Interest Rate Cuts: How will if Effect You?

March 8, 2007

Interest Rate Cuts: How will if Effect You?

Here is a great article from DiverseEducation.com on the proposed Interest Rate Reductions and how it will effect you. It gives a very clear breakdown on savings over the long run…

Just the Stats: Will Student Loan Interest Rate Cuts Really Help Low-Income Students?
By Olivia Majesky-Pullmann
Mar 2, 2007

The College Student Relief Act of 2007, recently approved by the U.S. House of Representatives, has been hailed as a savior for students trying to handle the ever-rising costs of college. Phased in over five years, the interest rate on federally backed loans will be cut in half, from 6.8 percent to 3.4 percent. But some say the cut isn’t the saving grace politicos make it out to be.

Once fully phased in, these cuts would save the typical borrower, with $13,800 in need-based federal student loan debt, $4,420 in savings over the life of the loan,” says U.S. Rep. George Miller, D-Calif., of the House Committee on Education & Labor, relying on an analysis by U.S. PIRG. The new interest rate will drop to 3.4 percent by 2001, but on January 1, 2012 the rates will go back to 6.8 percent.

But U.S. PIRG, a public interest advocacy group, has said Miller’s office has misquoted its findings. Miller’s prediction assumes that the interest rate at its low of 3.4 percent will be permanent, although the act is scheduled to expire in 2012. A student with $13,800 in debt might save $4,420, but only if the rate was not scheduled to go back up to 6.8 percent in 2012.

Even if the 3.4 percent interest rate were to be extended, it would only help borrowers taking out loans in 2012 or later. Unlike a mortgage, when the rates drop, students with existing loans do not have the capability to re-finance at the new, lower rates.

Who Will the Student Relief Act Really Affect?

Based on the U.S. Department of Education’s 2003-2004 National Postsecondary Student Aid Study, a national survey representing more than 80,000 students, only 36 percent of all low-income students received subsidized Stafford Loans. By comparison 32.7 percent of all middle-income students received the loans. The average Stafford loan for low-income students is $3,213, compared to $3,222 for middle-income students and $3,050 for upper-income students.

Whites receive 61 percent of all subsidized Stafford Loans, borrowing an average of $3,287. By comparison, Blacks received $3,105 and Hispanics received $3,092. Just over 19 percent of Blacks borrowed, while 11.5 percent of Hispanics did. Although the percent of loans going to Asians was low, at 3.7 percent, they were awarded a higher average loan amount at $3,484. Of all Black students enrolled in 2003-2004, nearly 37.8 percent received the loans – the highest of all races.

The following figures incorporate four-year and two-year institutions, however, the numbers shift when broken down by institution type, and Blacks have more cumulative Stafford Loan debt than any other race/ethnicity. Based on data derived from FinAid.org, the average cumulative subsidized Stafford Loan debt for students completing a degree program in 2003-2004 was the highest for Blacks at four-year institutions ($12,458) and at two-year institutions ($6,457).

Since Blacks borrow the most, they are also likely to save the most. However, when broken down by monthly payments, the savings are miniscule. Blacks will save about $2 more than any other race per month. These figures assume a student who took out a loan in 2007 at 6.12 percent interest, the first drop in the phased-in rate cut, will pay the loan back over 20 years.

The Average Amount of Savings Throughout the Life of the Loan by Race/Ethnicity, 2007Source: Mark Kantrowitz, Publisher, FinAid.org, 2007

Institutional Level

White

Black

Asian

Other

More than one race

Total

The Average Amount of Savings Per Month Throughout the Life of the Loan by Race/Ethnicity, 2007
Source: Mark Kantrowitz, Publisher, FinAid.org, 2007

Institutional Level

White

Black

Asian

Other

More than one race

Total

What Are Financial Aid Analysts Saying?

Mark Kantrowitz, publisher of FinAid.org, says there are several misleading errors in Miller�s claim. He says the committee overstated the average cumulative subsidized Stafford Loan debt of $13,800 for undergraduate borrowers because they didn�t account for two-year students when they averaged the per-student debt. The actual total debt for four-year degree completers in 2003-2004 totaled $10,667, and is projected to increase to $12,000 in 2007-2008. Two-year degree completer�s debt was $5,488 in 2003-2004 and will increase to about $6,200 by 2007-2008.

When combining unsubsidized and subsidized student loans, the total average cumulative debt is roughly $13,800, thus saving the borrower approximately $4,400 at 3.4 percent with a 15-year repayment term. �Since the 3.4 percent interest rate is limited to a six-month period, it is unreasonable to assume that all of the subsidized Stafford loan debt will be at this rate,� Kantrowitz says.

To measure the true impact of the loan rate cut, Kantrowitz suggests using the weighted average interest rate, since there will be a different rate each year as the cuts are phased in. This would be the impact:

Student Relief Act Average Amount of Stafford Loan Savings, 2007
Source: Mark Kantrowitz, Publisher, FinAid.org, 2007

Cumulative Stafford Loan Amount

Student Subsidized Loan Monthly Savings, 2007
Source: Mark Kantrowitz, Publisher, FinAid.org, 2007

Monthly Savings

Kantrowitz says the U.S. government will lose billions in interest revenue because of the lower interest rate.

�It is misleading to say that the legislation makes college more affordable for needy students at no new cost to taxpayers,� he says.

Thomas G. Mortenson a policy analyst with Postsecondary.org, has a similar view on the proposed act, �My concern is that this idea does nothing to make college affordable. It does nothing to reduce the $32 billion in unmet financial need that we identified from the 2004 NPSAS study�

According to FinAid.org, student loan interest rates are more likely to assist students already inclined to finish college rather than increase the number of students enrolling. Most students from middle and upper income families tend to pursue education regardless of debt incurred, says Kantrowitz. FinAid.org suggests that the government scale back loans for low-income students and increase grants.

Other Sources Used:

1. The College Student Relief Act of 2007

2. �Rep. Miller Introduces Legislation To Cut Interest Rates on College Loans,� House Committee on Education and Labor. January 12, 2007.

3. Undergraduate Financial Aid Estimates for 12 States: 2003�2004: National Center for Education Statistics (2006), 2003�2004 National Postsecondary Student Aid Study

4. PB 2007 Budget Baseline � Standard Loan Volume Tables in Extract Form

—Olivia Majesky-Pullmann

 

Click Here for a Link to this Article.

Remember, these rate reductions do not apply to loans that have already been disbursed so it is still worth consolidating now. It is still unknown what the new rate will be for variable interest rate loans.

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