[Congressional Record (Bound Edition), Volume 145 (1999), Part 21]
[Extensions of Remarks]
[Pages 31291-31292]
[From the U.S. Government Publishing Office, www.gpo.gov]



                    STUDENT LOAN INTEREST RATE INDEX

                                 ______
                                 

                         HON. PAUL E. KANJORSKI

                            of pennsylvania

                    in the house of representatives

                      Thursday, November 18, 1999

  Mr. KANJORSKI. Mr. Speaker, I rise today to speak about H.R. 1180, 
the Work Incentives Improvement Act. As a senior member of the House 
Committee on Banking and Financial Services, I want to provide my 
colleagues with an explanation of one provision in this conference 
report.
  Specifically, this legislation updates the funding formula for the 
Federal Family Education Loan Program by changing the lender index from 
the 91-day Treasury bill rate to the 90-day commercial paper rate. The 
interest rate index switch has a strong bipartisan backing, including 
the supporter of the Chairman and ranking Democratic member of both the 
Committee on Education and Workforce and its Subcommittee on 
Postsecondary Education, Training and Life-Long Learning. Additionally, 
this change will not in any way affect the interest rate paid by 
individuals on their student loans. This change only affects the index 
for lenders.
  Importantly, this switch will not cost the taxpayers a dime. 
According to the Congressional Budget Office, it will reduce taxpayer 
expenditures by tens of millions of dollars over the next decade. The 
Office of Management and Budget concurs that this change will not 
increase costs to the federal government.
  This change flows from the agreement made on lender yields during 
last year's debate over the Higher Education Act. The conferees on the 
Higher Education Act recognized that there were serious questions about 
whether the Treasury bill was still the appropriate index to use. 
Consequently, the Higher Education Act asked for a study. Over the last 
year, a great majority of the people who have intensively examined this 
matter have concluded that the Treasury bill index has serious 
shortcomings, which will worsen as the federal government continues to 
run a budget surplus and the market diminishes for Treasury securities.
  Furthermore, in June 1999 testimony before the Senate Committee on 
Finance, Deputy Secretary of the Treasury Stuart Eizenstat acknowledged 
this problem. He stated, ``As the supply of Treasuries dwindles in the 
future, as we gradually reduce the debt held by the public, there would 
be a ready supply of other securities of other issuers including high 
quality corporations and government sponsored enterprises that would 
likely become benchmarks for the broader securities markets.'' Deputy 
Secretary Eizenstat further said that, ``The Federal Reserve currently 
uses Treasury securities to conduct open market operations, but it has 
not always been that way, nor would it have to be in the future. As 
with other market participants, the Federal Reserve would adapt to such 
a changing environment by substituting other debt securities for 
Treasuries.''
  Mr. Speaker, that is exactly what this legislation does. It 
substitutes the 90-day commercial paper rate, with an appropriate 
adjustment determined by the Congressional Budget Office to reduce 
federal outlays by tens of millions of dollars, for the 91-day Treasury 
bill.
  This change is as important for students and their families as it is 
for providers of student loans. Without this change, the private sector 
will experience periods of time, such as the majority of last year, 
when it cannot issue asset backed securities to fund student loans. 
Because the private sector finances roughly two out of every three 
dollars of student loans, we must stabilize this important source of 
funding. Stability and liquidity in the market help all participants, 
including students and their families, and colleges and universities.
  Today, our fiscal and economic climate is dramatically different from 
what it was when the 91-day Treasury bill was selected as the index for 
the student loan program. Twenty-five years ago, the federal deficit 
and the Treasury bill market were both quite large, while the student 
loan and commercial paper markets were relatively small. Today the 
situation is reversed. The government has a budget surplus, and the 
size of the Treasury bill market is less than half of what it was as 
recently as 1996. Moreover, the volume of outstanding student loans has 
grown from $7 billion to $120 billion, and the commercial paper and 
London interbank offered rate (LIBOR) markets have exploded in size.
  The simple truth--as anyone on Wall Street will attest, is that the 
overwhelming majority of private sector commercial loans are based on 
LIBOR and commercial paper rates, not Treasury bill rates. The federal 
government should recognize this change in the marketplace and revise 
its statutes accordingly. Changing the interest rate index will not 
harm students, and it will not harm the federal government. Instead it 
will help both by ensuring that a large and liquid market remains 
available for student loans.
  Finally, Mr. Speaker, some people have tried to use this issue to 
reopen the debate between the merits of direct lending and guaranteed 
lending. That is a red herring. This change will not adversely affect 
the direct loan program or the competitive balance between direct and 
guaranteed loans. This change is simply a technical fix to reflect 
transformations in the marketplace that scores of financial experts 
have acknowledged.
  It is time to switch the interest rate index used to calculate lender 
returns for the Federal Family Education Loan Program. I encourage all 
my colleagues to read the following recommendations from the Chairmen 
and ranking Democratic members of the House Committee on Education and 
Workforce and its Subcommittee on Postsecondary Education, Training and 
Life-Long Learning.

