More Related Content Similar to Mark Kantrowitz on July 1, 2013 Stafford Loan Interest Rates Increase (20) Mark Kantrowitz on July 1, 2013 Stafford Loan Interest Rates Increase1. Copyright © Edvisors Network, Inc. (www.edvisors.com)
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
Editor's Notes 4. Why waste a good campaign pledge on just one election? 1c. Congress might do what Congress does best, which is nothing. The last session of Congress was the least productive in history. 0. The doubling of the interest rate on new subsidized Stafford loans may sound dramatic, but the actual impact on the typical borrower is minimal. 1. But Reauthorization might not happen on time. The last reauthorization took five years. 2. Republican, failed Senate 40-57 3. Republican, passed House 221-198 along party lines, President Obama threatened veto4. Democrat, passed Senate 51-46, but fell short of 60 votes needed to block a filibuster7,8. Margin to be determined by the US Department of Education based on administrative costs9. Democrat. Rate charged by the Federal Reserve for overnight loans to banks.10. BipartisanAs of May 2012, 91-day T-Bill was 0.09% and 10-year Treasury was 1.86%. As of May 2013, 91-day T-Bill was 0.05% and 10-year Treasury was 1.81%.http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldhttp://www.treasurydirect.gov/RI/OFAuctions?form=histQuerySub Stafford rates: 2.74%, 4.81%, 4.31% (variable), 3.4%, 3.4%, 3.4%, ?, ?, 0.75%, 4.31%/5.31%Unsub Stafford rates: 4.74%, 4.81%, 4.31% (variable), 6.8%, 6.8%, 6.8%, ?, ?, 6.8%, 4.31%/5.31%PLUS rates: 5.74%, 4.81%, 6.31% (variable), 7.9%, 7.9%, 7.9%, ?, ?, 7.9%, 6.31% 4a Democrat4b Republican 1b. Initially reduce interest rates on all new federal education loans, but allow interest rates to rise later, in some cases without any caps on the interest rates. 1c.The economic assumptions used by CBO are very conservative, meaning that in all likelihood the interest rates will increase much more than the CBO projects, perhaps even to double-digit levels.