Submitted by Anh Do (not verified) on July 18, 2008 - 7:49am.
Those are politically-determined estimates/projections of how a single year's "new" loans will default over the next few decades. Strange how the same people touting these types of estimates were constantly talking down the previous Administration's estimates as purely political. Here are the ones that count, from CBO, http://www.cbo.gov/budget/factsheets/2008b/education.pdf. Default rates? slightly higher in ffel than in dl, the exception being the defaulted ffel loans that are consolidated into dl — where the borrowers quite frequently default a second occasion. OMB counts those defaults as dl while CBO counts them as ffel (because that’s where the loan capital started out) defaults. If there were an iron wall between the programs, you would expect the exact same default rates, right, because, as the press is always touting, the terms/conditions of the loans are supposed to be the same in dl as in ffel?Just through an accident of history, though, many of the "lower risk" schools happen to be in dl.
The combination of (1) moving "bad" loan paper into dl consolidation and (2) removing dl's good loan paper through consolidation into ffel has probably created a significant disparity between omb and cbo approaches which ordinarily would not arise. In the first example omb counts potential defaults against dl while cbo counts them against ffel. In the second example omb would credit ffel with the good performance while cbo would credit dl (because that's where the loan capital originated). CBO does not consider consolidation to be a separate loan type but rather a repayment option for the underlying Stafford and PLUS loans. CBO scores the prepayment possibility/risk and other consolidation behavior as part of scoring the original Stafford and PLUS loan. CBO only provides cost estimates for Stafford and PLUS loans. There is no separate line for estimating the cost of consolidation loans. Thus, CBO attributes the default of a dl consolidation loan to the original ffel stafford loan in those cases where a defaulted ffel consolidates into DL and then the DL consolidation subsequently defaults. OMB, on the other hand, attributes all those defaults to the dl program. At the same time, under the omb approach, dl gets assigned with high defaults on loan capital it never originated. Defaults are just one of dozens of factors that go into what the taxpayer cost of the loan programs is. Even a significantly-higher dl default rate would not likely close the budgetary gap created by the primary difference: dl borrower payments go to the treasury, while ffel borrower payments go to the loan holder, as they should, because it was originally private capital supplied there. While the ffel loan may have been sold or securitized, the investors’ price included the assumption that private parties would receive payments of principal, interest, special allowance, etc.
Loan origination
Those are politically-determined estimates/projections of how a single year's "new" loans will default over the next few decades. Strange how the same people touting these types of estimates were constantly talking down the previous Administration's estimates as purely political. Here are the ones that count, from CBO, http://www.cbo.gov/budget/factsheets/2008b/education.pdf. Default rates? slightly higher in ffel than in dl, the exception being the defaulted ffel loans that are consolidated into dl — where the borrowers quite frequently default a second occasion. OMB counts those defaults as dl while CBO counts them as ffel (because that’s where the loan capital started out) defaults. If there were an iron wall between the programs, you would expect the exact same default rates, right, because, as the press is always touting, the terms/conditions of the loans are supposed to be the same in dl as in ffel?Just through an accident of history, though, many of the "lower risk" schools happen to be in dl.
The combination of (1) moving "bad" loan paper into dl consolidation and (2) removing dl's good loan paper through consolidation into ffel has probably created a significant disparity between omb and cbo approaches which ordinarily would not arise. In the first example omb counts potential defaults against dl while cbo counts them against ffel. In the second example omb would credit ffel with the good performance while cbo would credit dl (because that's where the loan capital originated). CBO does not consider consolidation to be a separate loan type but rather a repayment option for the underlying Stafford and PLUS loans. CBO scores the prepayment possibility/risk and other consolidation behavior as part of scoring the original Stafford and PLUS loan. CBO only provides cost estimates for Stafford and PLUS loans. There is no separate line for estimating the cost of consolidation loans. Thus, CBO attributes the default of a dl consolidation loan to the original ffel stafford loan in those cases where a defaulted ffel consolidates into DL and then the DL consolidation subsequently defaults. OMB, on the other hand, attributes all those defaults to the dl program. At the same time, under the omb approach, dl gets assigned with high defaults on loan capital it never originated. Defaults are just one of dozens of factors that go into what the taxpayer cost of the loan programs is. Even a significantly-higher dl default rate would not likely close the budgetary gap created by the primary difference: dl borrower payments go to the treasury, while ffel borrower payments go to the loan holder, as they should, because it was originally private capital supplied there. While the ffel loan may have been sold or securitized, the investors’ price included the assumption that private parties would receive payments of principal, interest, special allowance, etc.