The Alternative Reference Rates Committee today issued a consultation on draft fallback language for variable-rate private student loans that reference the U.S. dollar London Interbank Offer Rate. With Libor’s future beyond 2021 uncertain, the ARRC—a group of private-sector market participants and public agencies convened by the Federal Reserve—is developing plans to facilitate the transition to its recommended alternative rate, the Secured Overnight Financing Rate.
The draft language is similar to the ARRC’s recommendations for residential closed-end adjustable-rate mortgages and includes two steps in a successor rate “waterfall”: first to an index recommended for use in consumer products by the ARRC, and second, if there is no rate so recommended, to a replacement index selected by the note holder. The recommended fallback language would “explicitly spell out the possibility” that the note holder might adjust the loan’s margin to bring the overall interest rate calculated under the replacement index in line with the rate calculated using Libor. Feedback on the consultation is due by May 15.