A Comprehensive Analysis of the Student-Loan Interest-Rate Changes that Are Being Considered by Congress

7/28/2019 A Comprehensive Analysis of the Student-Loan Interest-Rate Changes that Are Being Considered by Congress

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1 Center or American Progress | A Comprehensive Analysis o the Student-Loan Interest-Rate Changes that Are Being Considered by Congre

A Comprehensive Analysis of

the Student-Loan Interest-RateChanges that Are BeingConsidered by CongressBy David A. Bergeron and Tobin Van Ostern June 27, 2013

Te ederal suden-loan programs should operae in a manner ha consisenly pussudens rs and rewards individuals or enrolling in and compleing college. I is a

naional economic imperaive ha we have more college graduaes in our workorce.

Bu ineres on suden-loan deb can sand in he way o some sudens deciding o

enroll, while i may cause ohers o drop ou. Keeping he ineres raes low on suden

loans enables sudens, workers, and people who

are unemployed o ge he possecondary raining

required o adap o new economic realiies.

On July 1, 2013, ineres raes on ederally sub-

sidized Saord suden loans are scheduled odouble rom 3.4 percen o 6.8 percen.1 Ineres

raes on unsubsidized Saord loans and PLUS

loans would remain unchanged a 6.8 percen and

7.9 percen, respecively. On May 23, 2013, we

published a column ha highlighed he dierences

beween he primary proposals being considered.2

In his brie we provide addiional deail and

conex or he curren ineres-rae debae. We also

make policy recommendaions based on he hree

major proposals currenly on he able.

Congress aced o preven an idenical rae hike

rom going ino eec on July 1, 2012,3 and is pre-

paring o ac o keep raes low again his year. Tere

are key dierences, however, beween he various

proposals. Unorunaely, some o he proposals are

Subsidized Staford loans are available to undergraduate students

with nancial need. The ederal government does not charge interest on

a subsidized loan while the student is in school at least hal time, or the

rst six months ater the student leaves school, and during an approved

postponement o loan payments.

Unsubsidized Staford loans are available to both undergraduate and

graduate students; there is no requirement to demonstrate nancial need

The student must pay interest, or it accrues and is added to the principal

amount o the loan.

PLUS loans allow parents o undergraduate and graduate students to

borrow up to the cost o attendancetuition and ees, room and board,

and allowances or living expensesless any other aid.

Pay As You Earn, or PAYE, is an income-based repayment option unde

which eligible borrowers payments are capped at 10 percent o their dis-

cretionary income, with any outstanding balance orgiven ater 20 years.

Definitions of student loans


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worse han he saus quo, paricularly or low- and middle-income sudens ha ake

ou subsidized Saord loans.

Te goal o he ederal suden-aid programs, including he loan programs, is o help

increase access o possecondary educaion. Tese programs have been largely suc-

cessul. Since he mid-1970s, he college-going rae or low-income recen high school

graduaes increased.4 While his rae has gone up, because o increases in he cos ocollege, hese sudens are dependen on loans, wih more sudens borrowing han ever

beore and in larger amouns.

Even hough hey have more

deb, college graduaes are be-

er o: Tey are nearly wice as

likely o nd a job compared o

hose wih only a high school

diploma, and college graduaes

will earn 63 percen more in ayear han hose wih only a high

school diploma. (see Figure 1)

Finally, he majoriy o suden

loans are repaid, and repaymens

will resul in subsanial revenues

o he ederal governmen.

Primary student-loan

interest-rate proposals

As we noed in our May 23,

2013, column,5 here are several

suden-loan proposals currenly on he able ha oer more han anoher one-year

soluion and have elemens ha could be brough ogeher o achieve an agreemen

beore July 1, 2013.

