparently lowered default costs; in FY2001, FFEL program
reinsurance payments to guaranty agencies for default claims were approximately
$1.6 billion. Collections on defaulted loans have also increased in the 1990s,
particularly due to the attachment of defaulter’s federal tax refunds after 1986, as
well as more aggressive collections efforts by guaranty agencies and ED. In FY2001,
FFEL program collections amounted to roughly $4.3 billion. (Collections totals
include not only outstanding principal and interest on defaulted loans, but also late
fees and collection charges and costs assessed against the defaulter.) Since the DL
program was only initiated in July 1994, default costs and collections are lower. In
FY2001, the DL program incurred approximately $1.3 billion in defaults4 and
collected roughly $370 million.5 It should be noted that annual default costs are less
useful in assessing trends because of variations in annual flows into and out of
repayment.
Default Rate Measures
In order to calculate program cost estimates for budget purposes for a given
fiscal year, ED must estimate lifetime dollar default rates, calculated as the percent
of dollar volume of loans disbursed in a given year that ever defaults. These
estimates are based on historical data; however, because of variations in the data used
4This reflects the amount of defaulted DL loans transferred to ED’s Debt Collection Service
during FY2001. Source: Unpublished data from the U.S. Department of Education.
5Unless otherwise noted, default cost data discussed in this section are from: The Federal
Student Loan Programs Data Book, FY1997-2000, and the FY2003 Budget Justifications,
Student Loans Overview.

CRS-9
and the estimating procedures, it is not possible to establish trends. The weighted
average lifetime default rates across the FFEL and DL programs for new loans
disbursed in FY2001 was approximately 14.3%. That is, of the estimated $35 billion
in new loans disbursed in FY2001, ED estimates that roughly 14.3% or $5.1 billion
will end up in default.6
A different default rate measure is used for institutional eligibility. Since 1989,
schools participating in the student loan programs must meet a special institutional
eligibility criterion which was established in an effort to reduce student loan costs
resulting from defaults. The HEA provides that institutions with a pattern of high
student loan cohort default rates are no longer eligible to participate in the loan
programs. Research had shown that most defaulters were dropouts and students
unable to find jobs; the cohort default rate provision holds schools responsible for
these circumstances of their former students. Currently, institutions with cohort
default rates of 25% or more for each of the 3 most recent fiscal years for which data
are available are ineligible to participate for the remainder of the fiscal year through
the 2 following fiscal years.7 Table 6 presents information on schools that suffered
a loss of loan program eligibility due to 3 consecutive years of high cohort default
rates.
6This lifetime dollar default rate rate, for the new loans disbursed in FY01(excluding
consolidation loans), was calculated based upon data presented in the Budget of the U.S.
Government, Appendix Fiscal Year 2003.
7Some exceptions and special criteria may apply. For details of these provisions, see CRS
Report 97-671, Institutional Eligibility for Student Aid under the Higher Education Act:
Background and Issues, by Margot Schenet.

CRS-10
Table 6. Types of Institutions Subject to Sanction Due to Three
Years of High Cohort Default Rates, Fiscal Years 1991-2000a
Type of institution
FY
Proprietary
Public
Private
Total
number
%
number
%
number
%

1991
232
92%
13
5%
8
3%
253
1992
266
87%
25
8%
15
5%
306
1993
123
89%
7
5%
9
7%
139
1994
55
86%
4
6%
5
8%
64
1995
51
74%
13
19%
5
7%
69
1996
20
83%
2
8%
2
8%
24
1997
8
73%
2
18%
1
9%
11
1998
0
—
0
—
0
—
0
1999
3
75%
0
0%
1
25%
4
2000
4
100%
0
0%
0
0%
4
Total 1991-2000 b
762
87%
66
8%
46
5%
874
Source: Unpublished data obtained from the U.S. Department of Education.
a Percentages may not sum to 100% due to rounding.
b This row reports the total number of final initial loss actions in fiscal years 1991-2000, it does not
report a total number of institutions affected by such actions. This is because some institutions of
higher education have been subject to more than one initial loss action (i.e., after having their
eligibility restored, they become subject to an initial loss action again in a later year).
An institution’s cohort default rate is defined as the number of borrowers last
attending that institution entering repayment in a given fiscal year who default by the
end of the succeeding fiscal year divided by the total number of those borrowers
entering repayment in the given year. Because of the short time period during which
borrower behavior is tracked and because these 2-year cohort default rates are based
on borrowers and not dollars, these rates are not comparable to the “lifetime” rates
used for budgetary purposes. Table 7 displays these rates by institutional sector
using the statutory definition. DL schools and borrowers are included beginning with
the FY1995 cohort.8
As the table shows, cohort default rates vary by institutional sector, with
proprietary school rates more than twice those of traditional 4-year institutions.
Community colleges, which generally have fewer borrowers, have also had higher
8Data are from ED’s Office of Postsecondary Education web site:
[http://www.ed.gov/offices/OSFAP/defaultmanagement/cdr.html].

CRS-11
default rates. As the eligibility cutoff has been applied, eliminating high default rate
schools from participation, proprietary school participation in the loan programs has
declined.9 These national 2-year cohort default rates rose from FY1988 to FY1990,
but have since declined significantly; primarily because of the reduction in defaults
among proprietary school borrowers.
Table 7. Student Loan Cohort Default Rates (%),
FY1988-FY2000
4-year
4-year
2-year
FY cohort
public
private
public
Proprietary
All
1988
6.1
6.0
16.6
30.5
17.2
1989
6.2
6.1
16.0
35.5
21.4
1990
7.0
6.5
17.2
41.2
22.4
1991
6.5
5.7
14.7
35.9
17.8
1992
7.0
6.4
14.5
30.2
15.0
1993
6.9
6.2
14.5
23.9
11.6
1994
6.8
6.3
13.8
21.1
10.7
1995
7.1
6.9
14.2
19.9
10.4
1996
7.0
6.6
13.3
18.2
9.6
1997
6.9
5.8
12.7
15.4
8.8
1998
5.7
4.5
10.7
11.4
6.9
1999
4.6
3.7
8.8
9.3
5.6
2000
4.8
3.8
9.2
9.4
5.9
Note: Rates for FY1995, FY1996, FY1997, FY1998, FY1999 and FY2000 include Direct Loan
borrowers.
9For instance, proprietary school participation in the subsidized Stafford loan program has
fallen from an estimated 28% of loan volume in academic year 1989-1990 to about 10.4%
in academic year1999-2000. See: The College Board. Trends in Student Aid 2001, p. 11.