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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 1 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 are 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.