The Cost of Eliminating the Interest Subsidy on Federal Student Loans

At a time when college students are graduating with record amounts of debt and facing the highest unemployment rate in recent history, it is not surprising that the national survey of young adults (18-34 years old) released today found strong bipartisan opposition to charging students with financial need interest on their federal loans while they are still in school.

Yet this is exactly what House Majority Leader Eric Cantor recently proposed, and some have speculated that the so-called Supercommittee may be considering this as a way to reduce the deficit.  However, this proposal would simply shift the debt burden from the federal government to young people and adults working to get the education and training they need to compete in today’s economy.

Removing the interest subsidy on federal Stafford loans for undergraduates with financial need would increase the cost of college by thousands of dollars at the same time that the interest rate on these loans is scheduled to double from 3.4% to 6.8%, further increasing student debt burdens.

Just how much more would eliminating the in-school interest subsidy cost students who take out the maximum subsidized student loan amount and graduate in six years?

  • The scheduled doubling of the interest rate alone will cost them $4,600 more if they repay over 10 years and $10,400 more if they repay over 20 years.
  • The doubling of the interest rate combined with the elimination of the in-school interest subsidy would cost them $6,250 more when they start repayment (after the six-month grace period), $13,250 more over 10 years, and $21,850 more over a 20-year repayment period.

Rather than entirely eliminating the in-school interest subsidy on subsidized student loans and directing the savings to deficit reduction, the Senate FY2012 Labor-HHS appropriations bill proposes eliminating the interest subsidy during the six-month grace period after a student leaves school and using those savings to fully fund the Pell Grant program.

How much more would eliminating the interest subsidy during the grace period cost students who take out the maximum subsidized student loan amount and graduate in six years, assuming the interest rate doubles, as scheduled, to 6.8%?  Allowing interest to accrue during the grace period would cost these students almost $800 more by the time they enter repayment, $1,100 more if they repay their loan over 10 years, and $1,450 more if they repay their loan over 20 years.

The Senate Appropriators proposed this change in order to fully fund the Pell Grant program, but the House Budget Committee is blocking the Senate from using all the savings to fund Pell Grants next year.  This means that students would face larger debt loads and the Pell Grant program would still have a $900 million budget gap in FY2012.

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