Are federal student loan interest rates too high?
Jose Espada Apr 25, 2012
Student Loan interest rates are back in the news again. President Obama touched on the interest rates in his State of the Union address in January 2012. This time everyone appears to be on board to make a change. Even though, during the current fiscal year (July 1, 2011-June 30, 2012) undergraduate students have been paying 3.4% on unsubsidized loans and the federal government is paying 3.4% on subsidized loans (while the student is in school), the news media is ignoring the fact that graduate students have been paying 6.8% on unsubsidized loans all along. They were not given the same break the undergraduate student population received 5 years ago.
Are student loan interest rates too high? As you look historically at student loan interest rates, there was a time in the 1980’s when Federal Stafford Loan interest rates were much higher than they are today. Prior to 1988, the Federal Stafford Loan interest rate was 9% and for a brief period between 1988 and 1992, the rates were a hybrid 8% – 10%, where the first four years of repayment the interest rate was 8% and then it jumped to 10% for the remaining 6 years of a standard loan repayment period. It wasn’t until after 1993 that Congress made Federal Stafford Loan interest rates a priority and based it on a variable rate using the 91-day Treasury bill. Initially, in 1992 the Federal Stafford Loan interest rate was set each July 1 using the 91-day Treasury bill plus 3.1%. In 1995, that formula was revised to the 91-day Treasury bill plus 2.5%. Later in 1998, Congress approved the formula to be the 91-day Treasury bill plus 1.7%. In 2006, Congress moved to fix the interest rates at the present 6.8%. This was done to stabilize the program’s cost after a 5 year stretch where interest rates were at their historical lows (ranging from 2.77 – 5.39%). In 2004, the interest rate was 2.77%. In fact, just this year the variable interest rate formula puts the interest rate at its lowest in history at 1.72%. This is for students who borrowed the Federal Stafford Loan prior to July 1, 2006.
You can imagine how fortunate former students are who took out student loans during the period when interest rates were based on the 91-day Treasury Bill plus 1.7% (from 1998 – 2006). Among our Class of 2012 graduating medical students, we have a few students graduating who took the option to consolidate loans taken out during the variable rate era and locked in the interest rates in at 2.875 (in 2005) so that today, their rates are slightly higher than when they took out the loan (in 2004).
So, as you can see, the federal government has made significant strides to lower and control the interest rates on federal student loans. Can they do more? Absolutely! When you consider that the graduate student has taken the brunt of Congress’s more recent changes in the program. There is an argument that things should be equitable across the board. The Debt Ceiling legislation in July 2011 was yet another hit that graduate student took when the Subsidized Federal Stafford Loan was eliminated for their population, but left intact for the undergraduate population. Additionally, the origination fee rebates for graduates were also eliminated causing the graduate student to pay more for the use of the funds, but not so for the undergraduate students. Also, graduate students are feeling the pinch when they have to borrow the more expensive Federal Graduate PLUS Loan at 7.9%. Why not expand the unsubsidized loan to the cost of attendance and eliminate the Grad PLUS Loan altogether?
Ask my opinion, and I would say it is about time. Especially since the government is now the only student loan provider and does not need to subsidize lenders, like in the past.