![handle is hein.congrec/cbo06395 and id is 1 raw text is:
Ac~lendum to The Profitability of Federally Guaranteed Student Loans,
Addendum to
The Profitability of Federally Guaranteed Student Loans,
an attachment to a letter to the Honorable Pete V. Domenici, March 30, 1998
The accompanying table was prepared at the request of the staff of the Senate Committee on the
Budget as an addendum to the Congressional Budget Office's analysis of the profitability of Federal
Family Education loans (FFELs). The table compares the expected returns from federally guaranteed
student loans under three interest rate formulas. For each formula, the table compares the returns of
lenders that hold FFELs in their portfolios through repayment with the returns of lenders that
securitize the loans when borrowers begin repayment.
Under the first formula, which under current law applies to loans made through June 30, 1998, the
interest rate earned by lenders on FFELs is the bond-equivalent yield (BEY) on 91 -day Treasury bills
plus a certain percentage-point additive: 2.5 percentage points when borrowers are in school or are in
the grace period, or if they defer repayment; and 3.1 percentage points when borrowers are repaying
their loans. (Under current law, the interest rate earned by lenders on loans made beginning July 1,
1998, will be based on the BEY on Treasury securities with a maturity comparable to FFELs [about
10 years], as established by the Secretary of Education, plus I percentage point.) Under the second
formula, the assumed rate that lenders earn equals the BEY on the 91-day T-bill plus 2.35 percentage
points when borrowers are in school, are in the grace period, or defer repayment; and 2.95 percentage
points when borrowers arc repaying their loans. Under the third formula, the additives are 2.2
percentage points and 2.8 percentage points, respectively.
Any legislation that established a new formula for determining the interest rate earned by lenders on
FFELs made beginning July 1, 1998, might make other changes that affect the profitability of federally
guaranteed student loans. CBO's analysis examines only the effect on profitability of differences in the
interest rate formula. For an explanation of the assumptions of CBO's analysis, see the attachment to
the letter from June E. O'Neill to Senate Budget Committee Chairman Pete V. Domenici, March 30,
1998.
EXPECTED AFTER-TAX RATES OF RETURN ON EQUITY FROM FEDERAL FAMILY EDUCATION
LOANS TO STUDENTS ENTERING SCHOOL IN THE FALL OF 1998 (In percent)
Current Formula Current Formula
Current Formula Minus 15 Basis Points Minus 30 Basis Points
Portfolio Portfolio Portfolio
Type of School/Borrower Lending Securitization Lending Securitization Lending Securitization
Two-Year School
Low-balance loan 16 22 13 17 10 11
High-balance loan 19 30 17 25 14 19
Four-Year School 18 26 16 22 13 17
Graduate School 23 35 21 29 18 25
SOURCE: Congressional Budget Office based on data from student lendes. For infomnation on the assumptions of CBO's analysis, see the attachment to the letter
from June E. O'Neill to Senate Budget Committee Chairman Pete V. Domenici, March 30, 1998.
Page I](ViewImageLocal?handle=hein.congrec/cbo06395&div=1&collection=&method=preview&ext=.png&size=3)
What Is HeinOnline?
Contact us for annual subscription options:
Already a HeinOnline Subscriber?
profiles profiles most
Contact us for annual subscription options:
Already a HeinOnline Subscriber?
profiles profiles most
Contact us for annual subscription options:
Already a HeinOnline Subscriber?
profiles profiles most