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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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