Compliance Corner: What’s Going On With Student Loan Interest Rates

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ashley norwoodWhen trying to understand a confusing topic like student loans, it helps to talk it through with someone—so that’s what we did. Today, compliance (i.e., student loan) expert Ashley tries to do the impossible: make student loan interest rates, well, interesting. You should care if you’re going to borrow new loans soon—these changes could cost you.

On July 1, Stafford loan interest rates are set to double from 3.4% to 6.8%. I’ll give you a moment to let that sink in.

You might wonder why the government is raising the interest rate on struggling students in what, some say, is a struggling economy. They aren’t actually. They’re trying to lower it.

Let me explain. Get ready for an economics lesson.

The Tumultuous History

Federal student loan rates (Stafford loans) were not always as low as they are now. In fact, they were more than double the current rate in the ‘90s.

Year Rate Undergrad Stafford Loan Formula
2011-13 3.4% Fixed rate
2010-11 4.5% Fixed rate
2009-10 5.6% Fixed rate
2008-09 6.0% Fixed rate
2006-08 6.8% Fixed rate
2005-06 5.30% Variable rate, cap 8.25%
2004-05 3.37% Variable rate, cap 8.25%
2003-04 3.42% Variable rate, cap 8.25%
2002-03 4.06% Variable rate, cap 8.25%
2001-02 5.99% Variable rate, cap 8.25%
2000-01 8.19% Variable rate, cap 8.25%
1999-00 6.92% Variable rate, cap 8.25%
1995-98 8.25% Variable rate, cap 8.25%
1994-95 7.43% Variable rate, cap 8.25%

So, What Happened?

In 1992, variable rates were introduced, and from ‘92 to ’00, rates fluctuated from 6.22% to 8.25%. No one who went to school during the ‘90s had interest rates as low as they are now. (A little consolation, right?)

Why was this? The economy was booming, and when the economy is doing well, it costs more to borrow. When the economy isn’t doing well, it costs less to borrow because the government wants to encourage growth. To learn more, register for Macroeconomics 101.

The 2000s not only brought Apple stores, The Office, Mad Men, and CSI, but they also introduced our current era of student loan debt awareness. More and more students entered college, borrowing more and more to do so. Students didn’t want the uncertainty of variable rates, so rates were permanently fixed at 6.8% in 2006 (right around the current market rate).

Of course, “permanently” lasted only 2 years, as temporary legislation changed the rate to take advantage of super-low rates.

A Temporary Reduction

In 2008, Congress launched a campaign to cut student loan interest rates in half, which they sort of did. They temporarily reduced subsidized Stafford loan rates annually for 4 years (from 6% to 5.6% to 4.5% to to 3.4%) until July 1, 2012, when the rates would go back to 6.8% to match the unsubsidized Stafford loan rates. (Unsubsidized Stafford loans have been 6.8% since 2006.) They did this anticipating the rates would return to the previous levels from pre-’08.

Of course, they didn’t.

Last year, student loan debt surpassed the $1 trillion mark, and lowering the interest rates became a priority. After a lot of partisan quibbling, both sides came to an agreement that kept the 3.4% interest rate for 1 year.

Plans Of Action

So, here we are in 2013, and the rates are set to double again. What’s being done? A lot, actually. Congress and the White House agree this problem needs to be resolved, but not everyone agrees on how to fix it.

Here is a quick breakdown of some of the proposals out there (as of today):

Whose Plan Is It? How Is It Calculated? 2013-2014 Rates? For How Long?
President Variable: tied to the 10-year Treasury note with no maximum rate, but would be fixed in repayment. For the 13-14 year, the subsidized Stafford loan would be 2.7%, the unsubsidized Stafford would be 3.7%, and PLUS loans would be 4.7%. All loans made after July 1, 2013.
House of Representatives (multiple plans in the works) Permanently extend current fixed rates. Subsidized Stafford at 3.4%. Unsubsidized Stafford and PLUS loans at 6.8%. All loans made after July 1 2013.
Extend current fixed rates for one year. Subsidized Stafford at 3.4%. Unsubsidized Stafford and PLUS loans at 6.8%. All loans made from July 1, 2013, to June 30, 2014.
Set all rates to 3.4%. 3.4%. All loans made after July 1, 2013.
Senate Variable: tied to the 10-year Treasury note with no maximum rate. For the 2013-14 year, all federal student loans would be 4.7%. All loans made after July 1, 2013.

This isn’t all the bills; in fact, three more were introduced as I was writing this. Still, this should give you a general picture of the ideas bouncing around D.C.

What This Means For You

There are pros and cons to each proposal, but I think things will go one of two ways. Either they settle on a variable rate system with a cap or they fix the rates at the current 3.4%.

If interest rates become variable with a cap, then the rates will change annually. They’ll be low when the economy struggles and higher when the economy does well. The cap will keep the rates from getting too high for comfort.

