Many student and education loans currently utilize the international index known as the London Inter-bank Offered Rate (LIBOR) to formulate their variable interest rates. In the near future, the LIBOR is set to be discontinued on December 31, 2021. Student loan lenders will have to plan to account for this. One possible route is to replace the LIBOR with the Secured Overnight Financing Rate (SOFR). Please see below for a brief Q & A about LIBOR discontinuing and how it may affect student lenders.
Why is LIBOR being discontinued?
“Due to interest rate manipulation stemming back to as early as 2003, LIBOR will be discontinued, on December 31, 2021.” – The Discontinuation Of LIBOR
What is the SOFR?
“The Secured Overnight Financing Rate (SOFR) is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. The SOFR includes all trades in the Broad General Collateral Rate plus bilateral Treasury repurchase agreement (repo) transactions cleared through the Delivery-versus-Payment (DVP) service offered by the Fixed Income Clearing Corporation (FICC), which is filtered to remove a portion of transactions considered “specials”.” – Secured Overnight Financing Rate Data
What is the difference between LIBOR and SOFR?
“SOFR varies from LIBOR in two major ways – it is based on U.S. Treasury-backed repurchase transactions, whereas LIBOR is unsecured, and it is an overnight-only rate, whereas LIBOR is published for different maturities (overnight/spot, one-week, one-month, two-months, three-months, six-months and twelve-months).” – The Discontinuation Of LIBOR
What will lenders do to account for LIBOR discontinuing?
We may be able to take some guidance from the AARC, in which the AARC recommends that lenders choose SOFR as the preferred alternative to LIBOR. “In June 2017, U.S. Federal Reserve Bank’s Alternative Reference Rates Committee (“ARRC”) selected the Secured Overnight Financing Rate (“SOFR”) as the preferred alternative rate to LIBOR.” – The Discontinuation Of LIBOR
The lending partners that work with Nomad Credit have not disclosed, as of 7/14/2020, what they plan to do when LIBOR is discontinued. If there are further questions about how the LIBOR discontinuing might affect a specific loan option, please contact your lending partner’s customer service team directly.