Student Loan Rates May Be Cut by Half
A proposal to cut interest rates in half on federal need-based student loans–scheduled for a House of Representatives vote tomorrow–would save college students thousands of dollars, an analysis shows.
Under the legislation, a priority for the new Democratic leadership of Congress, the rates on subsidized Stafford loans would be gradually cut from this year through 2011. The Stafford loans, which now carry a fixed interest rate of 6.8 percent, would be cut in five steps–to 6.12 percent this year, 5.44 percent in 2008, 4.76 percent in 2009, 4.08 percent in 2010, and 3.4 percent in 2011.
Lowering the interest rates would save a four-year college student who started school in 2007 some $2,280 over the lifetime of his or her subsidized Stafford loan, according to an analysis of the congressional proposal by the U.S. Public Interest Research Group. The average student beginning a four-year college career in 2011 would save $4,420.
Students who borrow money during the transitional years could consolidate their loans–lumping the loans together for simplified repayment–based on a weighted average of the interest rates on the various loans.
Democrats, led by Rep. George Miller, chairman of the House Education and Labor Committee, had promised to cut interest rates on student loans within the first 100 hours of the new Congress. "Today, far too many Americans are holding off on college or skipping it altogether because they can't afford it," Miller says.
A student with $20,000 in loans that are repaid over 10 years would have a monthly payment of $230.16 at the current interest rate of 6.8 percent, a Project on Student Debt analysis found. If the interest rate were halved to 3.4 percent, the monthly loan repayment would drop to $196.84, a savings of $33.32 per month. "When fully implemented, students with covered loans would see their payments reduced by 14 percent," says Robert Shireman, executive director of the project.
Critics, however, say that a better way to help college students would be to further increase grant aid instead of cutting loan interest rates. "It's not upfront when students need the money," says Mark Kantrowitz, publisher of FinAid.org, who estimates that the average student with $10,000 in subsidized Stafford loans would save $15 or $20 per month if the proposed interest rate cuts are fully implemented. "That's the price of a DVD. Most of the cost of repaying a loan is not the interest; it is the original loan balance."
Undergraduates took out $16.3 billion dollars' worth of subsidized Stafford loans in the 2004–05 school year, the most recent figures available. This academic year students may borrow between $3,500 and $5,500 worth of subsidized Stafford loans, depending on their financial need and year in school, up to an aggregate limit of $23,000. However, 43.2 percent of Stafford loans are unsubsidized. Those loans would not be affected by the proposed legislation. Unsubsidized Stafford loans are available to all students regardless of need and may continue to accumulate interest at a fixed rate of 6.8 percent while students are in school and after graduation.
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