Guaranteed Student Loans:

Eliminating Interest Rate Floors Could Generate Substantial Savings

HRD-92-113: Published: Jul 21, 1992. Publicly Released: Jul 21, 1992.

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Linda G. Morra
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Pursuant to a congressional request, GAO provided information on how interest rate floors on certain guaranteed student loans affect the federal government's and students' costs when rates on short-term government securities decline.

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.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: Section 427A(e) of the Higher Education Act of 1965 was amended effective October 1, 1992, to require adjustments to borrowers' loan repayments for any excess interest paid.

    Matter: Congress should revise the Higher Education Act, as amended, to make the interest rate on future Stafford and consolidation student loans vary with the yield on Treasury bills, not to exceed current maximum rates.


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