History of student loan interest rates
The tumultuous history of student loan interest rates is characterized by bipartisan indecision, delayed legislation and temporary solutions. Understanding the events is key to analyzing interest rates’ current trajectory. Here’s a summary of the last 20 years in student loans.
The following information is from the New America Foundation.
1992-93: (6.94%) Variable interests rates are introduced for federal student loans. Rates are determined annually by short-term U.S. Treasury bills plus 3.1% (maximum of 9%). Loans issued in the preceding 10 years retain an 8% to 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 tied to long-term U.S. Treasury bonds rather than short-term bills. Rates equal what it costs the Treasury to borrow, plus 1%.
1994-95: (7.43%) The variable rate maximum drops from 9% to 8.25%.
1998-99: (7.46%) The interest rate change set to begin in 1998 is postponed another five years. Congress had predicted the direct loan program would replace private lenders by ’98, but 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 would provide lower interest rates for borrowers. Some loan industry representatives and lawmakers propose abandoning the plan and continuing 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 last 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 four years before reverting 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 America Foundation, interest rates would only have 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 July 1, 2012. Rates revert to 6.8%.
- April 27, 2012: The House of Representatives passes a bill to extend the 3.4% interest rate by redirecting funds from 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.
- May 8, 2012: Senate Republicans block a Democratic bill that would have paid for the one-year extension by eliminating a tax break for S corporations (those that pass through profits and losses to shareholders, who number 100 or fewer). It would have forced high-earning stockholders to pay additional Social Security and Medicare payroll taxes.
Some borrowers can lower their interest rates through student loan refinancing.
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