Student Loans

In his State of the Union address, President Obama called on Congress to prevent federal student loan interest rates from doubling later this year. This is the culmination of decades of legislative changes to the federal student loan program. Few people are aware of the policies that led to the pending student loan interest rate increase and many question whether the 6.8 percent fixed interest rate charged on the most widely-available loans provides a real benefit to students.

The Federal Education Budget Project today released an issue brief regarding federal student loan interest rates. This issue brief details the history of interest rates on federal loans, including the decisions that led to today’s fixed rates and the pending rate increase. It also examines the popular argument that current rates are unfavorable for borrowers and disputes the claim that student loans earn revenue for the government. 

The timeline below shows the interest rates on federal student loans taken out in each year, as well as the Congressional action that led to these interest rates. Roll over the points in the graph for more information.

In his State of the Union address, President Obama called on Congress to prevent federal student loan interest rates from doubling later this year. This is the culmination of decades of legislative changes to the federal student loan program. Few people are aware of the policies that led to the pending student loan interest rate increase and many question whether the 6.8 percent fixed interest rate charged on the most widely-available loans provides a real benefit to students.

The Federal Education Budget Project today released an issue brief regarding federal student loan interest rates. This issue brief details the history of interest rates on federal loans, including the decisions that led to today’s fixed rates and the pending rate increase. It also examines the popular argument that current rates are unfavorable for borrowers and disputes the claim that student loans earn revenue for the government. 

The timeline below shows the interest rates on federal student loans taken out in each year, as well as the Congressional action that led to these interest rates. Roll over the points in the graph for more information.

In his State of the Union address, President Obama called on Congress to prevent federal student loan interest rates from doubling later this year. This is the culmination of decades of legislative changes to the federal student loan program. Few people are aware of the policies that led to the pending student loan interest rate increase and many question whether the 6.8 percent fixed interest rate charged on the most widely-available loans provides a real benefit to students.

Last week President Obama called on Congress in his State of the Union address “to stop the interest rates on student loans from doubling in July.” That line surely left a lot of people (Washington’s education policy circles not included) wondering what in the world the president was talking about. Is Congress really planning to double the interest rate on federal student loans this summer? The answer is yes, no, and maybe. In other words, it’s complicated. What’s more, a newly released estimate from the Congressional Budget Office shows that the cost of the president’s request will weigh heavily in any debate on the proposal.

Interest rates on Unsubsidized Stafford student loans, which are federal loans available to all students, issued for this academic year (2011-12) are fixed at 6.8 percent. The same rate has been charged on these loans issued since July of 2006. However, the interest rate is fixed at 3.4 percent for a subset of federal student loans – Subsidized Stafford loans for lower-income undergraduate students – issued this academic year. That rate is only temporarily available, and beginning in the 2012-13 academic year, the rate on that subset of loans will be the same as for Unsubsidized Stafford loans, 6.8 percent. So yes, rates are set to double for newly issued loans made to a subset of undergraduates after July 1, 2012.

Click here to read this full post on Ed Money Watch...

Note: This post was updated on 02/02/2012 with new cost estimate information.

Last week President Obama called on Congress in his State of the Union address “to stop the interest rates on student loans from doubling in July.” That line surely left a lot of people (Washington’s education policy circles not included) wondering what in the world the president was talking about. Is Congress really planning to double the interest rate on federal student loans this summer? The answer is yes, no, and maybe. In other words, it’s complicated. What’s more, a newly released estimate from the Congressional Budget Office shows that the cost of the president’s request will weigh heavily in any debate on the proposal.

Interest rates on Unsubsidized Stafford student loans, which are federal loans available to all students, issued for this academic year (2011-12) are fixed at 6.8 percent. The same rate has been charged on these loans issued since July of 2006. However, the interest rate is fixed at 3.4 percent for a subset of federal student loans – Subsidized Stafford loans for lower-income undergraduate students – issued this academic year. That rate is only temporarily available, and beginning in the 2012-13 academic year, the rate on that subset of loans will be the same as for Unsubsidized Stafford loans, 6.8 percent. So yes, rates are set to double for newly issued loans made to a subset of undergraduates after July 1, 2012.

The seeds for the coming rate change were planted way back in 2006. In their 2006 campaign platform, A New Direction for America, House Democrats promised to “slash interest rates on college loans in half to 3.4 percent for students and to 4.25 percent for parents.” By the end of 2007, they had (technically) made good on their promise. But just like those credit card offers that promise a low interest rate, the rate cut was enacted with important details listed only in the fine print.

Once lawmakers realized that their campaign promise would, according to the Congressional Budget Office, cost $133 billion over ten years (a substantial sum), they opted to scale it back dramatically. That’s where the fine print comes in.

To reduce the cost of the rate cut, Congress cut rates in half only for a subset of loans – Subsidized Stafford loans – which are available only to borrowers from families with middle and lower incomes. While graduate and undergraduate students were previously eligible for Subsidized Stafford loans, the law made only undergraduate students eligible for the rate cut. It left rates unchanged for the larger Unsubsidized Stafford loan program as well as for PLUS loans for parents and graduate students despite their inclusion in the campaign pledge. Even so, those caveats still didn’t get the cost of the proposal down to the size lawmakers wanted.

So to further reduce costs, Congress slowly phased in the interest rate cut over four years and then turned it off such that only loans issued for the 2011-12 school year would carry rates of 3.4 percent (half of 6.8 percent). Subsidized Stafford loans issued to undergraduate students after that year would again carry a fixed rate of 6.8 percent. In short, the 2007 law “cut interest rates in half” for loans issued only this academic year – and only for certain undergraduate students.

