Interest rates on federal student loans…too high?

This is a more complex question than I initially envisioned, and I think the answer depends, in part, on what the comparison is.  Based on historical 91 day T-bill yields and the corresponding student interest rate loans (see table below), today’s rates don’t seem particularly out of place—for loans issued b/w 1992 and 1994 borrowers were/are repaying at a rate of ~6.5%, between 94 and 98 closer to 8.5%, and anywhere from 3.5% to 8% between 1998 and 2006.  Given these historical rates, the 6.8% Stafford fixed rate loan seems like a relatively average deal for students.

Date  Disbursed

Type

In-School  Rate

Repayment  Rate

Cap

7/1/2010 to 6/30/2012 Stafford

Fixed Rate of  6.8%

Fixed Rate of  6.8%

NA

PLUS

Fixed Rate of  7.9%

Fixed Rate of  7.9%

NA

7/1/2006 to 6/30/2010 Stafford

Fixed Rate of  6.8%

Fixed Rate of  6.8%

NA

PLUS

Fixed Rate of  8.5% (FFEL) or 7.9% (DL)

Fixed Rate of  8.5% (FFEL) or 7.9% (DL)

NA

7/1/1998 to 6/30/2006 Stafford

91-day T-bill  + 1.7%

91-day T-bill  + 2.3%

8.25%

PLUS

91-day T-bill  + 3.1%

91-day T-bill  + 3.1%

9.0%

7/1/1995 to 6/30/1998 Stafford

91-day T-bill  + 2.5%

91-day T-bill  + 3.1%

8.25%

PLUS

CMT + 3.1%

CMT + 3.1%

9.0%

7/1/1994 to 6/30/1995 Stafford

91-day T-bill  + 3.1%

91-day T-bill  + 3.1%

8.25%

PLUS

CMT + 3.1%

CMT + 3.1%

9.0%

10/1/1992 to 6/30/1994 Stafford

91-day T-bill  + 3.1%

91-day T-bill  + 3.1%

9.0%

PLUS

CMT + 3.1%

CMT + 3.1%

10.0%

However, we obviously have a uniquely low interest rate environment in general today, so it doesn’t quite seem appropriate to be comparing today’s rates to historical averages. The more appropriate comparison is the rate that students were paying the last time the Federal Reserve dropped interest rates very low—that would be the rate in the early 2000’s after the Fed dropped the overnight rate to 1%. At that point in time, based on the formulas in the table, students were paying 2.7% on their loans in school and ~3.3% during the repayment period after school. Today’s 91 day T-bill yield is roughly .1%, so comparable rates would be even lower for students today. Thus, comparatively, the fixed rates of today are much higher than the rates were a decade ago in the most similar historical comparison to the current interest rate environment.

So, given the low interest rate environment today and the appropriate historical comparison, student loan rates today look like they are a bit higher than they should be, although perhaps not substantially so. I think this applies in spite of the fact that Congress lowered the interest rate on the subsidized Stafford loans to undergraduate students to 3.4%; the fact that the rates were lowered incrementally, for a subset (undergraduates) of a subset (subsidized loans) of the total student loan population, means that the average interest rate paid by students on federal loans over this period is probably still higher than it should have been.

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One thought on “Interest rates on federal student loans…too high?

  1. Pingback: Higher Education Policy according to the WSJ | lil stevie's econ blog

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