Interest Rates and College Student Loans: The Issues

The Interest Rate Policy

• In September of 2007, Congressional Democrats passed a budget bill that included phased-in rate cuts on subsidized Stafford loans to undergraduates.

• This legislation temporarily phased down interest rates for subsidized Stafford Loans made to undergraduate students over four academic years, at which point the rate would revert back to 6.8 percent.

• The phased-in cuts reduced rates to 3.4 percent for only one year – the 2011-2012 school year.
  • (The Washington Post’s assertion that Congress halved the interest rate on federally subsidized Stafford loans to 3.4 percent in 2007 is misleading at best.)

• The interest rate for subsidized Stafford will return to 6.8 percent on July 1^st, 2012.

• The 6.8 percent fixed rate was established by Congress and supported by advocacy groups in 2002.

The Higher Interest Rate: Who is Affected?

• The nonpartisan Congressional Budget Office estimates that it would cost the federal government over $6 billion to maintain a 3.4 percent interest rate for subsidized Stafford loans for one more year.

• Estimates by the New America Foundation conclude that students’ minimum monthly payments would increase by, at most, $9, with a national average of $7.

• House Democrats misrepresent the effects on borrowers by asserting that the rate increase will cost $1,000 dollars. It is important to note however, that this increase will be spread out over the term of the loan for which the national average is nearly 9 years: 104 months.

Who Really Pays?

• Congressional Democrats have yet to offer specific policies to offset the additional $6 billion cost to taxpayers.  This raises the real possibility that the plan is to simply increase the deficit – which already exceeds $1 trillion and represents an unfair and unwise burden on the next generations.

• Setting this precedent raises the specter of repeating this largesse year after year – a “Groundhog Day” approach that would burden the future with over $60 billion in additional debt.

• Equally unappealing, Democrats may be forced to reduce other education funding.  In light of the expected $6 billion dollar shortfall in funding for FY 2014 Pell Grants the Democrats are laying the groundwork for a reverse-Robin Hood funding strategy.