President Obamas proposal

In hisbudge, Presiden Barack Obama used a variable model o deermine loan raes

when hey are issued.6 Aer he loan is made, he ineres rae would remain xed or

he lie o he loan. Te presidens proposal ses he ineres rae o he 10-year reasury

noe plus an addiional 0.93 percen or subsidized Saord loans, 2.93 percen or

unsubsidized Saord loans, and 3.93 percen or PLUS loans. Under Congressional

Budge Oce projecions,7 ha would resul in 2013-14 ineres raes o 3.43 percen or

Figure 1

Unemployment rates and median weekly earnings by educational

attainment, 2012

Doctoral degree

Professional degree

Masters degree

Bachelors degree

Associates degree

Some college,no degree

High schooldiploma

Less thanhigh school diploma

2.5

2.1

3.5

4.5

6.2

7.7

8.3

12.4

1624

1735

1300

1066

785

727

652

471

All workers:

6.8%

All workers:

$815

Unemployment rate in 2012 (%) Median weekly earnings in 2012 ($)

Source: U.S. Bureau o Labor Statistics, Current Population Survey(U.S. Department o Labor, 2013).
http://www.ed.gov/budget14http://www.cbo.gov/publication/43907http://www.cbo.gov/publication/43907http://www.ed.gov/budget14


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subsidized Saord loans, 5.43 percen or unsubsidized Saord loans, and 6.43 percen

or PLUS loans. Unorunaely, he proposal does no include a cap on ineres raes,

nor does i provide or renancing o old loans. Te proposal is inended o be budge

neural, and i neiher coss new money nor generaes new savings.

Rep. John Klines proposal

Te Smarer Soluions or Sudens Ac, or H.R. 1911, passed he U.S. House o

Represenaives on May 23, 2013.12 Te bill, proposed by Rep. John Kline (R-MN),

chairman o he House Commitee on Educaion and he Workorce, would adop a

compleely variable ineres-rae proposal, meaning ha he raes on all loans would uc-

uae rom year o year. Similar o he adminisraions proposal, he ineres rae would

The goal o the ederal student-aid programs,

including the loan programs, is to help increase

access to postsecondary education. These

programs have been largely successul. The

college-going rate or low-income, recent high

school graduates increased rom 31 percent in

1975, three years ater the Pell Grant program

then called the Basic Educational Opportunity

Grantwas created, to 54 percent in 2011.8While not on par with students rom middle- and

upper-income studentsat 66 percent and 82

percent, respectivelysignicant progress has

been made. (see Figure 2)

Today students enrolled in higher education are

more dependent on student loans than they

were in 1975. Indeed, the maximum Pell Grants

met more than hal o the cost o college in the

1980s; today they meet only a third.9

Low-income students, particularly those that depend on Pell Grants, are

more likely to rely on subsidized Staford loans to meet postsecondary

expenses. Low-income students are also more sensitive to changes in

the cost o attending postsecondary education. 10 The additional cost o

borrowing resulting rom an increase in interest rates may thereore deter

enrollment at the very time that education beyond high school is critical

or millions o students and their amilies as they seek to move into or

remain a part o the middle class.

Recent reports rom the Bureau o Labor Statistics now show that colleg

graduates are nearly twice as likely to nd work as those with only a high

school diploma. (see Figure 1)11 An advanced degree provides individua

with a clear path to the middle class, a higher likelihood o meaningul

and gainul employment, and lielong nancial and personal benets.

College education also provides or a skilled workorce that is crucial to

rebuilding the entire American economy.

Federal investment in higher education pays off

Figure 2

Percentage of recent high school graduates enrolling immediately after

high school in 2-year and 4-year degree- granting colleges by income level,

1975 through 2011

20

40

60

80

100

1975 1980 1985 1990 1995 2000 2005 2011

High income

Middle income

Low income

Source: National Center or Education Statistics, Condition of Education 2013 (U.S. Department o Education, 2013).
http://edworkforce.house.gov/smartersolutions/http://edworkforce.house.gov/smartersolutions/


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be ied o he 10-year reasury noe bu wih an add-on o 2.5 percen o boh subsi-

dized and unsubsidized Saord loans and 4.5 percen o PLUS loans. I also includes

a airly high cap on ineres raes8.5 percen or Saord loans and 10.5 percen or

PLUS loans. Unorunaely, he 2.5 percen and 4.5 percen add-ons are more han is

necessary, resuling in $3.7 billion in addiional revenue, which would go oward paying

down he ederal deb. Te proposal also ails o make a meaningul disincion beween

subsidized and unsubsidized Saord loans, and i does no include he Pay As You Earnexpansion or a renancing mechanism.

