Student Loan Consolidation: The Relationship between Treasury Bills and Education Loans
How do student loans relate to Treasury Bills and rates?
Let's start with the basics. Treasury bills & bonds are essentially loans - you, as a purchaser of a Treasury bill, are loaning the government your money for a specific period of time.
When the economy is going well, chances are you're willing to loan more money for longer periods of time. You would therefore buy long term Treasury securities at a Treasury auction, like the 10-year Treasury Bond.
When the economy isn't going as well, chances are you will be a little more hesitant to loan a lot of money for long periods of time - you might need it for yourself. You would therefore buy short term Treasury securities, like the 91-day Treasury Bill, the selling price of which controls the federal student loan rate.
Not only are you influenced by the economy around you, but so is the government. When times aren't as good, the government needs to borrow more money, and offers a higher rate on the sale of Treasury Bills and Bonds. This is why the Treasury Bill and Bond rates change.
The student loan rates which are tied to the 91-day Treasury Bill are set that way due to the 1992 Reauthorization of the Higher Education Act.
How are student loan rates set?
- Treasury auctions occur every Monday of the year.
- The last auction in the month of May each calendar year is when student loan rates are set.
- The price of the 91-day Treasury Bill at that auction is the base rate for student loans, using the investment yield (as opposed to the discount yield)
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Each variable rate student loan product then adds a margin on top of that investment yield.
- For example, Stafford loans from 2005-2006 for students in school or in grace periods were T-Bill + 1.7%.
- Rates take effect on July 1 of that calendar year for the academic year beginning in September of that year.
- Federal loan interest rates are now fixed percentages. View the current student loan interest rates.