As President Obama demonstrated in his address last week, the rate cut issue will loom large this election year and Congress will be under a lot of pressure to stave off the rate hike. Of course, if lawmakers thought the 3.4 percent rate was too costly to make permanent back in 2007 at $3.0 billion a year, it won’t be any cheaper to do it this time around. In fact, it will be a lot more expensive. An early estimate from the Congressional Budget Office says extending the rate cut for one year will cost about $5.9 billion and $45 billion to extend it for ten years.

That’s why President Obama has requested only a one-year extension of the rate cut. Sadly, that’s exactly the type of shortsighted policymaking that got us here in the first place.

It's that time of the year again: high-school seniors around the country are anxiously awaiting the news that will change their lives -- early admission to the university of their choice. But while junior checks his email and the school's website 15 times an hour, parents are checking their savings account statements. As the recession bites into American families' incomes and makes the job search for recent graduates that much trickier, an increasing number of people are beginning to question the cost of attending colleges and universities in the United States.

Segment Transcript:

Kai Ryssdal: We're probably still a couple of lawsuits away from figuring out exactly how much power the Consumer Financial Protection Bureau's eventually going to have. Senate Republicans say they're going to challenge President Obama's recess appointment of Richard Cordray to run the agency. The president says he did it because without a permanent director, the bureau couldn't do key parts of its job. One big part of which is regulating what're called non-bank activities -- check cashing, debt collection, payday lending.

In the Budget Control Act of 2011 (aka the debt ceiling agreement) Congress provided the latest round of supplemental funding for the Pell Grant program. The law included $10 billion for fiscal year 2012 for the program and another $7 billion for fiscal year 2013. The law offset the cost of that one-time supplemental funding by eliminating a type of federal student loan available to graduate and professional students — Subsidized Stafford loans. These loans will no longer be issued to borrowers as of July 1, 2012. While this is old news to some, it’s come to our attention that Ed Money Watch posts and Federal Education Budget Project issue briefs do not fully explain an important nuance in what this policy change means for graduate students. Let’s set the record straight.

Click here to read the full post on Ed Money Watch...

In the Budget Control Act of 2011 (aka the debt ceiling agreement) Congress provided the latest round of supplemental funding for the Pell Grant program. The law included $10 billion for fiscal year 2012 for the program and another $7 billion for fiscal year 2013. The law offset the cost of that one-time supplemental  funding by eliminating a type of federal student loan available to graduate and professional students — Subsidized Stafford loans.  These loans will no longer be issued to borrowers as of July 1, 2012. While this is old news to some, it’s come to our attention that Ed Money Watch posts and Federal Education Budget Project issue briefs do not fully explain an important nuance in what this policy change means for graduate students. Let’s set the record straight.

Since the early 1990s, federal student loans have been available to borrowers regardless of family income. This includes undergraduate, graduate, and professional students. In earlier years, only middle and lower income families qualified for federal student loans, and the federal government did not charge interest on these loans while borrowers were enrolled in school. When Congress opened up the loan program in the early 1990s to effectively all students regardless of income, lawmakers maintained the in-school interest-free benefit for lower to middle income borrowers but did not offer this benefit to higher income borrowers.  Interest on loans issued to higher income borrowers accrues (but does not compound) while the borrower is in school. The loans with the interest benefit are called Subsidized Stafford loans and those without are Unsubsidized Stafford loans.

When Congress eliminated Subsidized Stafford loans for graduate students last year, most reports of this policy change (including ours at Ed Money Watch) explained that graduate students will lose the “in-school” interest benefit on loans issued on July 1, 2012 and later. But borrowers of Subsidized Stafford loans received additional benefits beyond the in-school subsidy, and few reports have mentioned that these benefits have also been eliminated – borrowers qualified for an interest-free benefit during the six months after leaving school (the so-called grace period interest benefit) and under any deferment period, including the three-year deferment periods for unemployment or economic hardship.

What is more, Subsidized Stafford loans provide an important benefit under the Income Based Repayment plan that Unsubsidized Stafford loans do not.  A borrower with Subsidized Stafford loans who does not pay enough each month to cover the interest on his loans (“negative amortization”) has this unpaid interest forgiven. Subsidized Stafford loan borrowers are eligible for this benefit for up to three years of repayment.  The federal government does not forgive this unpaid interest for borrowers with Unsubsidized Stafford loans, meaning their loan balances can grow while using Income Based Repayment.  (It’s interesting that the Obama Administration has fought to make the Income Based Repayment plan more generous for borrowers but simultaneously supported eliminating the Subsidized Stafford loans for graduate students, which makes Income Based Repayment far less generous for these borrowers.)

In short, eliminating Subsidized Stafford loans for graduate students means more than the loss of the in-school interest-free benefit. It includes the loss of a whole host of interest-free benefits for graduate students that would have received subsidized loans. These benefits helped lower costs for borrowers not just while they were in school, but during periods when they needed to delay (deferment) or reduce (income based repayment) repaying their loans.  For some students, those out-of-school interest benefits may have been worth more than the in-school portion, and they should be included in any analysis of the effects the elimination of Subsidized Stafford loans will have on graduate students. Moreover, policymakers and education advocates should keep this more complete explanation of the interest benefit in mind as they debate any proposal to end the still-available benefit for undergraduate students.

The Asset Building Program and the Center for Social Development at Washington University in St. Louis (CSD) are pleased to publish a series of reports collectively titled "Creating a Financial Stake in College." Authored by William Elliott III, professor at University of Kansas School of Social Welfare, the four-part series focuses on the relationship between children's savings and improving college success.