Sens. Tom Coburn and Richard Burr s proposal

Sens. om Coburn (R-OK) and Richard Burr (R-NC) have a similar proposal wih a

3 percen add-on or all Saord and PLUS loans. Te Coburn-Burr proposal is more

generous o he PLUS borrowers han any oher proposal. As such, he proposal would

mos bene hose wih higher incomes by acually reducing he ineres rae ha would

be charged o PLUS loan borrowers. On June 7, 2013, he Coburn-Burr proposal wasvoed on by he U.S. Senae as an amendmen o he Agriculure Reorm, Food, and Jobs

Ac o 2013 (S. 954) bu i did no pass.13

Sen. Tom Harkin, Senate Majority Leader Harry Reid, and Sen. Jack Reeds proposal

Sen. om Harkin (D-IA), chairman o he Senae Healh, Educaion, Labor, and

Pensions Commitee, pu orh legislaionS. 953wih Senae Majoriy Leader

Harry Reid (D-NV) and Sen. Jack Reed (D-RI) o exend curren suden-loan ineres

raes or wo years.14

Te legislaion, which has 20 co-sponsors, proposes ha subsidizedSaord loans would remain a 3.4 percen or wo years, and oher ineres raes would

be unaeced. Tis legislaion would cos $8.3 billion bu is ully paid or hrough a

package o hree noneducaion oses.

Te oses included in he Harkin-Reid-Reed proposal include closing hree loopholes

relaed o he oil indusry, ax-deerred accouns, and non-U.S. companies. On June 7,

2013, he U.S. Senae considered he bill as an amendmen o he Agriculure Reorm,

Food, and Jobs Ac o 2013, bu a moion o move or a voe ailed o pass.

Sen. Elizabeh Warren (D-MA) has also inroduced a proposal ha is a one-year plan

o se subsidized Saord loan ineres raes a a lower rae han hey are currenly. 15 She

accomplishes his by ying ineres raes o he Federal Reserve discoun rae, which is he

rae he Federal Reserve charges heir member banks or borrowing money. Sen. Warrens

Bank on Sudens Loan Fairness Ac (S. 897) has no been scored by he Congressional

Budge Oce. A companion bill, H.R. 1979, has been inroduced by Rep. John ierney

(D-MA). Sen. Warren is also a co-sponsor o he wo-year exension. Te proposal pres-
http://www.harkin.senate.gov/press/release.cfm?i=342757http://www.harkin.senate.gov/press/release.cfm?i=342757http://www.harkin.senate.gov/press/release.cfm?i=342757http://www.harkin.senate.gov/press/release.cfm?i=342757


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ens signican adminisraive

issues. Since he secreary would

borrow rom he Federal Reserve

or one year, loans made wih

hose unds would have o be

separaely racked, wih paymens

made o he Federal Reserveinsead o all oher loans where

he secreary pays he reasury.

Policy position and

recommendations

I is ime or Congress o adop

a comprehensive suden-loan

ineres-rae approach ha lowersstudent debt levels when compared

to the current policy. Suden-loan

borrowers mus be beter o han hey would be i no acion is aken and he subsidized

Saord suden-loan rae doubles on July 1 o 6.8 percen.

o ensure he long-erm viabiliy o he suden-loan program and ensure greaer equiy,

suden-loan ineres raes should be made variable, xed a he ime he loan is origi-

naed, and capped a a level ha is meaningul. Federal suden loans creae boh privae

and public good. As such, suden-loan ineres-rae changes need o be jusied by more

han jus he excess earnings being applied o deci reducion.

Under curren scoring rules,16 he ederal suden-loan programs reurn signican

savings o axpayers. (see Figure 3) Tis is rue under all o he curren proposals or

seting ineres raes. Te challenge is o develop an approach o ineres raes ha reas

sudens airly.

In he long erm, we believe ha sudens need o know ha ineres raes on heir su-

den loans are se in a manner ha is air and equiable. Generally, sudens knowand

o an exen undersandhe general economic environmen in which hey are living.

