On July 1, student loan interest rates are scheduled to double from 3.4 percent to 6.8 percent. They were originally set to double last year, but a White House-led effort succeeded in extending the 3.4 percent rate for federally subsidized Direct Loans for one year.
On May 16, the House of Representatives Committee on Education and the Workforce approved legislation that would create a variable interest rate for student loans. Democrats on the committee argued, unsuccessfully, for a bill that would keep interest rates at their current levels for the next two years so this issue could be resolved in legislation that reauthorizes the Higher Education Act.*
Under the Republican-led bill:
- Interest rates would be set for all Stafford undergraduate loans (subsidized and unsubsidized) at the 10-year Treasury yield plus 2.5 percentage points; for PLUS loans, the rates would be set at 10-year Treasury yield plus 4.5 percentage points.
- Interest rates would be truly variable and would be reset each year over the life of the loan.
- Interest rates would be capped—for Stafford loans, at 8.5 percent and for PLUS loans, at 10.5 percent.
In the FY14 budget request, the president now proposes to link student loan interest rates (on new federal loans only) to that of 10-year Treasury bonds, with different rates for subsidized Stafford Loans, unsubsidized Stafford Loans, and PLUS Loans. The Obama plan would not set a cap.
- Subsidized Stafford Loans: 10-year Treasury plus 0.93 percentage points
- Unsubsidized Stafford Loans: 10-year Treasury plus 2.93 percentage points
- PLUS Loans: 10-year Treasury plus 3.93 percentage points
A number of other proposals — from U.S. Senator Jack Reed and U.S. Senator Elizabeth Warren — have been introduced in both the House and the Senate and student organizations have weighed in against the House Republican proposal.
NACUBO joined ACE and a number of higher education associations in letters to congressional leaders expressing views and concerns about these legislative efforts to set student loan interest rates. They include a commitment to ensuring higher education is affordable for all students and a firm statement that, "Any changes need to reflect this purpose, and should be aimed at ensuring that deserving students, regardless of means, can afford to attend college."
The other key principles include:
- Federal student loans should be made at the lowest possible cost to students, while ensuring the continued reliable operation of the programs.
- Any short-term fix to the expiration of the 3.4 percent interest rate for Subsidized Stafford loans cannot preclude a more comprehensive, long-term approach to program reform.
- Students should not be forced to surrender long-term benefits in exchange for short-term gains.
- Changes to aid programs or existing benefits should only be made for the purposes of strengthening the system for all student loan borrowers. Eliminating benefits or increasing costs for one set of students in order to increase aid for another set of students simply shifts the burden.
- In order to keep the costs of borrowing correlated to the economic conditions that borrowers face, student loan interest rates should be tied to market rates.
*The current Higher Education Act expires at the end of 2013, with a one-year extension through 2014 likely. Leaders of the U.S. House of Representatives Committee on Education and the Workforce are presently seeking comments and suggestions from the public.