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Mark Kantrowitz on July 1, 2013 Stafford Loan Interest Rates Increase
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Mark Kantrowitz on July 1, 2013 Stafford Loan Interest Rates Increase

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If Congress does not act, interest rates on new subsidized Stafford loans will double from 3.4% to 6.8% on July 1, 2013. …

If Congress does not act, interest rates on new subsidized Stafford loans will double from 3.4% to 6.8% on July 1, 2013.

Mark Kantrowitz, nationally-recognized expert on student financial aid, scholarships and student loans, presented during a webinar for the Countil on Law in Higher Education. Here is the PowerPoint used during his presentation. Here is an article he wrote to summarize his talk: http://www.studentloannetwork.com/tips/financial-aid/will-student-loan-interest-rates-double-on-july-1/

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  • 4. Why waste a good campaign pledge on just one election?
  • 1c. Congress might do what Congress does best, which is nothing. The last session of Congress was the least productive in history.
  • 0. The doubling of the interest rate on new subsidized Stafford loans may sound dramatic, but the actual impact on the typical borrower is minimal.
  • 1. But Reauthorization might not happen on time. The last reauthorization took five years.
  • 2. Republican, failed Senate 40-57 3. Republican, passed House 221-198 along party lines, President Obama threatened veto4. Democrat, passed Senate 51-46, but fell short of 60 votes needed to block a filibuster7,8. Margin to be determined by the US Department of Education based on administrative costs9. Democrat. Rate charged by the Federal Reserve for overnight loans to banks.10. BipartisanAs of May 2012, 91-day T-Bill was 0.09% and 10-year Treasury was 1.86%. As of May 2013, 91-day T-Bill was 0.05% and 10-year Treasury was 1.81%.http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldhttp://www.treasurydirect.gov/RI/OFAuctions?form=histQuerySub Stafford rates: 2.74%, 4.81%, 4.31% (variable), 3.4%, 3.4%, 3.4%, ?, ?, 0.75%, 4.31%/5.31%Unsub Stafford rates: 4.74%, 4.81%, 4.31% (variable), 6.8%, 6.8%, 6.8%, ?, ?, 6.8%, 4.31%/5.31%PLUS rates: 5.74%, 4.81%, 6.31% (variable), 7.9%, 7.9%, 7.9%, ?, ?, 7.9%, 6.31%
  • 4a Democrat4b Republican
  • 1b. Initially reduce interest rates on all new federal education loans, but allow interest rates to rise later, in some cases without any caps on the interest rates. 1c.The economic assumptions used by CBO are very conservative, meaning that in all likelihood the interest rates will increase much more than the CBO projects, perhaps even to double-digit levels.

