If Congress does not act, interest rates on new subsidized Stafford loans will double from 3.4% to 6.8% on July 1, 2013. Mark Kantrowitz, nationally-recognized expert on student financial aid, scholarships and student loans, presented during a webinar for the Countil on Law in Higher Education. Here is the PowerPoint used during his presentation. Here is an article he wrote to summarize his talk: http://www.studentloannetwork.com/tips/financial-aid/will-student-loan-interest-rates-double-on-july-1/

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Will Student Loan
Interest Rates Double on July 1?

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 From October 1, 1981 to September 30, 1992, the GSL and
SLS loans had hybrid fixed/variable rates, where each year‟s
loans had a new fixed rate with caps as high as 14%.
 From October 1, 1992 to June 30, 2006, Stafford and PLUS
loans had variable rates with caps as high as 9% and 12%.
 Untitled legislation enacted on February 8, 2002 (P.L. 107-
139) scheduled a switch to fixed rates of 6.8% and 7.9%
effective July 1, 2006.
 The Higher Education Reconciliation Act of 2005, enacted on
February 8, 2006 as part of the Deficit Reduction Act of 2005
(P.L. 109-171), changed the PLUS loan interest rate from
7.9% to 8.5%. Due to a legislative drafting error, this change
applied only to FFEL program loans and not to direct loans.
Background

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 Democrats pledged to slash interest rates on student loans in half as
part of their “Six for „06” election year agenda.
 The College Cost Reduction and Access Act of 2007 (P.L. 110-
84), enacted on September 27, 2007, implemented a phased-in
interest rate reduction to the subsidized Stafford loan for
undergraduate students only, cutting the interest rate from 6.8% to
3.4%.
 Interest rates decreased to 6.0% in 2008-09, 5.6% in 2009-10, 4.5%
in 2010-11 and 3.4% in 2011-12.
 Since the 3.4% rate would have expired in the middle of an election
year, Congress passed a one-year extension as part of a pair of
transportation spending bills.
– The Temporary Surface Transportation Extension Act of 2012 (P.L. 112-
140), enacted on June 29, 2012, delayed disbursement of federal student
loans until July 6, 2012.
– The Moving Ahead for Progress in the 21st Century Act MAP-21 (P.L. 102-
141), enacted on July 6, 2012, extended the 3.4% rate for a year at a cost
of $6 billion.
Phased-in Interest Rate Reduction

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Year Stafford PLUS
10/1992 – 6/1994 91-day T-Bill + 3.1%, 9.0% cap CMT + 3.1%, 10.0% cap
7/1994 – 6/1995 91-day T-Bill + 3.1%, 8.25% cap CMT + 3.1%, 9.0% cap
7/1995 – 6/1998 91-day T-Bill + 3.1%, 8.25% cap CMT + 3.1%, 9.0% cap
7/1998 – 6/2006 91-day T-Bill + 2.3%, 8.25% cap 91-day T-Bill + 3.1%, 9.0% cap
7/2006 – 6/2008 Sub 6.8%, Unsub 6.8% 7.9% (DL), 8.5% (FFEL)
7/2008 – 6/2009 Sub 6.0%, Unsub 6.8% 7.9% (DL), 8.5% (FFEL)
7/2009 – 6/2010 Sub 5.6%, Unsub 6.8% 7.9% (DL), 8.5% (FFEL)
7/2010 – 6/2011 Sub 4.5%, Unsub 6.8% 7.9% (DL)
7/2011 – 6/2012 Sub 3.4%, Unsub 6.8% 7.9% (DL)
7/2012 – 6/2013 Sub 3.4%, Unsub 6.8% 7.9% (DL)
7/2013 – Sub ???, Unsub 6.8% 7.9% (DL)
History of Interest Rates (Repayment)

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 If Congress does not act, new subsidized Stafford loans made
on or after July 1, 2013 will be at the 6.8% interest rate
– Congress is not likely to act since this year they do not face the added
pressure of an election.
– If Congress does act, it will be at the last minute.
 Old loans are not affected, only new subsidized Stafford loans
 Interest rates if Congress does not act:
What will happen on July 1, 2013?
Loan Interest Rate Fees
Subsidized Stafford Loan (Undergrad) 6.8% fixed 1%
Unsubsidized Stafford Loan (Undergrad, Grad) 6.8% fixed 1%
Grad PLUS Loan 7.9% fixed 4%
Parent PLUS Loan 7.9% fixed 4%

