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

Mark Kantrowitz

April 24, 2012

Impact

The average undergraduate subsidized Stafford loan in 2007-08 was $3,357. The average undergraduate subsidized Stafford loan debt at graduation was $9,008 in 2007-08. The average subsidized Stafford loan debt at graduation for Bachelor’s degree recipients in 2007-08 was $11,329. (For an Associate’s degree the average subsidized Stafford loan debt at graduation was $6,588 and for Certificates it was $4,726.) The annual limit on undergraduate subsidized Stafford loans is $3,500 for freshmen, $4,500 for sophomores, $5,500 for juniors and $5,500 for seniors. The aggregate subsidized Stafford loan limit is $23,000.

Depending on the amount of debt and the repayment term, one can arrive at different cost figures for an increase in the interest rate from 3.4% to 6.8%.

The following figures assume that the borrower does not capitalize the interest during the 6-month grace period.

• For $3,357 in subsidized Stafford loan debt, the increased cost is $671 on a 10-year repayment term, $827 on a 12-year repayment term and $1,519 on a 20-year repayment term. That’s less than $7 per month.
• For $5,500 in subsidized Stafford loan debt, the increased cost is $1,100 on a 10-year repayment term, $1,355 on a 12-year repayment term and $2,488 on a 20-year repayment term. That’s less than $11 per month.
• For $9,008 in subsidized Stafford loan debt, the increased cost is $1,801 on a 10-year repayment term, $2,219 on a 12-year repayment term and $4,075 on a 20-year repayment term. That’s less than $17 per month.
• For $11,329 in subsidized Stafford loan debt, the increased cost is $2,265 on a 10-year repayment term, $2,791 on a 12-year repayment term and $5,125 on a 20-year repayment term. That’s less than $22 per month.
• For $23,000 in subsidized Stafford loan debt, the increased cost is $4,599 on a 10-year repayment term, $5,666 on a 12-year repayment term and $10,405 on a 20-year repayment term. That’s less than $44 per month.

The following figures assume that the borrower capitalizes the interest during the 6-month grace period.

• For $3,357 in subsidized Stafford loan debt, the increased cost is $761 on a 10-year repayment term, $925 on a 12-year repayment term and $1,649 on a 20-year repayment term. That’s less than $7 per month.
• For $5,500 in subsidized Stafford loan debt, the increased cost is $1,248 on a 10-year repayment term, $1,515 on a 12-year repayment term and $2,702 on a 20-year repayment term. That’s less than $12 per month.
• For $9,008 in subsidized Stafford loan debt, the increased cost is $2,043 on a 10-year repayment term, $2,481 on a 12-year repayment term and $4,425 on a 20-year repayment term. That’s less than $18 per month.
• For $11,329 in subsidized Stafford loan debt, the increased cost is $2,570 on a 10-year repayment term, $3,120 on a 12-year repayment term and $5,565 on a 20-year repayment term. That’s less than $24 per month.
• For $23,000 in subsidized Stafford loan debt, the increased cost is $5,217 on a 10-year repayment term, $6,335 on a 12-year repayment term and $11,299 on a 20-year repayment term. That’s less than $48 per month.

The President’s Proposal

President Obama is proposing to extend the 3.4% interest rate for an additional year.

President Obama and Senate Democrats propose to pay for the cost of the extension by ending a loophole in the tax treatment of S corporation income. House Democrats would pay for the cost by cutting oil subsidies. House Republicans announced their own proposal for extending the 3.4% interest rate on 4/25/2012, which they would pay for by tapping into the health care prevention fund established by the Health Care and Education Reconciliation Act of 2010. The House Republican bill passed the House on 4/27/2012 by a vote of 215 to 195, along party lines. President Obama has threatened to veto it. On 5/8/2012 the Senate Democratic bill failed to achieve the 60-vote supermajority necessary to prevent a filibuster, falling short by 8 votes. Both parties now support keeping the interest rate on new subsidized Stafford loans to undergraduate students at 3.4% for an additional year, but disagree on how to pay for it. Each side is proposing a funding mechanism that is unacceptable to the other side. If a compromise is reached, it will most likely occur at the last minute, toward the end of June 2012. [Updated 5/14/2012.] On June 7, 2012, Senate Majority Leader Harry Reid (D-NV) sent a letter to House Speaker John Boehner and Senate Minority Leader Mitch McConnell proposing to pay for the cost of the interest rate extension by modifying pension plan rules. The proposal would stabilize fluctuations in calculation pension plan contributions, yielding fewer business tax deductions for contributions to pension plans. It would also increase the premiums paid by employers for federal insurance provided by the Pension Benefit Guaranty Corporation. [Updated 6/18/2012.] On June 29, 2012, Congress passed a one-year extension to the 3.4% interest rate with strong bipartisan support. [Updated 6/29/2012.]

The cost of one additional year of 3.4% rate loans is approximately $5.6 billion on a net present value basis, assuming 7.4 million borrowers of an average of $3,357 in subsidized Stafford loans, with interest capitalized during the 6-month grace period, a 12 year repayment term and a 2% discount rate. The Congressional Budget Office (CBO) estimates a higher $6.7 billion cost, perhaps by assuming a higher average loan amount or a longer repayment term.


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