Transcript

  • 1. Copyright © Edvisors Network, Inc. (www.edvisors.com)Will Student LoanInterest Rates Double on July 1?
  • 2. Confidential, Distribute Only as permitted by Edvisors Network, Inc.Copyright © Edvisors Network, Inc. (www.edvisors.com) 2Copyright © Edvisors Network, Inc. (www.edvisors.com) 2 From October 1, 1981 to September 30, 1992, the GSL andSLS loans had hybrid fixed/variable rates, where each year‟sloans had a new fixed rate with caps as high as 14%. From October 1, 1992 to June 30, 2006, Stafford and PLUSloans had variable rates with caps as high as 9% and 12%. Untitled legislation enacted on February 8, 2002 (P.L. 107-139) scheduled a switch to fixed rates of 6.8% and 7.9%effective July 1, 2006. The Higher Education Reconciliation Act of 2005, enacted onFebruary 8, 2006 as part of the Deficit Reduction Act of 2005(P.L. 109-171), changed the PLUS loan interest rate from7.9% to 8.5%. Due to a legislative drafting error, this changeapplied only to FFEL program loans and not to direct loans.Background
  • 3. Confidential, Distribute Only as permitted by Edvisors Network, Inc.Copyright © Edvisors Network, Inc. (www.edvisors.com) 3 Democrats pledged to slash interest rates on student loans in half aspart of their “Six for „06” election year agenda. The College Cost Reduction and Access Act of 2007 (P.L. 110-84), enacted on September 27, 2007, implemented a phased-ininterest rate reduction to the subsidized Stafford loan forundergraduate students only, cutting the interest rate from 6.8% to3.4%. Interest rates decreased to 6.0% in 2008-09, 5.6% in 2009-10, 4.5%in 2010-11 and 3.4% in 2011-12. Since the 3.4% rate would have expired in the middle of an electionyear, Congress passed a one-year extension as part of a pair oftransportation spending bills.– The Temporary Surface Transportation Extension Act of 2012 (P.L. 112-140), enacted on June 29, 2012, delayed disbursement of federal studentloans until July 6, 2012.– The Moving Ahead for Progress in the 21st Century Act MAP-21 (P.L. 102-141), enacted on July 6, 2012, extended the 3.4% rate for a year at a costof $6 billion.Phased-in Interest Rate Reduction
  • 4. Confidential, Distribute Only as permitted by Edvisors Network, Inc.Copyright © Edvisors Network, Inc. (www.edvisors.com) 4Year Stafford PLUS10/1992 – 6/1994 91-day T-Bill + 3.1%, 9.0% cap CMT + 3.1%, 10.0% cap7/1994 – 6/1995 91-day T-Bill + 3.1%, 8.25% cap CMT + 3.1%, 9.0% cap7/1995 – 6/1998 91-day T-Bill + 3.1%, 8.25% cap CMT + 3.1%, 9.0% cap7/1998 – 6/2006 91-day T-Bill + 2.3%, 8.25% cap 91-day T-Bill + 3.1%, 9.0% cap7/2006 – 6/2008 Sub 6.8%, Unsub 6.8% 7.9% (DL), 8.5% (FFEL)7/2008 – 6/2009 Sub 6.0%, Unsub 6.8% 7.9% (DL), 8.5% (FFEL)7/2009 – 6/2010 Sub 5.6%, Unsub 6.8% 7.9% (DL), 8.5% (FFEL)7/2010 – 6/2011 Sub 4.5%, Unsub 6.8% 7.9% (DL)7/2011 – 6/2012 Sub 3.4%, Unsub 6.8% 7.9% (DL)7/2012 – 6/2013 Sub 3.4%, Unsub 6.8% 7.9% (DL)7/2013 – Sub ???, Unsub 6.8% 7.9% (DL)History of Interest Rates (Repayment)
  • 5. Confidential, Distribute Only as permitted by Edvisors Network, Inc.Copyright © Edvisors Network, Inc. (www.edvisors.com) 5 If Congress does not act, new subsidized Stafford loans madeon or after July 1, 2013 will be at the 6.8% interest rate– Congress is not likely to act since this year they do not face the addedpressure of an election.– If Congress does act, it will be at the last minute. Old loans are not affected, only new subsidized Stafford loans Interest rates if Congress does not act:What will happen on July 1, 2013?Loan Interest Rate FeesSubsidized Stafford Loan (Undergrad) 6.8% fixed 1%Unsubsidized Stafford Loan (Undergrad, Grad) 6.8% fixed 1%Grad PLUS Loan 7.9% fixed 4%Parent PLUS Loan 7.9% fixed 4%
  • 6. Confidential, Distribute Only as permitted by Edvisors Network, Inc.Copyright © Edvisors Network, Inc. (www.edvisors.com) 6 Each year about 30% of undergraduate students receivesubsidized Stafford loans (40% by graduation)– One year debt = $3,357– Debt at graduation = $9,008– Bachelor‟s degree recipients = $11,329– Aggregate limit = $23,000 Impact on typical borrower, assuming 10-year term andaverage subsidized Stafford loan amountsImpact on BorrowersDebt Extra Interest Extra Amount Per Month$3,357 $761 < $7$9,008 $2,043 < $18$11,329 $2,570 < $24$23,000 $5,217 < $48
