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Executive Summary
In 21st century America, a college education is critical for
individual success and the strength of our nation. Higher education is
associated with better health, greater wealth and more vibrant civic
participation, as well national economic competitiveness in today’s
global environment. As the need for a college degree has grown,
however, so has the cost of obtaining that education. The result is
rising student debt.
Some in Congress have proposed lowering
student loan interest rates to reduce the debt burden facing students
and families. This report addresses one specific proposal to cut
interest rates on undergraduate subsidized Stafford student loans in
half, from 6.8% to 3.4%, over a period of five years.
About 5.5
million students borrow subsidized Stafford loans every year. Of those
borrowers, nearly 3.3 million attend four-year public or private
nonprofit institutions. The vast majority of these borrowers come from
low- and middle-income families. According to the Congressional
Research Service, 75% of traditional-aged borrowers with subsidized
Stafford loans come from families with incomes below $67,374. The
median income for an American family of four is $65,000.
Congressional Proposal: Cut Interest Rates in Half
Congressional
leadership has proposed cutting 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 would be set
at fixed interest rates of 6.12% in 2007-2008, 5.44% in 2008-2009,
4.76% in 2009-2010, 4.08% in 2010-2011, and 3.4% from 2011 forward.
After graduation, students could consolidate their loans into one loan
at the weighted average of the interest rates of their various loans.
Findings: Students Would Save Thousands of Dollars with Lower Interest Rates
By
lowering interest rates on subsidized Stafford loans, Congress can save
college graduates thousands of dollars over the life of their loans. We
found:
- The average four-year college student starting
school in 2007 with subsidized Stafford loans would save about $2,280
over the life of his or her loans under the proposed legislation.
- When
the interest rate cut is fully phased in, the average four-year college
student starting school in 2011 with subsidized Stafford loans would
save $4,420 over the life of his or her loans.
- The
average savings for students starting school in 2011 vary slightly from
state to state, ranging from $4,830 for students in California to
$4,020 for students in West Virginia (Table ES-1).
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