Cutting Interest Rates, Lowering Student Debt
1/11/2007
Executive Summary
In 21st century America, a college
education is critical for individual
success and the strength of our nation.
Higher education is associated with
better health, greater wealth and more
vibrant civic participation, as well
national economic competitiveness in
today’s global environment. As the
need for a college degree has grown,
however, so has the cost of obtaining
that education. The result is rising
student debt.
Some in Congress have proposed
lowering student loan interest rates to
reduce the debt burden facing students
and families. This report addresses one
specific proposal to cut interest rates on
undergraduate subsidized Stafford
student loans in half, from 6.8% to 3.4%,
over a period of five years.
About 5.5 million students borrow
subsidized Stafford loans every year. Of
those borrowers, nearly 3.3 million
attend four-year public or private nonprofit
institutions. The vast majority of
these borrowers come from low- and
middle-income families. According to
the Congressional Research Service, 75%
of traditional-aged borrowers with
subsidized Stafford loans come from
families with incomes below $67,374.
The median income for an American
family of four is $65,000.
Congressional Proposal: Cut Interest
Rates in Half
Congressional leadership has proposed
cutting the fixed interest rate on subsidized Stafford loans for
undergraduates from 6.8% to 3.4% over
the next five years. Loans originated
during the intervening five years would
be set at fixed interest rates of 6.12% in
2007-2008, 5.44% in 2008-2009, 4.76% in
2009-2010, 4.08% in 2010-2011, and 3.4%
from 2011 forward. After graduation,
students could consolidate their loans
into one loan at the weighted average of
the interest rates of their various loans.
Findings: Students Would Save
Thousands of Dollars with Lower
Interest Rates
By lowering interest rates on subsidized
Stafford loans, Congress can save
college graduates thousands of dollars
over the life of their loans. We found:
1. The average four-year college
student starting school in 2007 with
subsidized Stafford loans would
save about $2,280 over the life of his
or her loans under the proposed
legislation.
2. When the interest rate cut is fully
phased in, the average four-year
college student starting school in
2011 with subsidized Stafford loans
would save $4,420 over the life of his
or her loans. The average savings for students
starting school in 2011 vary slightly
from state to state, ranging from
$4,830 for students in California to
$4,020 for students in West Virginia.
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