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 Each year about 30% of undergraduate students receive
subsidized Stafford loans (40% by graduation)
– One year debt = $3,357
– Debt at graduation = $9,008
– Bachelor‟s degree recipients = $11,329
– Aggregate limit = $23,000
 Impact on typical borrower, assuming 10-year term and
average subsidized Stafford loan amounts
Impact on Borrowers
Debt Extra Interest Extra Amount Per Month
$3,357 $761 < $7
$9,008 $2,043 < $18
$11,329 $2,570 < $24
$23,000 $5,217 < $48

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 Delay Decision
– Temporary extension of the 3.4% interest rate (or a lower rate) for 1, 2
or 4 years so Congress can seek a “permanent” solution as part of
reauthorization of the Higher Education Act of 1965
 Immediate Decision
– Congress enacts a “permanent” solution now pegged to the 10-year
Treasury rate plus a margin
Two Main Options for Action

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Proposal Subsidized Stafford Unsubsidized Stafford PLUS
President Obama 10-year Treasury + 0.93%
fixed, no cap
10-year Treasury + 2.93%
fixed, no cap
10-year Treasury + 3.93%
fixed, no cap
Sens. Coburn, Burr,
Alexander (S.682)
10-year Treasury + 3.0%
fixed, no cap
10-year Treasury + 3.0%
fixed, no cap
10-year Treasury + 3.0%
fixed, no cap
Reps. Kline, Foxx
(H.R.1911)
10-year Treasury + 2.5%
variable, 8.5% cap
10-year Treasury + 2.5%
variable, 8.5% cap
10-year Treasury + 4.5%
variable, 10.5% cap
Sens. Reed, Reid, Harkin
(S.953)
3.4% fixed for two years No change No change
Rep. Courtney (H.R.1595) 3.4% fixed for two years No change No change
Rep. Sinema (H.R.1876) 3.4% fixed for four years No change No change
Sens. Reed, Durbin
(S.909)
91-day T-bill + TBD%
variable, 6.8% cap
91-day T-bill + TBD%
variable, 8.25% cap
91-day T-bill + TBD%
variable, 8.25% cap
Rep. Tierney (H.R.1946) 91-day T-bill + TBD%
variable, 6.8% cap
91-day T-bill + TBD%
variable, 8.25% cap
91-day T-bill + TBD%
variable, 8.25% cap
Sen. Warren 0.75% for one year No change No change
Sen. Manchin III, Coburn,
King Jr., Burr
U: 10-year Treasury + 2.5%
G: 10-year Treasury + 3.5%
fixed, no cap
U: 10-year Treasury + 2.5%
G: 10-year Treasury + 3.5%
fixed, no cap
10-year Treasury + 4.5%
fixed, no cap
Many Proposals

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 Lack of a cap on the interest rate
 Disagreement on the interest rates scheme and margins
– Hybrid fixed/variable
– Fixed
– Variable
– Just subsidized Stafford or all loans (and one rate or several)
 Length of extension
– One-year extension delays decision into the mid-term elections
 How to spend the savings
– Extend Pay-as-You-Earn Repayment to all borrowers
– Reduce the budget deficit
Several Areas of Disagreement

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 The cure may be worse than the disease
– Some proposals do not include rate caps, so interest rates could
potentially reach double digits in just a few years
– Many proposals involve interest rate increases masquerading as
decreases
– CBO scored some legislation as saving the government
money, meaning that borrowers will pay more
 Distracts from the real problem, which is an increase in the
amount of debt, not in the cost of debt
Criticism

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 No good workarounds for borrowers, other than to minimize
need for debt
 Borrow to the limit before July 1?
– Eligibility is based on financial need capped at loan limits, so borrowers
do not have much discretion to borrow more
– Students cannot borrow next year‟s loans now to lock in the current rate
Workarounds for Borrowers

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 Increase the interest rates charged to borrowers, yielding
more revenue to the federal government
– Covers cost of extending PAYER to all borrowers, and
– Yields some deficit reduction
 Include an interest rate cap to prevent future double-digit
interest rates
Possible Path to a Compromise?

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 Follow Mark Kantrowitz on Twitter at @mkant
Thank You