As Congress works toward a comprehensive reauthorization of the Higher Education Act, policymakers share a goal of finding ways to simplify federal student loans so that students can more easily understand and navigate borrowing and repayment. Multiple budget proposals from the current Administration and from House Republicans have called for simplifying the loan program by eliminating subsidized student loans, which offer students better terms, including no accrual of interest during school and for six months after graduation. Eliminating these loans leaves students who need to borrow with no option but to use unsubsidized loans, which begin accruing interest at the time they’re borrowed. While one single federal loan may be simpler, this kind of simplicity would come at the expense of college affordability and leave student loan borrowers with bigger bills for little to no gain because the savings generated from these proposals are not reinvested in students.
In fact, eliminating subsidized loans would increase the cost of college by thousands of dollars for many of the nearly six million undergraduates who receive those loans each year.* The Congressional Budget Office (CBO) recently estimated that eliminating subsidized loans would add $21.6 billion in costs to students over 10 years.
Subsidized student loans are allocated on a sliding scale based on a borrower’s financial need and carry important advantages: not only does interest not accrue while students are in school and for six months after they leave school, but there is also no interest accrued during active-duty military service and for up to three years of unemployment or other economic hardship.
The charts below illustrate how much more a student would have to pay if subsidized loans are eliminated and the student borrows the same amount in unsubsidized loans instead. The calculations assume the student starts school in 2019-20, borrows the maximum subsidized student loan amount ($23,000), and graduates in five years.
The most recent estimates (based on CBO’s January 2019 projections of 10-year T-note yields) show that eliminating subsidized loans would cause this student to enter repayment with $3,900 in additional debt due to accrued interest charges while she was enrolled in school. As a result, the total cost of her debt would increase by 17 percent: if she repaid her debt over 10 years, her total costs would increase by $5,100. If she repaid over 25 years, the total cost would increase by $7,300.
The added costs to students would be even higher if interest rates increase faster than current projections. If the undergraduate Stafford loan interest rate hits the statutory cap of 8.25%, eliminating subsidized loans would cause this student to enter repayment with $5,700 in additional debt due to accrued interest charges. As a result, she would end up paying 25 percent more over the life of her loan: if she repaid over 10 years, she would incur $8,350 in additional costs and $13,450 in added costs if she repaid over 25 years.
As Congress considers ways to simplify student loans, it must take care to not increase the cost of college for borrowers currently benefiting from subsidized federal loans. In a time of growing public concern about rising student debt and broad consensus on the importance of higher education and postsecondary training to the US economy, we need to be doing more, not less, to keep college within reach for all students. For more information on TICAS’ proposals to streamline and improve federal student loans, see our summary of recommendations and our report, Make it Simple, Keep it Fair: A Proposal to Streamline and Improve Income-Driven Repayment of Federal Student Loans.
Note: The borrower in this example would only be eligible for a 25-year repayment plan if she borrowed unsubsidized Stafford loans in addition to subsidized Stafford loans and entered repayment with more than $30,000 in debt. The most recent data show that almost four in five (79%) undergraduates with subsidized loans also have unsubsidized loans.
*This figure refers to the 2016-17 award year. The most recent data file from the Department of Education notes these data are not final, and are current as of October 2018. The file also includes information for subsequent award years, but we have found that student loan volume data tend to get substantially revised after the first and second releases.