  • 7. Confidential, Distribute Only as permitted by Edvisors Network, Inc.Copyright © Edvisors Network, Inc. (www.edvisors.com) 7 Delay Decision– Temporary extension of the 3.4% interest rate (or a lower rate) for 1, 2or 4 years so Congress can seek a “permanent” solution as part ofreauthorization of the Higher Education Act of 1965 Immediate Decision– Congress enacts a “permanent” solution now pegged to the 10-yearTreasury rate plus a marginTwo Main Options for Action
  • 8. Confidential, Distribute Only as permitted by Edvisors Network, Inc.Copyright © Edvisors Network, Inc. (www.edvisors.com) 8Proposal Subsidized Stafford Unsubsidized Stafford PLUSPresident Obama 10-year Treasury + 0.93%fixed, no cap10-year Treasury + 2.93%fixed, no cap10-year Treasury + 3.93%fixed, no capSens. Coburn, Burr,Alexander (S.682)10-year Treasury + 3.0%fixed, no cap10-year Treasury + 3.0%fixed, no cap10-year Treasury + 3.0%fixed, no capReps. Kline, Foxx(H.R.1911)10-year Treasury + 2.5%variable, 8.5% cap10-year Treasury + 2.5%variable, 8.5% cap10-year Treasury + 4.5%variable, 10.5% capSens. Reed, Reid, Harkin(S.953)3.4% fixed for two years No change No changeRep. Courtney (H.R.1595) 3.4% fixed for two years No change No changeRep. Sinema (H.R.1876) 3.4% fixed for four years No change No changeSens. Reed, Durbin(S.909)91-day T-bill + TBD%variable, 6.8% cap91-day T-bill + TBD%variable, 8.25% cap91-day T-bill + TBD%variable, 8.25% capRep. Tierney (H.R.1946) 91-day T-bill + TBD%variable, 6.8% cap91-day T-bill + TBD%variable, 8.25% cap91-day T-bill + TBD%variable, 8.25% capSen. Warren 0.75% for one year No change No changeSen. Manchin III, Coburn,King Jr., BurrU: 10-year Treasury + 2.5%G: 10-year Treasury + 3.5%fixed, no capU: 10-year Treasury + 2.5%G: 10-year Treasury + 3.5%fixed, no cap10-year Treasury + 4.5%fixed, no capMany Proposals
  • 9. Confidential, Distribute Only as permitted by Edvisors Network, Inc.Copyright © Edvisors Network, Inc. (www.edvisors.com) 9 Lack of a cap on the interest rate Disagreement on the interest rates scheme and margins– Hybrid fixed/variable– Fixed– Variable– Just subsidized Stafford or all loans (and one rate or several) Length of extension– One-year extension delays decision into the mid-term elections How to spend the savings– Extend Pay-as-You-Earn Repayment to all borrowers– Reduce the budget deficitSeveral Areas of Disagreement
  • 10. Confidential, Distribute Only as permitted by Edvisors Network, Inc.Copyright © Edvisors Network, Inc. (www.edvisors.com) 10 The cure may be worse than the disease– Some proposals do not include rate caps, so interest rates couldpotentially reach double digits in just a few years– Many proposals involve interest rate increases masquerading asdecreases– CBO scored some legislation as saving the governmentmoney, meaning that borrowers will pay more Distracts from the real problem, which is an increase in theamount of debt, not in the cost of debtCriticism
  • 11. Confidential, Distribute Only as permitted by Edvisors Network, Inc.Copyright © Edvisors Network, Inc. (www.edvisors.com) 11 No good workarounds for borrowers, other than to minimizeneed for debt Borrow to the limit before July 1?– Eligibility is based on financial need capped at loan limits, so borrowersdo not have much discretion to borrow more– Students cannot borrow next year‟s loans now to lock in the current rateWorkarounds for Borrowers
  • 12. Confidential, Distribute Only as permitted by Edvisors Network, Inc.Copyright © Edvisors Network, Inc. (www.edvisors.com) 12 Increase the interest rates charged to borrowers, yieldingmore revenue to the federal government– Covers cost of extending PAYER to all borrowers, and– Yields some deficit reduction Include an interest rate cap to prevent future double-digitinterest ratesPossible Path to a Compromise?
  • 13. Confidential, Distribute Only as permitted by Edvisors Network, Inc.Copyright © Edvisors Network, Inc. (www.edvisors.com) 13 Follow Mark Kantrowitz on Twitter at @mkantThank You