Summary: 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.
