Student Loan Rate of 6.8 Percent Wasn't Always So Scary

Some of the same groups that fought today's hike to 6.8 percent fought for that rate not long ago.

If you haven’t started saving, here’s a list of reminders and strategies to consider as the years go by

Interest rates on student loans have seen many changes over the last decade and a half.

By + More

As the calendar flips from June to July, the interest rate on millions of current and future students' loans is also changing over, from 3.4 to 6.8 percent. And despite a slew of proposals to avert the rate hike – not to mention loud complaints from students and advocacy groups nationwide – Congress failed to agree on a path forward.

But not long ago, lenders, borrowers – and Republicans and Democrats alike – embraced the 6.8 percent rate. In fact, some of the same groups that fought it this time around also helped to enact the new rate.

"This is the great irony of this whole debate is that everybody said, 'Hey! That looks like a good rate. Let's just put it into law,'" says Jason Delisle, director of the Federal Education Budget Project at the New America Foundation, a Washington, D.C.-based think tank.

The interest rates on student loans have seen many changes over the last decade and a half. The 6.8 percent rate originated in 2002, when Congress decided to switch from an interest rate based off of the 91-day treasury bill and capped at 8.25 percent to a fixed rate of 6.8 percent, which they agreed would take effect in 2006. That proposal passed the Senate via unanimous consent and passed the House with overwhelming bipartisan support.

[POLL: Should Congress Allow Student Loan Interest Rates to Double?]

The new rate looked like a reasonable deal to borrowers at the time, providing a fixed rate that appeared to also be moderate. When the interest rate had been tied to the treasury, borrowers paid the 91-day treasury rate plus 2.3 percentage points. That meant rates could dip well below 6.8 percent, but could also climb above 8 percent, as occurred in 2000.

Still, the new rate was short-lived. In 2007, a newly Democratic Congress passed a bill to eventually halve rates on subsidized Stafford Loans for undergraduates, but only for the 2011-12 school year, after which the rates would again rise. Last year, amid great sound and fury, Congress passed an extension on that rate.

But now it has finally expired, and the question is what the rate "should" be.

That 3.4 percent rate is one reason why 6.8 percent looks so high today. But the low-interest rate environment also plays a big part. If the old formula of short-term treasury rates plus 2.3 percentage points were used today, loans would have a 2.3 to 2.4 percent rate – well below the newly expired 3.4 percent rate, not to mention the rates in almost all of the other plans put forward.

 

U.S. PIRG, a federation of state public interest research groups, is a consumer watchdog group that championed the 6.8 percent rate. As the Chronicle of Higher Education reported in 2001, state PIRGs and the U.S. Student Association championed a 6.8 percent interest rate in 2001.

After the rate was passed, U.S. PIRG called the bill "an important step in making college more affordable for millions of Americans." However, the group on Monday issued a statement saying that in allowing the interest rate to double to 6.8 percent now, "Congress is pushing student borrowers to their limit."

Chris Lindstrom, director of U.S. PIRG's Higher Education Program, was not with the group during the 2001-2002 fight, but defends the group's decisions at the time. While she acknowledges that 6.8 percent looked a lot lower in 2001 than it does now, she also says one key factor has changed since then.

"The biggest change is the banks," she says. Banks were heavily involved in making subsidized federal loans at the time, but that ended in 2010, when Congress passed a bill making the federal government the primary loan distributor. Lindstrom characterizes the 6.8 percent rate as a compromise – "essentially as good as we could get," she says.

"We were working very hard to thwart higher rates – an initiative for higher rates that the banks were undertaking at the time," she adds.

The U.S. Student Association also pushed for the 6.8 percent rate, which it also fought against this time around. While the 2001 leadership of the student-run organization is no longer in place, the group now says that avoiding higher rates is a matter of helping students plagued by debt amid a slow recovery.