Higher Education

In his State of the Union address, President Obama called on Congress to prevent federal student loan interest rates from doubling later this year. This is the culmination of decades of legislative changes to the federal student loan program. Few people are aware of the policies that led to the pending student loan interest rate increase and many question whether the 6.8 percent fixed interest rate charged on the most widely-available loans provides a real benefit to students.

The Federal Education Budget Project today released an issue brief regarding federal student loan interest rates. This issue brief details the history of interest rates on federal loans, including the decisions that led to today’s fixed rates and the pending rate increase. It also examines the popular argument that current rates are unfavorable for borrowers and disputes the claim that student loans earn revenue for the government. 

The timeline below shows the interest rates on federal student loans taken out in each year, as well as the Congressional action that led to these interest rates. Roll over the points in the graph for more information.

Student loan debt was a problem long before Occupy Wall Street protesters added it to their list of grievances. The recession hit the younger end of the workforce particularly hard: the combination of a jobless recovery, rising tuition bills and mounting debt have become a crushing burden. Total student debt today is approaching one trillion dollars — exceeding the balance due on credit cards — and is second only to mortgage debt in American households. In fact, it's the only class of debt in which defaults are increasing.

In his State of the Union address, President Obama called on Congress to prevent federal student loan interest rates from doubling later this year. This is the culmination of decades of legislative changes to the federal student loan program. Few people are aware of the policies that led to the pending student loan interest rate increase and many question whether the 6.8 percent fixed interest rate charged on the most widely-available loans provides a real benefit to students.

The Federal Education Budget Project today released an issue brief regarding federal student loan interest rates. This issue brief details the history of interest rates on federal loans, including the decisions that led to today’s fixed rates and the pending rate increase. It also examines the popular argument that current rates are unfavorable for borrowers and disputes the claim that student loans earn revenue for the government. 

The timeline below shows the interest rates on federal student loans taken out in each year, as well as the Congressional action that led to these interest rates. Roll over the points in the graph for more information.

In his State of the Union address, President Obama called on Congress to prevent federal student loan interest rates from doubling later this year. This is the culmination of decades of legislative changes to the federal student loan program. Few people are aware of the policies that led to the pending student loan interest rate increase and many question whether the 6.8 percent fixed interest rate charged on the most widely-available loans provides a real benefit to students.

Science, technology, engineering, and math (STEM) have featured prominently in the Obama administration’s education policy priorities, most recently as the focus of the third round of Race to the Top funding. And it looks like it will play a big role moving forward: An announcement from President Obama at today’s White House Science Fair offers a peek into the administration’s fiscal year 2013 budget proposal, which will apparently include a spotlight on STEM learning. But the real story is buried behind the budget rhetoric – the president also proposes a new STEM focus to the existing Teacher Incentive Fund program, which will require no Congressional action.

The details on the budget request should not be ignored, of course. This year, says the White House, the president’s budget request will include a host of new and revitalized STEM programs. Among them is $80 million for a new competitive grant program to provide funding for STEM teacher preparation programs. The federal funds will be accompanied by private investments from a coalition of companies and organizations called 100Kin10; 14 members will collectively contribute $22 million to a fund dedicated to STEM teacher preparation and support, distributed by the group. These efforts are a follow-up to his 2011 State of the Union address, in which Obama issued a challenge to the education community to prepare 100,000 new STEM teachers.

The president will also propose a $100 million investment in the National Science Foundation to support new and existing programs to improve the quality of postsecondary STEM education. He will resubmit a request for funding for the First in the World program, now with a new STEM priority. The program would reward applicants with innovative ideas for improving college completion rates and lowering the costs of postsecondary education. And the president will recommend a joint Department of Education-National Science Foundation project to support K-16 education reforms through evidence-based approaches to mathematics learning. The project will be jointly funded, with $30 million contributed each from the Department and NSF.

But it is unlikely that Congress will even pass a budget for fiscal year 2013 before the fiscal year begins – many members will be busy running for reelection or consumed by the presidential election – so most of these proposals probably won’t see the light of day on the Hill.

Instead, the real story lies in the proposals that require no Congressional approval.

The Department of Education, promised the announcement, will continue to focus on STEM education in its next Race to the Top (RTT) competition. This refers to the nearly $550 million Congress appropriated for Race to the Top in its fiscal year 2012 budget. The competition, which is open to both states and school districts, is likely to take place later this year.

More significantly, however, the president announced that a portion of funding already appropriated for the Department of Education’s fiscal year 2012 Teacher Incentive Fund – $300 million – will be newly dedicated to improving “compensation, evaluation, and professional development systems for STEM educators.” These types of interventions have the potential to strengthen the STEM teacher force by attracting and retaining STEM professionals in teaching. And because the change will require no legislative changes, the Department can begin to implement it immediately, starting with the next round of TIF grants.

To improve general teacher quality, the president announced that the TEACH Grant program, funded with nearly $24 million in fiscal year 2012 to distribute grants to undergraduate students who plan to teach in schools that serve low-income students, will now target postsecondary students at top schools. The Department will also factor quality into its TEACH Grant distribution.

President Obama’s proposal represents a marked policy shift toward focusing on STEM, adding some weight to his rhetoric on improving STEM readiness. But most of the administration’s proposals are likely to be tossed aside if and when Congress starts its own 2013 appropriations process (as are most White House budget requests), particularly if Congress is weary of increased domestic spending. Given that reality, the president may have to rely on the Department of Education to head up this new STEM charge through programmatic changes to the Teacher Incentive Fund alone.

