ERIC Number: ED347876
Record Type: Non-Journal
Publication Date: 1990-Sep
Reference Count: N/A
An Assessment of the Department of Education's Approach and Model for Analyzing Lender Profitability.
Jenkins, Sarah; And Others
An assessment was done of the Department of Education's (ED) approach to determining lender profitability for Guaranteed Student Loans. The assessment described the current net present value (NPV) method as well as discussing its strengths and weaknesses. The NPV method has been widely accepted for determining the profitability of different lending activities, including student loans. The approach is appealing because it accounts for all cash flows throughout the life of a loan as well as the opportunity cost of making a loan. This approach has also allowed lenders to evaluate the loan independently of other lending activities. In particular the assessment found that the ED model accurately determines lending profitability for this program, that it depends on a number of assumptions, that the appropriate discount rate is the lender's cost of capital adjusted for the relative riskiness of student loans compared to other types of lending, that assumptions used in ED's analysis erred on the side of understating lender profitability, that student loans could help insulate financial institutions from economic downturn, and that the analysis probably does not fully account for the relatively low level of liquidity and interest rate risk faced by lending institutions. Includes one table and five references. (JB)
Publication Type: Reports - Evaluative
Education Level: N/A
Sponsor: Department of Education, Washington, DC.
Authoring Institution: Regional Financial Associates, Inc., West Chester PA.
Identifiers - Laws, Policies, & Programs: Guaranteed Student Loan Program