Federal Budget Proposes Student Loan Interest Rate Change

The fiscal 2014 federal budget that the Obama administration has submitted to Congress proposes a change in the calculation of federal student loan interest rates.

The proposed budget would peg student loan interest rates to 10-year Treasury bill rates plus the following margins, producing the following resulting rates, based on current T-bill rates.

  • Subsidized Stafford loans, 0.93 percentage points (2.7 percent rate, based on current rates).
  • Unsubsidized Stafford loans, 2.93 percentage points (4.7 percent rate, based on current rates).
  • PLUS loans, 3.93 percentage points (5.7 percent rate, based on current rates).

Rates would be adjusted annually, although the rate would be fixed for the term of the loan.

The proposal provides for no cap to limit the maximum interest rate. In fact, it would eliminate the current 8.25 percentage point limit on interest rates for Direct Consolidation loans.

The proposal comes as Congress is struggling to address an impending doubling of student loan interest rates on July 1. A one-year extension of the fixed 3.4 percent rate on subsidized Stafford loans expires June 30. Absent some legislative change, those rates would rise to 6.8 percent effective July 1.

Separate legislative proposals now pending before Congress would extend or make permanent the 3.4 percent rate.
The administration’s interest rate proposal may attract bipartisan support. Congressional Republicans have advocated for a market-based solution to the student loan interest rate dilemma.