Maintained for Historical Purposes

This resource is being maintained for historical purposes only and is not currently applicable.

(GEN-98-20) This letter provides guidance on the interest rates for loans made on or after October 1, 1998 under the Federal Family Educational Loan (FFEL) Program and the William D. Ford Federal Direct Loan (Direct Loan) Program.

DCLPublicationDate: 9/1/98
DCLID: GEN-98-20
AwardYear:
Summary: This letter provides guidance on the interest rates for loans made on or after October 1, 1998 under the Federal Family Educational Loan (FFEL) Program and the William D. Ford Federal Direct Loan (Direct Loan) Program.


September 1998

GEN-98-20



Summary: This letter provides guidance on the interest rates for loans made on or after October 1, 1998 under the Federal Family Educational Loan (FFEL) Program and the William D. Ford Federal Direct Loan (Direct Loan) Program.


Dear Colleague:

As you may know, interest rate formulas set by law for loans made under the Direct Loan and FFEL programs were scheduled to change on October 1, 1998. Recent Congressional action clarified this scheduled change. I am pleased to announce the interest rates for student and parent loans in the FFEL and Direct Loan programs made on or after October 1, 1998, as well as rates for consolidation loans under both programs.

Student and Parent Loans 1

The interest rate formulas for all Direct Loan and FFEL student and parent loans made on or after July 1, 1998 and before October 1, 1998 are provided in the Higher Education Act of 1965, as amended (HEA), at Sections 427A(j) for FFEL and 455(b) for Direct Loans. These interest rate formulas, enacted by the Transportation Equity Act for the 21st Century, Pub. L. 105-178, generally lowered the interest rates for student loans.

The bill entitled The Higher Education Amendments of 1998, which reauthorizes the HEA, has now been passed by both Houses of Congress and is expected to be signed by the President shortly. That bill includes amendments to Sections 427A and 455(b) that effectively extend the current interest rate formulas to loans made between October 1, 1998 and July 1, 2003. These formulas and the current interest rates are shown in the attachment.

This legislation provides that the interest rate provisions will be effective on October 1, 1998, even if the bill becomes law after that date. To promote the effective and efficient operations of the loan programs, FFEL lenders are authorized and the Direct Loan servicer has been instructed, to implement the new interest rates on October 1, 1998. These interest rates are summarized in the attachment.


1 Direct Subsidized, Direct Unsubsidized, Direct PLUS, FFELP Stafford Subsidized, FFEL Stafford Unsubsidized, and FFEL PLUS.

Consolidation Loans

The legislation will change the formula for setting interest rates on consolidation loans under both the Direct Loan and FFEL programs. The formulas and rates for consolidation loans are included in the attachment to this letter.

The new formula provides that the interest rate on new consolidation loans is equal to the weighted average of the loans being consolidated, rounded up to the nearest one-eighth of one percent, capped at 8.25 percent. However, the bill sets different effective dates for each program.

For FFEL Consolidation Loans, the new formula applies to any consolidation loan for which the application is received by a FFEL lender on or after October 1, 1998. Those FFEL Program lenders who make consolidation loans on or after October 1, 1998, are authorized to use the weighted average in anticipation of the legislation becoming law.

For Direct Consolidation Loans, the new formula applies to any consolidation loan for which the application is received on or after February 1, 1999. The Direct Loan servicer will use the new weighted average formula for any application received on or after February 1, 1999.

For Direct Loan consolidation loans (both student and parent) for which the application is received between October 1, 1998 and January 31, 1999, the new law establishes a different formula. The interest rate equals the bond equivalent rate of the 91-day Treasury bills sold at the final auction before June 1, 1998 plus 2.3 percent, except that the interest rate may not exceed 8.25 percent. (This formula is the formula for setting the repayment period interest rate for Direct Consolidation Student Loans made on or after July 1, 1998. See the attachment for the current interest rate.)

Further, for the period between October 1, 1998 and January 31, 1999, a borrower who is enrolled or accepted for enrollment in an institution of higher education may not obtain a Direct Consolidation Loan unless the borrower certifies that the borrower has no outstanding Title IV loans other than Direct Loans.

If you have any questions on the information provided in this memorandum, please contact our policy staff at (202) 708-8242.



Sincerely,




Diane E. Rogers
Acting Deputy Assistant Secretary
Student Financial Assistance Programs


Attachment

Last Modified: 10/19/1998