Archived Information

Technical Amendments to the Higher Education Act


INTEREST RATES

SEC. ___. (a) Section 427A(c)(4)(C) of the Higher Education Act of 1965 (20 U.S.C. 1077a(c)(4)(C), hereinafter referred to as 'the Act') is amended--

(1) by inserting the clause designation "(i)" immediately after the subparagraph designation; and

(2) by adding at the end thereof the following new clause:

"(ii) For any such 12-month period beginning on or after July 1, 2001, subparagraph (B)(i) shall be applied by substituting 'the weekly average of the one year constant maturity Treasury yield for the calendar week preceding such June 1, as published by the Board of Governors of the Federal Reserve System' for 'the bond equivalent rate of 52-week Treasury bills auctioned at the final auction held prior to such June 1'.".

(b) Section 455(b)(4) of the Act (20 U.S.C. 1087e(a)(4)) is amended by adding at the end thereof the following new subparagraph:

"(C) For any such 12-month period beginning on or after July 1, 2001, subparagraph (A)(i) shall be applied by substituting 'the weekly average of the one year constant maturity Treasury yield for the calendar week preceding such June 1, as published by the Board of Governors of the Federal Reserve System' for 'the bond equivalent rate of 52-week Treasury bills auctioned at the final auction held prior to such June 1'.".


Rationale:

The interest rate for PLUS Loans (loans made to parents of dependent students under section 428B of the Higher Education Act of 1965, "the Act", 20 U.S.C. 1078-2) and Supplemental Loans for Students (SLS loans, made generally to independent students under former section 428A of the Act, 20 U.S.C. 1078-1, now repealed), that are made or refinanced on or after July 1, 1987, but before July 1, 1998, is variable and equal to the bond equivalent rate of the 52-week Treasury bill ("T-bill"), plus a fixed percentage (either 3.25 percent or 3.1 percent). The interest rate for Federal Direct PLUS Loans made under section 455(b)(4)(A) of the Act (20 U.S.C. 1087e(b)(4)(A)) on or after

July 1, 1994, but before July 1, 1998, is also tied to the 52-week T-bill, plus 3.1 percent.

Although the Department of the Treasury will hold an auction of 52-week Treasury bills on May 30 that will permit the Department of Education to set the rate on all of these loans for the new 12-month period beginning July 1, 2000, the Department of the Treasury is expected to discontinue auctions of 52-week T-bills at some point in the future. Section ___ would provide a substitute rate for these loans as of the 12-month period beginning July 1, 2001. This substitute rate would be the weekly average of the one-year constant maturity Treasury yield for the calendar week preceding June 1 (the date that the interest rates for these loans are determined for the 12-month period starting each July 1), as published by the Board of Governors of the Federal Reserve System, plus 3.25 percent or 3.1 percent, as the case may be.

Yields on Treasury securities at "constant maturity" are read by the Treasury from the daily yield curve. This curve, which relates the yield on a security to its time to maturity, is based on the closing market yields on actively traded Treasury securities in the over-the-counter market. These market yields are calculated from composites of quotations obtained by the Federal Reserve Bank of New York. The constant maturity yield values are read from the yield curve at fixed maturities, currently 3 and 6 months and 1, 2, 3, 5, 7, 10, 20, and 30 years. This method provides a yield for a one-year maturity, for example, even if no outstanding security has exactly one year remaining to maturity.

Based on historical data and economic projections, it appears that the weekly average of these yields for the calendar week preceding June 1 will most closely approximate the bond equivalent rate for the 52-week T-bill. Thus, changes to the current law percentages that are added to this rate (3.25 or 3.1 percent) are unneeded. This amendment would provide ample lead time for the student loan industry and borrowers of these loans to enable an orderly transition to the new rate.

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