         Committee on Education and the Workforce, House of 
           Representatives,
                                 Washington, DC, November 8, 1999.
     Hon. Bill Archer,
     Chairman, House Ways and Means Committee, Longworth House 
         Office Building, Washington, DC.

     Hon. Tom Bliley,
     Chairman, House Commerce Committee, Rayburn House Office 
         Building, Washington, DC.

     Hon. Dick Armey,
     Majority Leader, House of Representatives, the Capitol, 
         Washington, DC.

     Hon. Charles Rangel,
     Ranking Minority Member, House Ways and Means Committee, 
         Longworth House Office Building, Washington, DC.

     Hon. John Dingell,
     Ranking Minority Member, House Commerce Committee, Ford House 
         Office Building, Washington, DC.
       Dear Conferee, We are writing to clear up some 
     misinformation regarding Section 409 of H.R. 1180, the Work 
     Incentives Improvement Act.
       At issue is a provision that was added to H.R. 1180 that 
     would update the index on which lender returns are based in 
     the Federal Family Education Loan Program (FFELP). Last year, 
     as we reauthorized the Higher Education Act of 1965, the 
     Committee became concerned that the 91-day Treasury bill, 
     which is the index used for the last 25 years to determine 
     the interest rate on guaranteed student loans, was becoming 
     an out of date tool for determining lender yields. T-bill 
     based payments made sense when the loan program was 
     conceived. However, financial markets have evolved, and most 
     lenders now fund their portfolios using more commonly traded 
     instruments such as commercial paper (CP) or London interbank 
     offered rate (LIBOR) rates.
       While the Committee was willing to explore other mechanisms 
     for determining lender yields during reauthorization, the 
     complexity of the issue required us to form a study group, 
     made up of a broad range of stakeholders in the program, to 
     determine the financial instrument that would be most 
     efficient and cost effective. Unfortunately, the study group 
     failed to reach consensus on an appropriate alternative 
     index. To date, the only proposal that has been put forth

[[Page 31292]]

     came from the lending community. The provision in Section 409 
     is based on that recommendation.
       We are seriously concerned that, in an attempt to stall 
     this important change, some are spreading a set of contrived 
     ``what if'' numbers, which are not based on sound assumptions 
     or supportable data. The facts, are as follows.
       Changing the FFELP index for lender yields will not cost 
     the federal government money. CBO scoring shows that this 
     provision will actually save the government $20 million in 
     reduced payments to lenders. These are savings that will help 
     to pay for benefits provided for disabled workers under H.R. 
     1180.
       Changing the index won't create a windfall for lenders. The 
     fact of the matter is that had this change been in effect 
     over the last 10 years, lender return would have been 
     slightly lower than the returns that were earned using the 
     current T-Bill based index.
       Changing the index will not drive smaller lenders or 
     community banks from the program. In fact, in a letter to 
     Senator Lott dated November 3, 1999, the Independent 
     Community Bankers of America (a trade association that 
     exclusively represents this nation's community banks) raised 
     the index change, stating that it ``maximizes community 
     banker participation in the program.''
       This provision will not cost students a dime. It in no way 
     affects the interest rates paid by students.
       The bottom line is that changing the index for determining 
     lender yields for the FFEL program is sound policy, and it 
     enjoys the bipartisan support of our Committee leadership. It 
     will increase the efficiency and stability of the program. By 
     basing the index on a private sector funding mechanism such 
     as commercial paper, lenders can more easily borrow money 
     from the private sector and fund more student loans. This 
     change simply ensures that student loans will be readily 
     available for all students.
       In closing, we urge you to maintain Section 409 in 
     conference. If you have any question, please do not hesitate 
     to contact us or have your staff call George, Conant 
     (Majority) at ext. 5-6558, or Maryellen Ardouny (Minority) at 
     ext. 6-2068.
           Sincerely,
     Bill Goodling,
       Chairman, Committee on Education and the Workforce.
     Howard P. ``Buck'' McKeon,
       Chairman, Subcommittee on Postsecondary Education, Training 
     and Life-Long Learning.
     Bill Clay,
       Ranking Member, Committee on Education and the Workforce.
     Matthew G. Martinez,
       Ranking Member, Subcommittee on Postsecondary Education, 
     Training and Life-Long Learning.

     

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