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Study Endorses Cutting Student Loan Rates in Half

January 5, 2007

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Cutting student loan interest rates in half will save the average working and middle class borrower $4,420 over the life of their loans, according to a new report by U.S. PIRG's Higher Education Project.

The Congressional proposal would lower interest rates on undergraduate subsidized Stafford loans over the next five years until they are cut in half to 3.4% starting in 2011. In 2004-2005 more than five and a half million students took out subsidized Stafford loans to pay for college.

"Over the past decade we have asked America's college students to shoulder a heavy burden of debt to pay for college," said Luke Swarthout, U.S. PIRG Higher Education Advocate. "Cutting interest rates on student loans will help millions of working and middle-class students and their families by saving them thousands of dollars in student loan payments."

By lowering interest rates on subsidized Stafford loans, Congress can save college graduates thousands of dollars over the life of their loans.

The average four-year college student starting school in 2007 with subsidized Stafford loans would save $2,280

When the interest rate cut is fully phased in, the average four-year college student starting school in 2011 with subsidized Stafford loans will save $4,420 over the life of his or her loans.

About five and a half million students take out subsidized Stafford loans every year. Of those borrowers, nearly three and a half million attend four-year public or private non-profit institution. According to the Congressional Research Service, 65% of traditional-age subsidized Stafford borrowers come from families with incomes between $26,000 and $91,000. The median income for an American family of four is $65,000.

"Lowering interest rates on loans is a great first step towards a more affordable college education. Congress should continue to help students pay for college by increasing need-based federal student aid and passing broad protections for student borrowers, such as limits on the percent of income that can be required for student loan repayment," concluded Swarthout.

The policy proposal analyzed by PIRG would cut the fixed interest rate on subsidized Stafford loans for undergraduates from 6.8% to 3.4% over the next five years. Loans originated during the intervening five years will be set at fixed interest rates of 6.12% in 2007-08, 5.44% in 2008-09, 4.76% in 2009-10, 4.08% in 2010-11, and 3.4% from 2011 forward.

After graduation, students would be able to consolidate their loans into one loan at the weighted average of the interest rates of their various loans.

All federal Stafford loans receive two forms of government support: the federal government covers the cost of the loans to lenders in case of student default and provides financial subsidies to insure lenders make a profit. Stafford loans are considered "subsidized" when the government pays the interest charges on the loan while the student is in school.

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