WASHINGTON -- The interest rate for new, federally subsidized student loans will increase to 6.8 percent on July 1 if Congress does not act. A Congressional Budget Office report released Monday put more numbers behind the various plans calling for changes to the loan program, estimating that keeping the rate at 3.4 percent would cost the government $41 billion over 10 years but that other changes might generate significant savings.
The report, prepared at the request of Senator Lamar Alexander's office, also examines a few options for changes to the loan program that haven't been legislatively proposed, including limiting eligibility for subsidized loans to students who are eligible for Pell Grants, or eliminating the subsidized loan program altogether.
Restricting the loans to Pell recipients, but keeping the interest rate at 3.4 percent, would cost the government only $1 billion more over 10 years than would allowing the interest rate to double, the budget office found. Eliminating the subsidized loan program entirely would save $49 billion over 10 years.
Subsidized Stafford loans, which make up about half of the Education Department's loans to undergraduates, currently have a lower interest rate and don't accumulate interest while students are enrolled in college. Available only to students judged to have financial need, they go mostly to those from low- and middle-income families. The interest rate increase, long-planned and postponed by 12 months last year, will add about $38 to the monthly payment on an average subsidized Stafford loan being paid back over 10 years.
President Obama, Congressional Republicans and some Congressional Democrats have all put forward ideas on long-term changes to how the interest rate is determined. But in recent days, Obama has joined Democrats on the Hill in calling for a one- or two-year extension of the 3.4 percent interest rate, giving Congress more time (presumably as part of deliberations over extend the Higher Education Act) to work out a long-term solution. (While the CBO evaluated the 10-year impact of keeping the rate at 3.4 percent, no lawmakers have endorsed that as an option.)
Basing student loan interest rates on the 10-year Treasury note plus a few percentage points would also save the government money -- up to $90 billion over four years if the rate was set at the 10-year Treasury yield plus 4 percentage points, the CBO found. Adding an interest rate cap of below 9 percent, though -- an option many student groups support -- would make the loans more expensive for the government than allowing the interest rate to rise to 6.8 percent.
The report also drew a distinction between current accounting rules and so-called "fair value" accounting, which takes risk into account and generally makes lending programs appear to be more expensive than they seem under current rules.
Under the accounting rules that are now in place, the student loan program appears to turn an enormous profit -- $184 billion over the next 10 years -- because the government charges a much higher interest rate to students than it is charged to borrow the money. But under fair value accounting, the program appears to cost the government $95 billion over the next 10 years. Congressional Republicans support a switch to fair-value rules, a measure included in the most recent House of Representatives budget.