Issue Brief: Federal Student Loans Charge Borrowers Less Than Full Program Cost to Taxpayers

The New America Foundation disputes the argument that federal student loan interest rates are unfavorably high for student borrowers given the government’s low cost of borrowing, in an issue brief released Thursday.

"Few people are aware of the policies that led to the pending student loan interest rate increase and many question whether the 6.8 percent fixed interest rate charged on the most widely-available loans provides a real benefit to students," said New America Foundation Federal Education Budget Project Director Jason Delisle.

The "Student Loan Interest Rates: History, Subsidies, and Cost" issue brief details the history of federal student loan interest rates and legislative changes to the federal student loan program. It also makes the case that federal student loan interest rates are still favorable even in today’s low rate environment, and that current rates provide borrowers with subsidies and better terms than are available in the private market. 

"The 6.8 percent fixed interest rate on federal student loans may seem high to some in this low interest rate environment," the issue brief states. "That is partly because Congress set that rate some ten years ago using estimates that envisioned a different economic reality. ...However, after comparing interest rates and terms on federal student loans to private fixed-rate loans, it is clear that current federal rates remain favorable to borrowers." 

The New America Foundation states that "fair value" cost estimates reveal that despite the low interest rates the government pays to borrow, federal student loans charge borrowers less than the full cost that taxpayers incur in making them.

The issue brief also includes an online interactive timeline that shows the interest rates on federal student loans taken out in each year, as well as the Congressional action that led to these interest rates. Roll over the points in the graph for more information.