Tey know, or example, wha ineres rae is being oered o homebuyers even i hey

don undersand he dierences beween he various home-loan opions available. Te

curren mechanism or seting ineres raes, however, is purely poliical and is hereore

perceived o be inequiable. For his reason, having suden-loan ineres raes vary based

on a marke mechanism would have a signican advanage no only because i would be

air bu also because i would beperceived o be air and would allow borrowers o ake

advanage o odays hisorically low ineres raes.

Figure 3

5- and 10-year cumulative effects of various interest-rate proposals

against baseline, 2013 to 2023

-200000

-150000

-100000

-50000

0Administration Kline

Harkin-Reed-Reid

Coburn-Burr

10-year net

5-year net

10-year baseline

5-year baseline

Source: Center or American Progress analysis o 2013 Congressional Budget Oce scores.Note: The Warren proposal is not included because a score rom the Congressional Budget Oce is unavailable.


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A plan ha relies exclusively on variable ineres raes se by marke mechanisms,

however, would no provide sudens wih proecions agains ineres raes rising dra-

maically in he uure. High ineres raes on suden loans, which would signicanly

increase he cos o going o college, could discourage some sudens rom enrolling and

persising in possecondary educaion.

A plan ha uses a marke mechanism o esablish he suden-loan ineres rae requireshe seting o he base ineres rae and an add-on. Te add-on ineres-rae amoun

should be as low as possible and avoid addiional deci reducions ha shi he

naional deb ono sudens.

In addiion, expanding proecions such as PAYEwhich les borrowers limi heir

monhly paymens o an aordable percenage o heir incomeo include all borrow-

ers, along wih he addiion o a renancing mechanism, would urher srenghen he

ederal suden-loan program. Te PAYE expansion, oulined in he presidens budge

or scal year 2014, would ensure ha all ederal suden-loan borrowers could cap heir

monhly loan paymens o 10 percen o heir income so ha he paymens are aord-able and achievable.

A renancing and loan-modicaion mechanism would provide borrowers wih he

opion o swich heir loans rom heir curren ineres-rae model ino he new sysem.

Conclusion

Te ederal suden-loan programs should operae in a manner ha consisenly pus

sudens rs and rewards individuals or enrolling in and compleing college. Amonglow-income borrowers, who principally bene rom subsidized Saord loans, suden-

loan deb burden can sand in he way o enrolling and compleing a degree or ceri-

cae. Keeping ineres raes low helps people ge he possecondary raining required o

adap o new economic realiies and ensures ha employers have he skilled workorce

hey need o compee. I is ime or Congress o adop a comprehensive suden-loan

ineres-rae approach ha lowers sudens deb burden compared o he curren policy.

Suden-loan borrowers mus be beter o han hey would be i no acion is aken and

he subsidized Saord suden-loan rae doubles on July 1 o 6.8 percen.

David A. Bergeron is the Vice President for Postsecondary Education at the Center for

American Progress. Tobin Van Ostern was formerly the Deputy Director of Campus Progress.


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Appendix

Elements of interest-rate setting

Since he beginning o he ederal suden-loan program, a primary issue has been wha

he ineres rae should be. A number o elemens need o be considered when seting anineres rae. Each o hese elemens are described in his appendix.

Variable or fixed interest-rate loans

Loans are unds ha are provided o an individual wih an expecaion o repaymen

o he amoun provided plus ineres. Te ineres rae on mos loans is xed over he

enire lie o he loan. When a loans ineres rae is xed, he lender ses he ineres rae.

In erms o suden loans, Congress has generally se he ineres rae or he lie o he

loan. In 1992 Congress moved away rom he xed rae o a variable ineres rae. Undera variable-rae approach, he ineres rae changes annually in concer wih he reerence

rae. In 2007 Congress wen back o xed ineres raes in he College Cos Reducion

and Access Ac.17 Subsequenly, Congress emporarily lowered he ineres raes on

subsidized Saord loans. In his FY 2014 budge, Presiden Obama proposed going back

o an alernaive approach o seting a variable ineres rae where he rae is xed or he

lie o he loan a originaion. Tis ype o variable-xed ineres-rae loan has no been

used in he ederal suden-loan programs beore.

