Stafford loans

On August 12, the Congressional Budget Office (CBO) released its estimates of the subsidy rates on federal student loans before and after enactment of the Bipartisan Student Loan Certainty Act of 2013 signed by President Obama earlier this month. These CBO estimates show:
  • That the government will profit from Stafford graduate, graduate PLUS, and parent PLUS loans in every year over the next decade, and beginning in 2016 will make even more profit from them than had been projected under prior law.  Note that CBO does not separate estimates for unsubsidized loans to undergraduate students versus graduate students, so the unsubsidized line understates the profits CBO is projecting from Stafford graduate loans.
  • That the government will still profit off of subsidized Stafford undergraduate loans for the next two years (but less so than if the rates had doubled to 6.8%), after which subsidized loans will require a subsidy that is equal to or greater than the subsidy under prior law.
Ultimately, these estimates underscore the increased profits projected from federal student loans under the new law as well as the shift in costs to students starting a few years from now, especially graduate students and parents of undergraduates.

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This week, the Senate passed legislation to change the way interest rates are set on federal student loans. It’s expected to pass the House next week and soon become law. While it would lower rates for borrowers this year, it is more of a missed opportunity than a cause for celebration, as we said in our statement last week. That’s because it is expected to cost students and families more over time than if Congress had done nothing at all after interest rates doubled on subsidized Stafford loans.

Over the next 10 years, the legislation is expected to cost borrowers $715 million more than if current rates were simply left in place, and current rates are already projected to generate $184 billion in profits for the government. It lowers rates for today’s students only by requiring future students to pay far more. Within a few years, new loans for undergraduates, graduate students, and parents are all projected to carry higher fixed rates than they do right now.

Still, the Senate-passed bill is better than the earlier bill passed by the House, which would have set truly variable rates – meaning the rates on existing loans would change every year while in repayment – and charged borrowers even more to pay for deficit reduction.

Several other proposals removed any cap on how high rates could rise, but Senate Democrats successfully fought to include caps in the final compromise. An amendment offered by Senators Reed and Warren would have lowered those caps to where interest rates are today: 6.8% for all Stafford loans and 7.9% for PLUS loans for parents and graduate students. Notably, that amendment got 46 votes, but not enough to prevail and prevent the final bill from passing with the higher caps.

As many in Congress have pointed out, the upcoming reauthorization of the Higher Education Act is a crucial opportunity to revisit student loan policy, including but not limited to interest rates, in the context of higher education reform as a whole. We urge Congress and the Administration to make college more affordable – not less – for both today’s students and tomorrow’s.

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With just three days until interest rates on subsidized Stafford loans are scheduled to double from 3.4% to 6.8%, Congress should not make college more expensive, either by letting rates permanently double or by making permanent changes that leave students worse off than doing nothing at all. Instead, Congress should freeze interest rates to avoid increasing the cost of college for millions of students and families already struggling to cover rising costs. The Reed/Hagan bill (S.1238) introduced today with more than 30 other senators would freeze rates for one year and pay for itself by closing a tax loophole. It’s scheduled for a Senate vote on July 10.

By contrast, the bill Senators Manchin, Burr, Coburn, Alexander, and King announced they will introduce today would be worse for students than doing nothing at all. It would let rates for subsidized Stafford loans more than double by 2018 and set no limit on how high rates on all new loans could rise.

There has always been a cap on federal student loan interest rates. As we, alongside other organizations that advocate for students and young people, recently wrote to Congress, a rate cap is essential to ensure that student loans remain affordable and that high interest rates don’t deter students from starting or completing college during periods of high and rising rates.

Nevertheless, some have objected to maintaining an interest rate cap, suggesting that the availability of income-driven repayment plans eliminates the need for any cap. But that’s simply not the case.

Still others have claimed that an interest rate cap isn’t necessary because federal consolidation loans would still have a maximum rate of 8.25%. However, the potential to consolidate is not a legitimate substitute for capping how high rates can rise. Consolidation comes with risks, which vary depending on the borrower’s specific circumstances. For example, consolidation can increase the total cost of the loan by lengthening the repayment period, and it can make it harder to qualify for Public Service Loan Forgiveness. We described these and other consolidation risks in our last post.

A recent alternative Democratic proposal would cap rates and keep subsidized loan rates below 6.8%, but rates on unsubsidized loans would be expected to exceed 7% by 2016. Because 82% of undergraduates with subsidized loans also have unsubsidized loans, keeping rates low on one while increasing rates on the other may not reduce costs for low- and moderate-income students, and could even increase them.

The table below compares how four recent long-term proposals compare to the current rates and scheduled rates for undergraduate subsidized Stafford loans over the next decade. Under three of the proposals, rates on subsidized loans would rise sharply—exceeding 7%, more than double the current rate, by 2018. The difference can be substantial. For a student borrowing the maximum allowable in subsidized and unsubsidized loans over four years, the difference in the rates can cost them over $5,000 more if they repay in 10 years, and over $7,000 more if they repay under an income-driven plan (for details, see our recent analysis here).

