House Republicans on May 12 unveiled a new analysis from the independent Congressional Research Service (CRS) showing that variable rate consolidation loans have tended to cost borrowers less over time than fixed rates. The analysis was distributed at the committee's HEA reauthorization hearing.
The CRS memorandum presents results from simulations conducted by CRS at the education committee's behest.
In the simulation, CRS assumed that the hypothetical borrower's outstanding debt was $22,000, or roughly the average debt of actual consolidation loan borrowers.
In the first scenario, the borrower takes out a fixed rate consolidation loan, in which the rate equals the T-bill rate at the time of consolidation, plus 2.3%, capped at 8.25%.
In the second scenario, CRS modeled a variable rate consolidation loan under the same circumstances. Analysts then determined the estimated APR, interest payments, and total payments on the $22,000 loan, using a 10-year repayment period and a 20-year period.
The analysis revealed that from 1986 (the first year of the consolidation loan program) to 2003, borrowers would generally have been better off had their consolidation loans been available under a variable interest rate.
CRS found that for a 10-year loan, total variable rate payments were less than fixed rate payments in 13 of the 18 years examined. The exceptions were 1992-1994 and 2002-2003. The finding were similar for a 20-year loan, with the exceptions of 1992-1993 and 2002-2003.
In a press release discussing the findings, Committee Chairman John Boehner (R-Ohio) said, "No one can accurately predict what future interest rates will be. What we can do is examine past history ... and this new information from CRS does just that. This analysis definitively shows that borrowers would be better off under the variable rate consolidation loan structure we are proposing."
On March 24 CRS released a memorandum containing case simulations projecting costs for consolidation loan borrowers should loan rules change from a fixed to a variable interest rate as a result of the current HEA reauthorization.
That analysis--which has been championed by House Democrats--found that under a variable interest rate a student with $17,000 in debt would have to pay $5,484 more in interest over the life of the loan, assuming a 15-year repayment term.
By Elizabeth B. Guerard
NASFAA Assistant Director of Communications
Posted May 17, 2004 on
www.NASFAA.org, the Web Site of the
National Association of Student Financial Aid Administrators (NASFAA).
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