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ERIC Number: ED540303
Record Type: Non-Journal
Publication Date: 2012-Feb
Pages: 11
Abstractor: ERIC
Reference Count: N/A
Federal Student Loan Interest Rates: History, Subsidies, and Cost. Issue Brief
Delisle, Jason
New America Foundation
The 2011 Occupy Wall Street protests brought countless media reports about unemployed college graduates struggling to repay their student loans and headlines sounding alarms that outstanding student loan debt will soon reach $1 trillion. Even though evidence is mixed on whether today's college graduates leave school with significantly more debt than students did a decade ago, public anxiety over student indebtedness has led some to scrutinize the repayment policies that Congress and the U.S. Department of Education set on federal student loans. Federal loans account for more than $650 billion of the $845 billion in outstanding student loans. In particular, many observers have questioned the 6.8 percent fixed interest rate the government currently charges on the most widely-available type of federal student loan (Unsubsidized Stafford) given that interest rates on other loans, such as home mortgages, are now at record lows. In the same vein, many are puzzled as to why a temporary reduction on interest rates for a subset of loans (Subsidized Stafford loans) in effect since 2008 expires this year. Relatedly, some observers--including members of Congress--claim that that the federal government is making a profit on student loans because it charges higher rates than it pays to borrow. They point to official cost estimates that appear to show that borrowers receive "negative subsidies" on their student loans. This issue brief examines the claims and arguments outlined above. It explains why Congress set the interest rate on federal student loans at a fixed 6.8 percent rate and why Congress temporarily reduced this rate to 3.4 percent for certain loans. It also argues that federal student loan interest rates are still favorable even in today's low rate environment, and that current rates provide borrowers with subsidies and better terms than are available in the private market. This issue brief disputes the argument that the government's low cost of borrowing suggests that student loan interest rates are unfavorably high for borrowers. It concludes with an explanation of why official cost estimates, which suggest that student loan interest rates earn revenue for the government, do not fully account for the costs of the program. (Contains 39 notes.)
New America Foundation. 1899 L Street NW Suite 400, Washington, DC 20036. Tel: 202-986-2700; Fax: 202-986-3696; Web site:
Publication Type: Reports - Descriptive
Education Level: Higher Education; Postsecondary Education
Audience: N/A
Language: English
Sponsor: N/A
Authoring Institution: New America Foundation
Identifiers - Laws, Policies, & Programs: Stafford Student Loan Program