The federal government makes low-cost financing for higher education widely available through its fast-growing direct and guaranteed student loan programs. Both programs offer borrowers similar loan products and terms. From the perspective of other key stakeholders, including educational institutions, commercial lenders, and state guaranty agencies, the programs differ significantly. The programs also report widely divergent budgetary costs. In this study, we propose and implement a methodology to estimate the cost of the two programs in market-value terms. In doing so, we address the question of how much of the difference in reported subsidy rates can be attributed to real cost differences and how much is due to idiosyncrasies in the rules that govern the budgeting of federal credit. We find that budgetary costs for both programs are well below their market value. This is mostly attributable to budget rules requiring that expected net cash flows be discounted at Treasury rates. Understatement of the market cost of capital also is the reason that some direct loans appear to make money for the government, despite the favorable terms offered to borrowers. Administrative costs are accounted for inconsistently across programs, complicating cost comparisons. Nevertheless, it appears that the guaranteed program is fundamentally more expensive than the direct program. Guaranteed lenders are paid more than is required to induce them to lend at statutory terms. The excess funds are largely absorbed in competition for borrowers, which occurs through various discounts, marketing activities, and higher service levels and subsidies to educational institutions.
