The History of Federal Student Loan Interest Rates: A Timeline of Events

Student Loans

On July 1st, Subsidized Stafford loans are returning to their scheduled 6.8% rate after a temporary 4-year cut. Doubling from 3.4%, the increase, though not unexpected, has student advocates up in arms. And while both parties want to extend the 3.4% interest rate, Republicans and Democrats cannot agree on how to fund the $6 billion necessary.

The tumultuous history of student loan interest rates

The history of student loan interest rates is characterized by bipartisan indecision, delayed legislation and temporary solutions. Understanding the events leading to today’s low rates is key to analyzing their current trajectory. Here’s a summary of the past 20 years in student loans. Pay special attention to 2007 and beyond.

The following information is provided by the New America Foundation.

1992-93: (6.94%) Variable interests rates are introduced for federal student loans. Rates are determined annually by short-term US Treasury Bills plus 3.1% (maximum of 9%).  Loans issued in the proceeding 10 years retain a 8-10% fixed rate.

1993-94: (6.22%) Congress creates the Direct Loan program to gradually eliminate the need for bank loans. Beginning in 1998, variable rates are to reference long term US Treasury bond rather than short-term bills. Rates will equal a comparable Treasury borrowing rate plus 1%.

1994-95: (7.43%) The variable rate maximum drops to from to 9% to 8.25%.

1998-99: (7.46%) The interest rate change scheduled in 1993 is postponed another 5 years. Congress had predicted the Direct Loan program to replace private lenders by ’98, but in actuality, private loans still account for 60% of all federal student loans. The interest rate change is declared untenable for private lenders and delayed until 2003.

2001-02: (5.99%) The scheduled 2003 alterations become a topic of debate. Student advocates defend the change, arguing it will provide lower interest rates for borrowers. Some loan industry reps and lawmakers propose abandoning the plan and continuing on with the current system.

2002-03: (4.06%) The 1993 rate change is canceled. The current variable rate remains in place. In 2006, loans will begin to carry a 6.8% fixed interest rate. The 6.8% rate is determined by predicting future rates using the 1993 structure.

2005-06: (5.3%) Over the past few years, the variable rate structure has consistently yielded a lower rate than the fixed 6.8% scheduled for 2006. A House proposal cancels the change. A Senate proposal maintains the change. Because fixed interest rates mean larger savings for deficit reduction, the Senate proposal is enacted, and the 2006 fixed rate remains in place.

2006-07: (6.8%) With the 6.8% fixed rate in place, Democrats launch a campaign pledge to cut student loan interest rates in half.

2007-08: (6.8%) Making good on the Democrats’ pledge, Congress passes a bill for a temporary interest rate reduction. The cut, which only affects Subsidized Stafford loan, will last 4 years before reverting back to the normal fixed rate.

2008-09: (6% for Subsidized Stafford, 6.8% for other loans) The rate reduction for new Subsidized Stafford loans begins. According to Jason Delisle of the New American Foundation, interest rates would have only been 2.5% had the variable rate structure remained intact.

2010-11: (4.5% for Subsidized Stafford, 6.8% of other loans) During the third phase of  rate cuts, Congress eliminates the bank-based federal student loan program. The Direct Loan program now issues all loans.

2011-12: (3.4% for Subsidized Stafford, 6.8% for other loans) The fourth and final phase of the temporary rate cut further reduces rates. A budget bill makes graduate students ineligible for Subsidized Stafford loans.

2012-13: (6.8%) The 2007 rate reduction expires on 1 July 2012. Rates revert back to 6.8%.

  • 27 April 2012: House of Representatives passes a bill to extend the 3.4% interest rate by redirecting funds for the Prevention and Public Heath fund created by the healthcare reform law championed by President Obama. The White House promptly responds with a veto threat of the bill.
  •  8 May 2012: Senate Republicans block a Democratic bill which would have paid for the one-year extension by eliminating a tax break for S corporations that would force high-earning stockholders to pay additional Social Security and Medicare payroll taxes.

Who does the increase effect? And by how much?

Because Subsidized Stafford loans were the only to receive the 2007 interest rate reduction, they are the only loans affected. Unfortunately for students, they account for a huge portion of financial aid. Subsidized Stafford loans are need-based, granted to mid- to low- income students. The “subsidized” part means the government will pay interest while the student is in school or requests deferment.

Depending on the political agenda, the numbers can be spun to seem either cruel or inconsequential. Some say increase will cost students an average of $1,000 more per year of school. Others say the increase is equivalent to a mere $6 per month. The amount isn’t huge (especially when compared to overall tuition costs), but it will certainly have some impact.

Is 6.8% fair?

If you’re to confirm a pre-established stance, we suggest you cease reading. The issue is far too complex to declare a binary right and wrong. Here are facts:

  • This is not a new interest rate increase. It is a scheduled return to the fixed rate structure that was in place four short years ago.
  • The increase will cost students more money. The amount of money is substantial but not worth reconsidering your entire education.
  • Had we kept the variable rate structure in place, student interest rates would be far lower. But… we didn’t. Oops.
  • According to the CCAP, another year of 3.4% interest will cost taxpayers $6 billion.
  • High graduate unemployment / underemployment rates exaggerate the challenges of paying back ever increasing loan debts.
  • Republicans and Democrats would both like to extend the 3.4% rate. They can’t agree on how to fund the reduced rate, and thus 6.8% stands.

With the 2012 election season in full effect, it will be a battle before Congress comes to an agreement. The two parties will continue to politicize, which unfortunately helps no one but their own party interests. Everyone can agree that education is good, but how can we empower and enable students to make the best decisions for their future? This is first of many higher education issues which must be soon addressed. College tuition continues to increase, substantially outpacing inflation. Other federal programs, such as the Pell Grants, remain underfunded. A generation of Americans are starting their adult lives firmly entrenched in a debt cycle. And I am not even going to touch the quality of education, I’ll leave that to another blog.