Projected Rates for Undergraduate Subsidized Stafford Loans

(based on CBO fiscal year projections for 10-year Treasury notes)

 

Years Rates Projected to  Exceed 7% (2013-2023)

Years Rates Projected to  Exceed 8% (2013-2023)

Cap on How High Rates Can Rise (Yes/No)

Scheduled Rate (6.8%)

NONE

NONE

Yes

Current Rate (3.4%)

NONE

NONE

Yes

Coburn/Burr/Alexander

2016-2023

2018-2023

No

Kline/Foxx

2013-2023*

NONE

Yes

Manchin/Burr

2018-2023

NONE

No

Alternative Dem

NONE

NONE

Yes

*Rate is projected to exceed 7% beginning in 2017 and would apply to all loans taken out after July 1, 2013, because under the Kline/Foxx bill, the rates for all loans vary each year throughout the life of the loans.
 

Both today’s students and tomorrow’s deserve affordable student loans, not so-called solutions that let rates double and rise even higher without any upper limit. Instead, current rates should be temporarily frozen so that Congress and the Administration have time to come up with a plan that makes real sense for both students and taxpayers and helps make college affordable for all. Both the Reed/Harkin bill, supported by a majority of the U.S. Senate and the Administration, and the new Reed/Hagan bill, do just that by extending current rates and fully covering the cost by closing unnecessary tax loopholes.

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With just nine days until interest rates on subsidized Stafford loans are scheduled to double from 3.4% to 6.8%, policymakers keep scrambling to come up with a long-term fix. But so far, their long-term proposals – actual and rumored – fall short on the most important measure of all: keeping loans affordable for students, both now and in the future.

The table below uses CBO projections for 10-Yr T-Note yields (fiscal year) to compare how three recent long-term proposals compare to the current rates and scheduled rates for undergraduate subsidized Stafford loans over the next decade. As you can see, rates would rise sharply under all three proposals, increasing the cost of college for millions of students and families already struggling to pay for college.

 

Projected Rates for Undergraduate Subsidized Stafford Loans (2013-2023)

 

Years Rates Projected to  Exceed 7% (2013-2023)

Years Rates Projected to  Exceed 8% (2013-2023)

Cap on How High Rates Can Rise (Yes/No)

Scheduled Rate (6.8%)

NEVER

NEVER

Yes

Current Rate (3.4%)

NEVER

NEVER

Yes

Coburn/Burr/Alexander

2016-2023

2018-2023

No

Kline/Foxx

2013-2023*

NEVER

Yes

Manchin/King/Coburn

2018-2023

NEVER

Uncertain**

*Rate is projected to exceed 7% beginning in 2017 and would apply to all loans taken out after July 1, 2013,  because under the Kline/Foxx bill, the rates for all loans vary each year throughout the life of the loans.
**Media reports on this proposal vary, and the proposal itself has not been made public.

The table shows that in five years or less, projected rates under these long-term proposals would exceed 7%, more than double the current rate. Some conservatives have objected to including any cap on how high rates can rise. Others have suggested that the availability of income-driven repayment plans eliminates the need for an interest rate cap. But that’s simply not the case.

Still others have claimed that an interest rate cap isn’t necessary because federal consolidation loans would still have a maximum rate of 8.25%. They argue that students who borrow when rates are even higher could consolidate into a new loan at 8.25%.

However, the potential to consolidate is not a legitimate substitute for capping how high rates can rise. Consolidation comes with risks, which vary depending on the borrower’s specific circumstances. Among the risks of consolidation:

  • Consolidation costs you more by extending your repayment period: the longer you stretch out your payments, the more interest you pay. Standard consolidation repayment periods range from 10-30 years depending on your debt level.
  • Any accrued but unpaid interest is capitalized (added to the loan principal) when you consolidate.
  • Rates on consolidation loans are rounded up to the nearest 1/8th of one percent of the weighted average of the loans or 8.25%, whichever is lower. This can also add to the cost of your loan.
  • Consolidating prevents you from paying down your highest interest loan first to reduce the average rate and total cost of your remaining debt.
  • The way repayment periods are automatically set in consolidation makes it harder to qualify for Public Service Loan Forgiveness (PSLF). The only payments that count towards the 120 required for PSLF are income-driven or “standard” 10-year payments. But “standard” consolidation repayment periods are longer than 10 years if you have at least $7,500 in debt.
  • If you consolidate a Parent PLUS loan with your own student loans, the resulting consolidation loan will not be eligible for Income Based Repayment or Pay As You Earn.
  • Benefits and rights associated with individual loans are lost in consolidation.

Both today’s students and tomorrow’s deserve affordable student loans, not so-called solutions that let rates double and rise even higher without any upper limit. Congress must not rush to make permanent changes that leave students worse off than doing nothing at all. Instead, current rates should be temporarily frozen so that Congress and the Administration have time to come up with a plan that makes real sense for both students and taxpayers. The Reed/Harkin bill, supported by a majority of the U.S. Senate and the Administration, does just that: extending current rates for two years while fully paying for itself by closing unnecessary tax loopholes.

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