As the above demonstrates, the student loan market is much bigger than it sometimes seems to be in the debate over interest rates. Not every rate on every federal student loan is scheduled to double July 1. At issue, under the law, is the rate on the subsidized Stafford loan for new borrowers.
Doubling the rate would add, experts say, about $1,000 to the cost of a given loan. But the effect of that for a 10-year loan, considered another way, would amount to less than $10 a month on a typical repayment bill.
Obama’s budget also puts into play potential changes for various types of loans.
Under his proposal, the rate for subsidized Stafford loans would be equal to the yield on the 10-year treasury note plus 0.93 percentage points. For unsubsidized Stafford loans and for Perkins loans, the rate would be the 10-year T-bill rate plus 2.93 percentage points. For PLUS loans, the rate would be the 10-year T-bill rate plus 3.93 percentage points. The rates, Obama officials say, would be determined annually before the start of the academic year and then fixed for the duration of the loan.
In the short term, with market rates low, the Obama proposal would be good news for borrowers. The 10-year T-bill yield is now about 1.8 percent. So rates would go down for Stafford and PLUS loans (and slightly for Perkins loans).
But interest rates are projected to rise at some point. And the proposal provides for no caps. That means student borrowers in the future might well have higher rates, a point that led to criticism from some student advocates.
The Obama plan, said Ethan Senack of the U.S. Public Interest Research Group, “lowers interest rates over the next couple years, but it pays for that by charging higher interest rates down the road. It’s like robbing Peter’s little brother to pay Peter.”
The Obama administration, sensitive to this charge, said that any rise in interest rates would be cushioned by an initiative called “pay as you earn,” limiting loan repayment obligations to 10 percent of a borrower’s discretionary income. Obama officials say their plan aims to protect borrowers, put the loan program in sync with financial markets, and remain budget-neutral over the next decade.
Jason Delisle, an analyst with the New America Foundation, said the Obama plan is the “most practical way” to lower rates in the near term without busting the federal budget.
“If you wanted to make rates low all the time, forever, you’re talking hundreds of billions of dollars in new costs. That’s not really an option that’s on the table for anybody.”