Past Students Would Have Saved Up To $1,500 With Obama’s Proposed Student Loan Reform

Loans, Student Loans
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Summary:

On July 1st, legislation set to keep subsidized Stafford student loan rates at 3.4% is set to expire, doubling the rate to 6.8%.  President Obama has taken a proactive step towards addressing the issue in his 2014 Budget Proposal.  His proposal ties student loan rates to the market—specifically to the 10-year Treasury bill.  NerdScholar applied Obama’s proposal to recent years that student loans have had fixed rates—how would this proposal have changed student loan payments in the past 7 years, if it had been in effect?

Key findings: 

  • If President Obama’s proposed rates had been in effect during the years of fixed Stafford student loan rates (2006-2013), the weighted average rates would have been consistently lower each year.
  • For each year of loans students, interest rates would have been an average of .83% lower, costing students $330 less.
  • In this time period, the average 4-year student would have saved an average of $1,300, or a range from $1,030 to $1,430.

Background: 

Currently subsidized loans have a fixed interest rate of 3.4% and unsubsidized loans have a fixed interest rate of 6.8%. However, after July 1st the subsidized Stafford student loan rates are set to double from 3.4% to 6.8%.  Obama’s proposed budget will have Stafford loans tied to the ten-year Treasury bill.  Subsidized loans will have an interest rate of .93% on top of the ten-year Treasury bill rate.  Unsubsidized loans will have an interest rate of 2.93% on top of the ten-year Treasury bill rate. 

Current Interest Rate

Interest Rate After Legislation Expires July 1st

Interest Rate Under Obama’s Budget

Subsidized Stafford Loans

3.40%

6.80%

Ten-Year Treasury Bill Interest Rate + .93%

Unsubsidized Stafford Loans

6.80%

6.80%

Ten-Year Treasury Bill Interest Rate + 2.93%

History of Student Loan Rates: 

This isn’t the first time that student loan rates have been tied to the market.  In fact, in recent history, it was the norm that student loans were tied to market rates.  The past 7 years have been fixed rates, but from 1992-2006 student loan rates had been tied to the 91-day Treasury bill.

Past Fixed Rates versus Market Rates: 

Student loan interest rates were switched to fixed rates in an attempt to keep rates consistent and low for students.  However, if we applied Obama’s budget proposal retroactively we see that weighted subsidized and unsubsidized Stafford loan rates would have been consistently lower than their fixed counterparts.  If the rates had been tied to the market, on average they would have been .83% lower.

Actual Enacted Weighted Fixed Interest Rates Hypothetical Weighted Interest Rates Under Obama’s Budget Proposal The difference between the interest rates
2006-2007 6.80% 6.73% -0.07%
2007-2008 6.80% 6.11% -0.69%
2008-2009 6.41% 5.27% -1.15%
2009-2010 6.22% 5.52% -0.71%
2010-2011 5.69% 5.05% -0.65%
2011-2012 5.16% 4.05% -1.12%
2012-2013 5.16% 3.73% -1.44%
Average 6.04% 5.20% -0.83%

 

When these rates are applied to the average 4-year student’s loans during this time period, the savings range depending on the time period.  The high was $1,430 for students between 2009-2013 and the low was $1,030 for students between 2006-2010.

Range of Savings from 2006-2013

Savings
High $1,430
Average $1,300
Low $1,030

 

Currently, one of the major points of contention is the lack of a cap on the interest rates in Obama’s budget proposal.  Historically the cap has been at 8.25% and out of 14 years of interest rates tied to the market from 1992-2006, the cap has been reached 5 times.