Subsidized Stafford Loan Interest Rates Rise, But for How Long?

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July 2, 2013 · by mlivolsi · Spark Notes

Prepared by: Harrison Wadsworth (hwadsworth@wpllc.net)

The Senate and House have departed for the 10-day U.S. Independence Day recess, with both returning to Washington on July 8. They left without resolving competing proposals for modifying the interest rates charged on some or all federal Direct Loans.  As a result, on Monday, subsidized Stafford Loan interest rates for new loans originated on or after July 1 rose from 3.4 to 6.8 percent. However, it remains quite possible that no one will actually pay the higher rate, at least for now.

After weeks of activity and House of Representatives passage of a bill that would return the rate structure for all federal Direct Loans to annually variable rates, the end of last week saw competing proposals in the Senate, with most Democrats attacking a proposal advanced by a small group of Democrats and Republicans that closely tracked President Obama’s variable fixed rate proposal from April. That bipartisan proposal , introduced as S. 1241 by Sen. Joe Manchin (D-WV), base all rates on the rates of the 10-year Treasury Note plus various spreads for undergraduate, graduate and parent loans, retaining an effective cap of 8.25 percent by keeping consolidation loans unchanged.  (The bill doesn’t include caps on Stafford and PLUS Loans themselves, but the rate on consolidation loans would remain the weighted average of the loans being refinanced with a cap of 8.25 percent.  Thus a 10 percent Stafford loan when “consolidated” could have a rate of no more than 8.25 percent.)

Consumer and student groups opposed the proposal in large part because the Congressional Budget Office (CBO) calculated that over a 10-year period, the proposal would cost the government slightly less – which means it could cost borrowers slightly more.  The Democratic leadership in the Senate about the same time introduced a bill, S. 1238 by Sen. Jack Reed (D-RI), which would simply keep subsidized Stafford rates at 3.4 percent for one more year, offsetting the cost by requiring quicker taxation of inherited IRAs and 401(k) funds.  A vote to move forward with that bill is scheduled for Wednesday, July 10.  It will require a three-fifths majority of 60 votes to overcome the expected Republican filibuster, so it will fail unless some Republican support is found. The Manchin proposal is also expected to fail Wednesday if it is voted on.

However, despite all the rhetoric, it remains quite possible that a bill based on the market-based rate proposals will emerge. Ratcheting down the interest rates a little to the point where the Congressional Budget Office scores no cost to the government or borrowers or even a government cost (borrower savings) could do the trick.   Since no one is paying interest on subsidized Stafford Loans while in school and for six months after leaving school, no one will actually have to pay more interest for at least six months, and large volumes of disbursements won’t start until August.  That gives Congress more time, at least the month of July, to come up with a compromise.

Meanwhile, over the Independence Day week, student loans will remain in the news as an obvious example of Congressional dysfunction.   COHEAO will have more analysis and information in the Torch, which will be published tomorrow, July 3rd.

Below are links to comments on the situation.

  • A statement from Senate HELP Chairman Tom Harkin:

http://www.help.senate.gov/newsroom/press/release/?id=719d405e-ecb4-4de1-816a-efe4c112b932&groups=Chair