Last week President Obama called on Congress in his State of the Union address “to stop the interest rates on student loans from doubling in July.” That line surely left a lot of people (Washington’s education policy circles not included) wondering what in the world the president was talking about. Is Congress really planning to double the interest rate on federal student loans this summer? The answer is yes, no, and maybe. In other words, it’s complicated. What’s more, a newly released estimate from the Congressional Budget Office shows that the cost of the president’s request will weigh heavily in any debate on the proposal.

Interest rates on Unsubsidized Stafford student loans, which are federal loans available to all students, issued for this academic year (2011-12) are fixed at 6.8 percent. The same rate has been charged on these loans issued since July of 2006. However, the interest rate is fixed at 3.4 percent for a subset of federal student loans – Subsidized Stafford loans for lower-income undergraduate students – issued this academic year. That rate is only temporarily available, and beginning in the 2012-13 academic year, the rate on that subset of loans will be the same as for Unsubsidized Stafford loans, 6.8 percent. So yes, rates are set to double for newly issued loans made to a subset of undergraduates after July 1, 2012.

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Note: This post was updated on 02/02/2012 with new cost estimate information.

Last week President Obama called on Congress in his State of the Union address “to stop the interest rates on student loans from doubling in July.” That line surely left a lot of people (Washington’s education policy circles not included) wondering what in the world the president was talking about. Is Congress really planning to double the interest rate on federal student loans this summer? The answer is yes, no, and maybe. In other words, it’s complicated. What’s more, a newly released estimate from the Congressional Budget Office shows that the cost of the president’s request will weigh heavily in any debate on the proposal.

Interest rates on Unsubsidized Stafford student loans, which are federal loans available to all students, issued for this academic year (2011-12) are fixed at 6.8 percent. The same rate has been charged on these loans issued since July of 2006. However, the interest rate is fixed at 3.4 percent for a subset of federal student loans – Subsidized Stafford loans for lower-income undergraduate students – issued this academic year. That rate is only temporarily available, and beginning in the 2012-13 academic year, the rate on that subset of loans will be the same as for Unsubsidized Stafford loans, 6.8 percent. So yes, rates are set to double for newly issued loans made to a subset of undergraduates after July 1, 2012.

The seeds for the coming rate change were planted way back in 2006. In their 2006 campaign platform, A New Direction for America, House Democrats promised to “slash interest rates on college loans in half to 3.4 percent for students and to 4.25 percent for parents.” By the end of 2007, they had (technically) made good on their promise. But just like those credit card offers that promise a low interest rate, the rate cut was enacted with important details listed only in the fine print.

Once lawmakers realized that their campaign promise would, according to the Congressional Budget Office, cost $133 billion over ten years (a substantial sum), they opted to scale it back dramatically. That’s where the fine print comes in.

To reduce the cost of the rate cut, Congress cut rates in half only for a subset of loans – Subsidized Stafford loans – which are available only to borrowers from families with middle and lower incomes. While graduate and undergraduate students were previously eligible for Subsidized Stafford loans, the law made only undergraduate students eligible for the rate cut. It left rates unchanged for the larger Unsubsidized Stafford loan program as well as for PLUS loans for parents and graduate students despite their inclusion in the campaign pledge. Even so, those caveats still didn’t get the cost of the proposal down to the size lawmakers wanted.

So to further reduce costs, Congress slowly phased in the interest rate cut over four years and then turned it off such that only loans issued for the 2011-12 school year would carry rates of 3.4 percent (half of 6.8 percent). Subsidized Stafford loans issued to undergraduate students after that year would again carry a fixed rate of 6.8 percent. In short, the 2007 law “cut interest rates in half” for loans issued only this academic year – and only for certain undergraduate students.

As President Obama demonstrated in his address last week, the rate cut issue will loom large this election year and Congress will be under a lot of pressure to stave off the rate hike. Of course, if lawmakers thought the 3.4 percent rate was too costly to make permanent back in 2007 at $3.0 billion a year, it won’t be any cheaper to do it this time around. In fact, it will be a lot more expensive. An early estimate from the Congressional Budget Office says extending the rate cut for one year will cost about $5.9 billion and $45 billion to extend it for ten years.

That’s why President Obama has requested only a one-year extension of the rate cut. Sadly, that’s exactly the type of shortsighted policymaking that got us here in the first place.

It's that time of the year again: high-school seniors around the country are anxiously awaiting the news that will change their lives -- early admission to the university of their choice. But while junior checks his email and the school's website 15 times an hour, parents are checking their savings account statements. As the recession bites into American families' incomes and makes the job search for recent graduates that much trickier, an increasing number of people are beginning to question the cost of attending colleges and universities in the United States.

Today, the Asset Building Program and the Center for Social Development at the Washington University in St. Louis released the final report in the “Creating a Financial Stake in College” series. The fourth report “Ideas for Refining Children’s Savings Account Proposals” makes a case for establishing formal mechanisms for low- and middle-income children to save. Author William Elliott argues that a systematic, national approach to children’s savings accounts is a critical part of improving access to postsecondary education, particularly for low- and middle-income students.

“Creating a Financial Stake in College” is a four-part series of reports that focuses on the relationship between children’s savings and improving college success. This series examines: (1) why policymakers should care about savings, (2) the relationship between inequality and bank account ownership, (3) the connections between savings and college attendance, and (4) recommendations to refine children’s savings account proposals.