The fixed rate of 3.4% seems like a deal, but it may not always be. It all depends on what the Treasury bill rates are set at each year. Unfortunately, I don’t have an interest rate crystal ball to predict when the variable rate may be lower than the fixed one.

Another problem that Congress has to deal with is the cost of lowering or extending the current interest rate. Extend the 3.4% for a year, and it will cost the taxpayers $6 billion. Keep rates at the current level or lower them, and that may mean removing student loan subsidies or increasing origination fees—making borrowing more expensive in other ways.

This is why fixing the interest rate problem isn’t an easy thing to do.

Load your loan info into SALT™ to calculate how the various interest rate proposals would affect your loans

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  1. Karson June 10, 2013 / 12:57 pm

    I believe that the interest rate should fluctuate with the economy, but at the same point, I don’t understand why the expense of college has skyrocketed in the past decade. My dad graduated from college debt-free by working weekends and when he could. I don’t get how college suddenly costs almost 2x as much now.

  2. Joshua McDonald June 10, 2013 / 1:34 pm

    Wow, so informative, I never knew all this. Great writing, well worth reading.

    • Ashley June 11, 2013 / 8:03 am

      Thanks Joshua! I’m glad I could shed some light on such a confusing subject. There are a lot of articles being posted about the rising rates, but not many are giving students the information about why it’s happening or what is being done about it.

  3. luca federici farey June 10, 2013 / 4:28 pm

    I think America needs to have a long conversation with itself about what higher education means. If it’s money you’re worried about, do a stem degree and you’ll do fine. If you’re in it for purposes of goal-fulfillment or self-improvement, get ready to be punished for it. Not like we didn’t know what we were signing up for though, right?

  4. niakeela June 10, 2013 / 5:14 pm

    lot of facts, very helpful.

  5. Sarah June 10, 2013 / 5:40 pm

    Wow, this article made an ignorant person like me, more informed and wanting to look into reducing my personal debt. Thank-you, and I will definitely will be spreading the word.

    • Ashley June 11, 2013 / 8:05 am

      Thanks, Sarah! I love hearing that this has inspired you to take control of your debt. has a ton of helpful resources to do just that. Go explore!

  6. Ryan June 10, 2013 / 7:20 pm

    Best article Ive read so far! Thanks!

    • Ashley June 11, 2013 / 8:07 am

      Wow, Ryan, that means a lot. That’ll be hard to beat. Any suggestions for future posts?

  7. KB1HotMess June 10, 2013 / 7:38 pm

    Wow. Just wow.

  8. Andre June 10, 2013 / 8:39 pm

    this answered questions that has been pondering in side my head since i started applying for college.

  9. Ryan Martin June 10, 2013 / 8:45 pm

    Very helpful. I will use this as a source again for more information.

  10. Claire Miller June 10, 2013 / 8:58 pm

    I don’t understand why they just keep doing this to the price of a high education, how are people in this economy going to be able to afford it?

  11. Jake June 10, 2013 / 9:20 pm

    I found this very interesting! I think that even though student loan rate is going down, the overall cost of college is on the rise, and will continue to rise. I predict that many years from now, college won’t even be an option to most Americans because of expense, and decreasing benefits ( Job market, economy etc.) People need to learn how to be smart with their money today so it will help them tomorrow.

  12. Ashanti Jones June 10, 2013 / 10:18 pm

    Wow, this was kind of revealing and mind blowing.

  13. Hyym June 11, 2013 / 2:40 am

    thanks for the info. I have a question not related to the above. Why do colleges have skyrocketing tuition?

  14. Ashley June 11, 2013 / 8:12 am

    Thank you everyone for your comments and appreciatition. I am admittedly a student loan and financial aid nerd and had a lot of fun writing this piece. Any suggestions for future posts would be much appreciated!

  15. Lori June 11, 2013 / 9:53 am

    Thanks for this, very informative! I feel the biggest mistake I made was going away to another city to live at a 4 year private college and not working during the school year, and also my choice of major (english). I was the first in my family to go to college and none of us knew any better! If I could have a redo I would go to a local community college, work my way through it, and take summer/winter courses to finish early.

  16. Tyler June 11, 2013 / 11:35 pm

    Thank you for sharing. Unlike some of the previous SALT things, I actually learned something new from this article :)

    My wife and I are repaying her student loans, and we’re paying for both of us to go to graduate school with careful budgeting of our income. Fortunately, student debt hasn’t been as catastrophic to our lives as it has been to some of our colleagues, but much of that has been through hard work, financial education, and careful planning.

    It’s really great to see that this is helping people. Hopefully it’s helping a lot of people. We’re graduating students from high school who don’t understand the implications of financial decisions on their lives, and that’s a scary thing.

    • Ryan Lane June 12, 2013 / 10:28 am

      Oh, don’t think we won’t take that compliment, Tyler! Glad the post helped! :)

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