ustrates that current budget rules--mandated by the Credit Reform Act of 1990--make "apples-to-apples" cost comparisons difficult (Dept. of Education, 2000). The rules calculate subsidy costs as the net present value (NPV) of costs over the life of loans made in a given year. However, the rules calculate administrative costs as all costs in that year to support all loans, regardless of when they were made.
The negative subsidy figures for direct loans, at net present value, reflect the FY2000 federal budget surplus. If the federal budget were to balance or go into deficit, subsidy costs would turn around dramatically.
The positive subsidy figures (relating to default and interest subsidies paid by the government) for FFEL loans show that more than 10% of a loan functions as a default contingency fee.
Subsidy figures reflect only default costs per se, not the administrative costs--such as employee training, telephone costs, record-keeping costs, and opportunity costs in other administrative down time--of the debt-collection process.
What these facts are building is evidence of a market gap and a need for increased loan-administration efficiencies in connection with student-loan defaults. Default on student loans authorized under Section 435(i), Title IV of the Higher Education Act occurs on an FFEL loan after 270 to 330 days, depending on the loan repayment schedule, and over the course of the 1990s, the federal government has become more aggressive about collecting student-loan repayments. In 2000, 49 schools with high default rates may lose student aid eligibility altogether (Riley, 2000). Consider the implications:
Educational institutions clearly have a financial stake in seeing that their students repay their loans in a timely way.
Students whose loans are collected through agencies are responsible not only for the debt but also for the agency fee, which may range from 25% to 28% of the default amount (Dept. of Edu...