The Higher Education Amendments of 1998 directs CBO to participate in a study group which shall evaluate the spread between each of the 30-day and 90-day commercial paper rates, and the 90-day LIBOR to the 91-day Treasury bill rate.
Summary
Robert Arnold, Angelo Mascaro, and Matthew Salomon
The Higher Education Amendments of 1998 direct CBO and other organizations to participate in a study group which shall evaluate the spread between each of the 30-day and 90-day commercial paper rates, and the 90-day London Interbank Offered Rate (LIBOR) to the 91-day Treasury bill rate. The study group, chaired by the Comptroller General (GAO) and the Secretary of Education, has asked CBO to present an illustration of its projections of these spreads as well as that between 30-day LIBOR and the 91-day Treasury bill rate. The study group has also asked CBO to present illustrations of probability ranges for the levels of commercial paper, London interbank, and Treasury bill rates which would emerge from these projections. The levels and volatilities of these interest rates would be used in CBO's probability scoring of proposed changes to the federal student-loan programs. Under current legislation due to expire in 2003 federal student loan programs use the 91-day Treasury bill rate in the context of various formulas that establish payments by students, receipts by lenders, and special allowance payments by the federal government. Though CBO makes projections of the 91-day Treasury bill rate, it currently makes no projections of the alternative rates considered here. The CBO did prepare one-time projections of rates on commercial paper and LIBOR in 1997, however, when these rates were first proposed as alternatives to Treasury interest rates for use in the Federal Student Loan program.
This paper provides illustrative projections for the spreads of one- and three-month commercial paper rates and one- and three-month London interbank offer rates (LIBOR) to the interest rate on three-month Treasury bills. Projections are also included for spreads of one- and three-month Eurodollar rates to the rate on three-month Treasury bills. The projections are illustrative because CBO does not currently make forecasts for commercial paper and LIBOR. The projections are consistent with the economic assumptions discussed in the Congressional Budget Office's January 1999 outlook, The Economic and Budget Outlook: Fiscal Years 2000-2009.
The paper provides a brief background on the instruments, a discussion of the determinants of the spreads and their volatility, a summary of the quantitative procedures developed for the illustrative projections, and a summary table that consolidates information on the projections for commercial paper and LIBOR, given the outlook for Treasury bill rates from CBO's January 1999 budget outlook. Following that is a description of CBO's methodology for developing probability bands around the baseline outlook, and illustrative results for the interest rates examined in the paper. A technical appendix provides additional discussion of the methodology and presents econometric information on the projection equations.
The paper is being issued in draft form to solicit comment prior to issuing a final version. It is being distributed to staff of the Committee on Education and the Workforce of the U.S. House of Representatives and the Committee on Health and Education of the U.S. Senate, members of the federal student loan working group, CBO’s panel of economic advisers, and other interested individuals and organizations.