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 non-profit 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).