# Federal Losses From current Student Loans

Federal Losses From current Student Loans

Topic: Go as far as you can to determine likely Federal losses from existing student loans.

Assumptions:

· Assume 97% guarantee

Naïve approach:

1. Determine amount of loans outstanding

2. Determine the default rate

3. Calculate defaulted \$ amount, multiplied by 0.97

4. Multiply this by recovery rate – between 50% and 80%

Less naïve: Calculate how much the Federal Government is subsidizing loans.

· Given characteristics on loans: maturity, default probabilities, cost of funds, and profit margin, calculate rate that would/should have been charged by a private bank

· Actual rate, minus calculated rate = subsidy from government

Need the following information:

1. Stafford loan issuance by year, with rates

2. Loan amounts outstanding, by year

3. Default rates, by year

4. 10-year Treasury rate by year

5. Recovery rate

1. http://www2.ed.gov/offices/OSFAP/defaultmanagement/lga.html

2. http://www2.ed.gov/offices/OSFAP/services/data4schools.html

3. https://www2.ed.gov/offices/OSFAP/defaultmanagement/cdr.html