Te original inen o a xed rae was o have predicabiliy or sudens, lenders, and

he ederal governmen. A variable ineres rae, ied o he prevailing ineres rae inhe economy, was viewed as more susainable over he long erm han one wih a xed

ineres rae. I was also inended o reduce he cos o he ederal governmen. Te raes,

however, were dicul or borrowers o undersand. In addiion, privae-secor loan ser-

vicers, working under conrac o he lender, oen made errors in billing, which in some

cases wen undeeced or a decade. oday here are ar ewer servicers, and he servicers

can hereore be moniored more closely by he ederal governmen.

Base rate

When seting an ineres rae, a primary consideraion is he cos o he loan program o

axpayers o he paricular ineres rae seleced. When he rae is xed in law, he cos o

a ederal loan program rises and alls wih he cos o capial o he governmen. When

an ineres rae varies, he cos o capial is jus anoher variable ha moves and aecs

he cos o he program. In selecing he base rae o which an add-on may be applied,

hereore, wo acors can be considered: (1) he cos o capial o he ederal govern-

men; and (2) he more general prevailing ineres raes in he economy.


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In erms o cos o capial o he lender, he ederal governmen borrows o mee cur-

ren expenses hrough approximaely 14 dieren unding insrumens ranging rom

4-week reasury bills o 10-year reasury noes o 30-year bonds. One commonly used

insrumen or seting ineres raes is he 91-day reasury bill. Te 91-day reasury

bill accouns or a h o all deb held by he public. Te 91-day reasury bill rae has

been used o se lender yield and ineres raes in ederal loan programs. So i is a logical

insrumen o consider as a base or seting a variable ineres rae.18

Anoher reasury-derived rae ha has been considered by Congress and various

adminisraions or seting suden-loan ineres raes is he 10-year reasury noe. Te

average mauriy o he 10-year reasury noe maches he hisoric norm or he lengh

o repaymen o suden loans. Te average lengh o repaymen will likely increase as

he deb load aken on by sudens increases over ime and he new ypes o repaymen

opions exend he lengh o repaymen. Te Pay As You Earn repaymen opion, or

example, which caps a borrowers paymen a 10 percen o his or her discreionary

income, will likely exend he ime required o repay suden loans. As a resul, an insru-

men o longer duraion20 years or 30 yearscould be jusied.

Anoher base ha some privae-secor lenders have used o se ineres raes or privae

suden loans is he rae a which commercial paper, or CP, rades. CP consiss o shor-

erm promissory noes issued primarily by corporaions. Mauriies range up o 270 days

bu average abou 30 days. Many companies use CP o raise cash needed or curren

ransacions, and many nd i o be a lower-cos alernaive o bank loans. Te Federal

Reserve Board disseminaes inormaion on CP weekly in is H.15 Saisical Release.19

Recenly, anoher alernaive base was proposedhe rae ha he Federal Reserve

charges commercial banks and oher deposiory insiuions on loans hey receive romheir regional Federal Reserve Banks lending aciliy. Tis is known as he discoun rae.

Te discoun rae is he rae charged o he mos sable lending insiuions or overnigh

borrowing. Te discoun raes are esablished by each Reserve Banks board o direcors,

subjec o he review and deerminaion o he Board o Governors o he Federal Reserve

Sysem. While his approach has only been proposed or loans made beween July 1,

2013, and June 30, 2014, i oers anoher alernaive ha has no been in he debae unil

now. I is hereore helpul in expanding he range o opions being considered.

Excep or he 10-year reasury noe, all hree oher insrumens are relaively shor

erm. As a resul, hey ucuae in very similar ways. Te 91-day reasury bill, however,

is consisenly he lowes o he raes, ollowed closely by he discoun rae. Te average

gap beween he 91-day reasury bill and he 10-year reasury noe was jus under

1.75 percen bu ranged beween 0.07 and 3.11 percen over a 15-year period. (see

Figure 4) When compared o he 10-year reasury noe, he 91-day reasury bill, he

commercial paper, and he discoun rae are very volaile, and he mauriy does no

mach ha o suden loans.


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Add-on

Any exercise in lending is

essenially a ranser o risk.

Commonly, crediors price hese

risks by charging hree premi-

ums: (1) inaion premium,(2) liquidiy premium, and (3)

credi-risk premium. ying he

borrowers ineres raes o he

10-year reasury noe (or o any

oher long-erm insrumen)

akes care o he inaion and

liquidiy premiums because

hese raes are se in he bond

markes based on he uure

expecaions o inaionaryrends and he abiliy o sell or

rade he noes.

Te add-on, hereore, only needs o cover he credi risk, which includes he cos o

adminisering he loan program. Te cos o insurance provided o borrowers explicily

and implicily under he ederal suden-loan programdeah, disabiliy, unemploy-

men, ec.is anoher elemen o he credi risk and should be covered.

Beyond covering hese coss, any addiion o he add-on would be pro or axpayers.

I he value o sociey in providing loans o low- and middle-income sudens is highbecause o he impac ha college graduaes have on he naions economic and social

well-being, hen he add-on should be relaively low, wih ederal axpayers holding

more o he credi risk. I he add-on is high, however, i suggess ha he loan program

and he sudens ha beneed rom i are less valuable o sociey.

One alernaive would be o charge no add-on above he base ineres rae. Tis

approach would signal ha here is only public good generaed by he invesmen in

sudens and ha sociey should bear more o he risk. As previously discussed, here are

signican privae benes o suden loans.

Anoher approach would be o charge an add-on equal o he esimaed cos o admin-

isering he ederal suden-loan programs. Tese coss would include he direc cos o

making and servicing he loans as well as he cos o insurance provided o borrowers

under he ederal suden-loan program.

Figure 4

Average interest rates on various financial instruments

0

1

2

3

4

5

6

7

Commercial paper rate

91-day Treasury bill

10-year Treasury note

Federal discount rate

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Board o Governors o the Federal Reserve System, H.15 Selected Interest Rates, June 24, 2013, available at

http://www.ederalreserve.gov/releases/h15/current/.


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10 Center or American Progress | A Comprehensive Analysis o the Student-Loan Interest-Rate Changes that Are Being Considered by Cong

Approaches ha keep he cos o borrowing low make good sense or individuals, includ-

ing hose rom low-income amilies and hose rom cerain deb-averse minoriy groups,

which are also exremely sensiive o he cos o enrolling in higher educaion. For his

reason, a very modes add-on should be considered or low-income sudens. Having

an add-on and resuling ineres rae ha is oo low, however, could cause middle- and

upper-income sudens o borrow more han necessary o mee educaional expenses.

Tis poenial overborrowing, while proable or he ederal governmen, has long-ermimpacs on he economy by suppressing consumer spending, paricularly in key segmens

o he economy such as housing and auomobile sales.20 I is his division ha led o he

dierence in ineres raes charged under he subsidized and unsubsidized loan programs.

Beyond a modes add-on inended only o cover coss or low-income sudens, i is

unclear how an objecive sandard or seting he add-on could be reached. As shown in

Figure 5, low-income sudens rely on boh subsidized and unsubsidized suden loans,

bu so do more afuen sudens. So he disincion beween he wo loan ypes is blurred.

One consideraion is ha setinga higher add-on could preven

excessive borrowing, which

could be an issue in he unsubsi-

dized Saord loan and, perhaps

more signicanly, in PLUS

loans. Because o he relaively

low loan limis on subsidized

Saord loans, prevening exces-

sive borrowing is no a consid-

eraion. Bu i is a legiimaeconsideraion in he unsubsi-

dized Saord and PLUS loan

programs, where ineres raes

ha are oo low could promoe

overborrowing.

Interest-rate ceiling

In addiion o he base rae and he add-on, policymakers mus decide wheher o

include a ceiling or maximum ineres rae ha a borrower could be charged. A ceiling

on he ineres rae charged o borrowers will ensure ha even i he resul o he base

plus add-on exceeds an esablished level, he ineres rae will no go higher han, or

example, 8 percen. Tis is an especially imporan proecion or borrowers ha could

see ineres raes rise o a level ha makes i dicul or hem o make paymens excep

under an income-based repaymen plan. As such, a ceiling on he ineres rae charged is

an imporan proecion or borrowers.

Figure 5

Income percentile rank for all students by Stafford loan types received,

2007 to 2008

0

20

40

60

80

100

Stafford

subsidized

Stafford, both

subsidized and

unsubsidized

Stafford

unsubsidized

Parent PLUS

loan

Highest quintile

Fourth quintile

Middle quintile

Second quintile

Bottom quintile

Source: National Center or Education Statistics, 2007-08 National Postsecondary Student Aid Study (U.S. Department o Education, 2013).


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11 Center or American Progress | A Comprehensive Analysis o the Student-Loan Interest-Rate Changes that Are Being Considered by Cong

Where o se he ceiling is based,

again, more on values han

empirical analysis. Ta being

said, he hisory o suden-

loan ineres raes is insrucive.

Since 1992 suden-loan ineres

raes have ranged rom a low o3.4 percen o a maximum o

8.25 percen, wih an average

o 6.6 percen. (see Figure 6)21

Consisen wih hisorical rends

in ineres raes overall, he rend

has been oward lower ineres

raes. As a resul, a ceiling a or

below he curren unsubsidized

suden-loan ineres rae would

seem reasonable or Saordloans. For PLUS loans, a ceiling

o approximaely 7.5 percen

would seem reasonable.

Refinancing and other borrower protections

As can be seen in Figure 6, suden-loan ineres raes have ucuaed signicanly in

recen years, reecing he cos o capial and o servicing suden-loan deb. Various

oher proecions or sudens could be included in legislaion o keep ineres raes romrising. A renancing opion, or example, could be provided o permi exising borrow-

ers o move ino he new ineres-rae model. Tis would allow borrowers ha currenly

have ineres raes as high as 8.25 percen o move down o he newly esablished rae.

o deray he cos o a renancing program, borrowers could be assessed a one-ime

ee or charged a slighly higher ineres rae similar o he curren consolidaion loans.

Under he consolidaion-loan program available o some borrowers oday, he ineres

rae charged is rounded up o he neares one-eighh o a percen. A dieren round-

ing conveniono he neares 0.5 percen, or examplewould generae addiional

revenues o deray program expenses.

Finally, repaymen ools such as Pay As You Earn could be expanded o help borrowers

who have a dicul ime making paymens on heir loans. While such proecions are

no direcly relaed o suden-loan ineres raes per se, hey do provide a mechanism o

address he mos signican impacs o suden-loan deb on he mos vulnerable.

Figure 6

Highest student-loan interest rate charged, 1992 to 2010

2

4

6

8

10

2010

201

1

2009

201

0

2008

200

9

2007

200

8

2006

200

7

2005

200

6

2004

200

5

2003

200

4

2002

200

3

2001

200

2

2000

200

1

1999

200

0

1998

199

9

1997

199

8

1996

199

7

1995

199

6

1994

199

5

1993

199

4

1992

199

3

Student

PLUS

Source: FinAid, Historical Interest Rates, available at http://www.fnaid.org/loans/historicalrates.phtml(last accessed June 2013).
http://www.finaid.org/loans/historicalrates.phtmlhttp://www.finaid.org/loans/historicalrates.phtml


12/12

12 C t A i P | A C h i A l i th St d t L I t t R t Ch th t A B i C id d b C

Endnotes

1 College Cost Reduction and Access Act, Public Law 84, 110thCong. (September 27, 2007), available at http://www.gpo.gov/dsys/pkg/PLAW-110publ84/pd/PLAW-110publ84.pd.

2 David A. Bergeron and Tobin Van Ostern, Proposals toBring Student-Loan Interest Rates Under Control,Centeror American Progress, May 23, 2013, available at http://

www.americanprogress.org/issues/higher-education/news/2013/05/23/64254/proposals-to-bring-student-loan-interest-rates-under-control/.

3 Moving Ahead for Progress in the 21st Century Act, Public Law112-141.

4 Susan Aud and others, The Condition o Education 2013(Washington: National Center or Education Statistics, 2013),available at http://nces.ed.gov/pubs2013/2013037.pd.

5 Bergeron and Van Ostern, Proposals to Bring Student-LoanInterest Rates Under Control.

6 U.S. Department o Education, Fiscal Year 2014 Budget:Summary and Background Information (2013), available athttp://www2.ed.gov/about/overview/budget/budget14/summary/14summary.pd.

7 Congressional Budget Oce, CBOs Reestimate o the

Presidents 2014 Mandatory Proposals or PostsecondaryEducation (2013), available at http://www.cbo.gov/publica-tion/44232.

8 National Center or Education Statistics, 2012 Digest oEducation Statistics, Table 236, Percentage o recent highschool completers enrolled in 2-year and 4-year colleges,by income level: 1975 through 2011, available at http://nces.ed.gov/programs/digest/d12/tables/dt12_236.asp (lastaccessed June 2013).

9 Tyler Kingkade, Pell Grants Cover Smallest Portion OCollege Costs In History As GOP Calls For Cuts, TheHungton Post, August 29, 2012, available at http://www.hungtonpost.com/2012/08/27/pell-grants-college-costs_n_1835081.html;The Institute or College Accessand Success, Pell Grants Help Keep College Aordable orMillions o Americans (2013), available at http://www.ticas.org/fles/pub/Overall_Pell_1-pager_2-15-12.pd.

10 Augenblick, Palaich, and Associates, Price Sensitivity In

Student Selection O Colorado Public Four-Year HigherEducation Institutions (2012), available at http://highered.colorado.gov/Publications/Studies/2012/201201_PriceSen-sitivity_APA.pd.

11 U.S. Bureau o Labor Statistics, Earnings and unemploy-ment rates by educational attainment, May 22, 2013, avail-able at http://www.bls.gov/emp/ep_chart_001.htm.

12 House Education and the Workorce Committee, TheSmarter Solutions or Student Loans Act, available at http://edworkorce.house.gov/smartersolutions/ (last accessedJune 2013).

13 Chris Casteel, Oklahoma Sen. Tom Coburn loses bid tochange student lo an rates,, The Oklahoman, June 7, 2013,

available at http://newsok.com/oklahoma-sen.-tom-coburn-loses-bid-to-change-student-loan-rates/article/3842538)(http://thomas.loc.gov/cgi-bin/bdquery/z?d113:s.954.

14 U.S. Senate Committee on Health, Education, Labor, & Pen-sions, Senators Introduce Fully Paid-For Legislation to Pre-vent Student Loan Rate Hike, Press release, May 15, 2013,available at http://www.help.senate.gov/newsroom/press/release/?id=483746e-8915-4b96-a160-a2396191db4b.

15 Oce o Sen. Elizabeth Warren, Bank on Students Loan Fair-ness Act Fact Sheet (2013), available at http://www.warren.senate.gov/documents/BankonStudentsFactSheet.pd.

16 There has been some discussion about whether the currentscoring rules are appropriate or assessing the cost o theederal student-loan programs. The issue o score rules isbeyond the scope o this analysis. I nterested parties are en-couraged to see John Grith, An Unair Value or Taxpayers(Washington: Center or American Progress, 2012), available

at http://www.americanprogress.org/issues/budget/re-port/2012/02/09/11094/an-unair-value-or-taxpayers/.

17 College Cost Reduction and Access Act.

18 Oce o Debt Management, Fiscal Year 2013 Q1 Report(TheDepartment o the Treasury, 2013), available at http://www.treasury.gov/resource-center/data-chart-center/quarterly-reunding/Documents/TBAC_Discussion_Charts_Feb_2013.pd.

19 Board o Governors o the Federal Reserve System, H.15Selected Interest Rates, June 24, 2013, available at http://www.ederalreserve.gov/releases/h15/current/.

20 Meta Brown and Sydnee Caldwell, Young Student LoanBorrowers Retreat rom Housing and Auto Markets, LibertyStreet Economics, April 17, 2013, available at http://libertys-treeteconomics.newyorked.org/2013/04/young-student-loan-borrowers-retreat-rom-housing-and-auto-markets.html.

21 FinAid, Historical Interest Rates, available at http://www.fnaid.org/loans/historicalrates.phtml (last accessed June2013).
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