Impact of Federal Student Loan Interest Rate Proposals on Cost of Borrowing

With interest rates on subsidized Stafford loans scheduled to double to 6.8% on July 1, today the House passed H.R. 1911 (sponsored by Representatives Kline and Foxx). It would permanently change the way interest rates are set and cost student borrowers more than letting rates double as planned. Meanwhile, the Senate is expected to vote soon on S. 953 (sponsored by Senators Reed and Harkin), which freezes current rates for two years. In addition, there are various other proposals, including one from the President.

To help track and compare these proposals, TICAS has developed a handy summary chart.

We’ve also analyzed how several proposals would affect students’ cost of borrowing, based on a traditional-age student who graduates in four years and borrows the maximum amount of subsidized and unsubsidized Stafford loans ($27,000). For each proposal, we compare the costs in a standard 10-year repayment plan and the income-based Pay As You Earn plan.

Here are some highlights from the full analysis:

Costs in the Standard 10-Year Repayment Plan

  • For a student who starts college this fall, the long-term change in the Kline-Foxx bill (H.R. 1911) would actually cost over $1,000 more than if Congress did nothing at all.

• Letting the subsidized loan rate double to 6.8% as scheduled would cost the student almost $4,000 more than leaving the current 3.4% rate in place.

• H.R. 1911 would cost the student over $5,000 more than leaving the current 3.4% rate in place.

  • For a student who starts college five years from now (in 2018), H.R. 1911 would cost the student over $1,800 more than if Congress did nothing and let rates double to 6.8%.

Costs in the Pay As You Earn Plan (income-based payments, 20-year repayment period)

Our findings underscore that interest rates do make a difference in what many students will have to pay even if they are in Pay As You Earn.

  • For a sample student in Pay As You Earn, extending the current 3.4% rate for subsidized loans saves the student a significant amount of money: ranging from almost $3,000 to almost $10,000 depending on the proposal.
  • Under H.R. 1911, this student would pay over $7,000 more in interest compared to an extension of the current rate, and over $2,000 more than if the rates were allowed to double.

Comprehensive reform is needed to keep federal loans affordable, support sensible borrowing, and provide well-targeted debt relief (note that our recent white paper includes such reform). However, with less than six weeks until student loan rates double to 6.8%, none of the current long-term proposals meet these goals. We must protect students now while giving Congress and the Administration time to consider and enact permanent changes that make sense for both students and taxpayers.

Posted in Federal and State Policy | Tagged | 3 Comments

3 Responses to Impact of Federal Student Loan Interest Rate Proposals on Cost of Borrowing

  1. Pingback: Nobody Should Care if Student Loan Interest Rates Double - The Empowered Dollar

  2. Pingback: How will the vote in Congress impact my student loans? | Quizzle.com Blog

  3. Pingback: Why Your Student Loan Interested Rate Could Double in July | NAkedLaw

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