Unexpected $8 Billion Boon to Student Loan Borrowers

Remember interest rates on federal student loans? That was an all-consuming topic earlier this year and now there’s hardly a mention of it anywhere. But this week, the Congressional Budget Office (CBO) reminded us that Congress and the president passed a law to significantly reduce interest rates on federal student loans issued for the 2013-14 school year.

The budget office finished squaring away last year’s spending and revenue tally this week, and lo and behold, the Department of Education spent about $10 billion more than CBO anticipated. And most of that figure–$8 billion–is the result of the Bipartisan Student Loan Certainty Act of 2013, which lowered interest rates for all categories of new loans  this year (undergraduates, graduates, and parents). The table below details the new interest rates.

[table id=39 /]

The new law sets interest rates according to the rate on the 10-year Treasury note, plus a markup, beginning in the current 2013-14 academic year. That formula sets rates lower this year than they were when Congress set them arbitrarily years ago. A fixed 3.86 percent interest rate on all newly issued undergraduate loans is far better than the 6.80 percent rate on Unsubsidized Stafford loans in prior law, and a steal compared to what the private market offers students. It’s also about the same as a 15-year fixed rate home mortgage—debt that requires the borrower to make a 20 percent down payment and have excellent credit, neither of which apply to the federal student loan program.

One would think that a bill that cut interest rates by so much and resulted in sharply higher spending for the U.S. Department of Education this year would not be one that Senate Democrats opposed – but well over a dozen Democratic holdouts (and Tea Party Republican Mike Lee [R-UT]) voted against the bill. They said they wanted an even better deal for students. Student and advocacy organizations egged them on. Ultimately, Senators Manchin (D-WV), King (I-ME), Coburn (R-OK), and Burr (R-NC) persuaded enough of their colleagues that the bill was, in fact, a good deal for students.

Sure, the long-term view could be different. CBO predicted earlier this year that taxpayers would save money as a result of the law, as interest rates in the economy begin to increase. But rates might also stay lower for longer, making the law a boon for borrowers. And even if rates are higher a few years out, that would indicate that the economy is in better shape and graduating college students would be walking into a better job market, making it easier to pay those higher rates.

But for now, the bipartisan student loan interest rate compromise has been a big win for borrowers in its first year – as proven by the CBO. Still, you probably won’t catch those Senate Democrats who voted against the bill, or the education advocates who opposed it, championing the fact that education spending was $8 billion higher last year that it would have been without the compromise bill.”