Guaranteed Student Loans

Establishing a variable interest rate structure for guaranteed student loans, while retaining the current caps, could save the federal government and student borrowers hundreds of millions of dollars in future interest payments. To ensure adequate private loan capital, the government guarantees lenders participating in the student loan programs a rate of return pegged to three-month Treasury bill yields plus a "special allowance factor" of about 3.25 percent. If a borrower's interest rate falls below this yield, the government pays lenders the difference. Currently, some student loan rates fluctuate with prevailing Treasury bill yields, while others have interest rate floors that prevent borrowers and the government from benefiting when Treasury bill yields drop. If such loans had variable interest rates, the government and student borrowers could cut their interest payments in fiscal year 1992 by about $100 million and $143 million, respectively. The potential cost savings associated with applying variable interest rates to guaranteed student loans could be even more substantial if loan volumes continue to grow and Treasury bill yields remain low.

GAO found that: (1) the federal government and student borrowers could save several hundred million dollars in future interest payments if the Department of Education implemented a variable interest rate structure for guaranteed student loans while retaining the current caps; (2) due to recent declines in Treasury bill (T-bill) yields, interest rates have fallen on certain kinds of loans under the Stafford Student Loan Program, but not on others; (3) Supplemental Loans for Students (SLS) and Parent Loans for Undergraduate Students (PLUS) borrowers benefit from decreases in T-bill rates, because the interest rates on those loans vary directly with T-bill rates; (4) consolidation borrowers do not realize benefits from a decline in T-bill rates, because those loans have interest rate floors; (5) the federal government and student borrowers could pay about $100 million and $143 million less in fiscal year 1992 interest payments if Stafford and consolidation loans had variable interest rates; and (6) allowing the interest rate on Stafford and consolidation loans to vary with the yield on T-bills should not affect student accessibility to loan capital, since variable interest rates have not had an adverse impact on SLS or PLUS program growth.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Team: Phone: