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A Primer on the Doubling of the Subsidized Stafford Loan Interest Rate

Mark Kantrowitz

April 24, 2012

This article summarizes the background concerning the doubling of the interest rate on new subsidized Stafford loans to undergraduate students from 3.4% to 6.8% on July 1, 2012. It also discusses the impact of the pending change. [Congress passed a one-year extension to the 3.4% interest rate on June 29, 2012.]

Background

The College Cost Reduction and Access Act of 2007 (P.L. 110-84) enacted a phased-in interest rate reduction on subsidized Stafford loans to undergraduate students, gradually reducing the interest rates from 6.8% to 3.4%. This legislation was enacted to fulfill the Democrats’ “Six for ’06” pledge to slash the interest rates on student loans in half.

The interest rate reduction applied only to subsidized Stafford loans to undergraduate students. The interest rates on unsubsidized Stafford loans to undergraduate students remained at 6.8%, as did the interest rates on subsidized and unsubsidized Stafford loans to graduate and professional students. The interest rates on PLUS loans remained at 8.5% (FFELP) and 7.9% (Direct Loans).

Congress did not reduce the interest rates on other types of federal education loans because of the high cost of the legislation. Congress also phased-in the interest rate reductions to reduce the cost. Likewise, the legislation did not permanently reduce the interest rate to 3.4% because of the cost, which is about $6 billion for each year’s worth of 3.4% rate loans.

The interest rates were reduced from 6.8% in 2007-08 to 6.0% in 2008-09, 5.6% in 2009-10, 4.5% in 2010-11 and 3.4% in 2011-12. If Congress does not act, the interest rates will be 6.8% in 2012-13 and subsequent award years. (Award years start on July 1 and end on June 30.)

The original interest rate reduction fulfilled a 2006 campaign pledge, so it’s not surprising that that expiration would be timed to coincide with an election year. Congress normally passes legislation with a 5-year or 10-year window. This legislation involved a 4-year window. The doubling of the interest rate also yields a dramatic issue that may motivate middle-income voters.

What is Changing?

The fixed interest rate on new subsidized Stafford loans to undergraduate students will be doubling on July 1, 2012, increasing from 3.4% to 6.8%.

What isn’t Changing?

The interest rates on unsubsidized Stafford loans to undergraduate and graduate students remain unchanged at 6.8%.

The interest rate on subsidized Stafford loans to graduate and professional students remained at 6.8%. However, graduate and professional students will no longer receive subsidized Stafford loans starting July 1, 2012, due to changes enacted by the Budget Control Act of 2011. Graduate and professional students can still borrow the same amount of money, but it will be entirely unsubsidized.


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