Unintended consequences of Stafford Loan rate changes | 03.20.08

Posted in PLUS Loans, Student Loan Links By Kristin Morris

As far back as 2001, Congress, looking at incredibly high interest rates on federal student loans (8.25% statutory maximum on the Stafford loan, 8.5% on the PLUS loan) decided to legislate a mandatory fixed rate of 6.8% on Stafford loans beginning July 1, 2006. At the time, it seemed like a good idea to legislators to try “fixing” market prices. Prior to that legislation, Stafford and PLUS loans had variable rates of 2.3% and 3.1% + the 91-day Treasury Bill rate at the last auction in the month of May.

Fast forward to today – 2008. With the economic uncertainty, the 91-day Treasury Bill’s current rate is a shockingly low 0.21% (as of noon 3/20/08). If Stafford loan rates were still variable rate loans and rates were set today, the Stafford loan would have a variable rate of 2.51% – lower than student loan interest rates have ever been. For students now paying 6.8%, a rate of 2.51% would mean paying about $50 less per month on $20,000 in federal student loans. Had Congress also left student loan consolidation alone (not reducing subsidies to lenders, thereby reducing availability of consolidation loans to students) that same rate change would mean paying 56% less interest for the life of the loan.

This is a lesson for all of us – when government attempts to manage free markets, unintended consequences may result, and those consequences may be financially quite harmful in the long term.


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10 Responses to “Unintended consequences of Stafford Loan rate changes”

  1. Freeman Tollerud says on January 10, 2013 at 4:22 am:

    Great post JD! Knowing net worth is *very* important.

    Reply To This Comment
  2. Jeff says on June 12, 2008 at 4:42 pm:

    “danny says ‘I agree. Name one program that the government has run successful and not put loads of money into it.’ ”

    Hello! — the whole point of federal programs is to handle issues that DO cost loads of money (lest federal involvement not be needed in the first place). Mercedes-Benz runs a fine car company, and yet “puts loads of money into it”; so? Rather than being seen as a failure, the amount of money a company puts into its programs is typically seen as a good thing and actually drives, not thwarts, investment. Why would — or should — we expect anything different from government?

    The real question is, can the private sector do the same thing as government, but more effectively and less expensively? Hmmm…when the private sector took over banks, well, one scandal after another required the government to come back in and clean up the mess with a costly bailout. What about when the private sector took over Air Traffic Control? — airline safety plummeted. What about when the private sector took over the US Postal Service? — costs went up (way up, over and over), and performance went down. Like clockwork. When the private sector takes over a monopoly, like the ATC or Postal Service, profit, not performance, is the guiding motive — whereas with the non-monopolistic example of Mercedes, competition spurs performance.

    The whole notion of “big government” and its perils is a myth planted and routinely stoked by right wing friends of big, unfettered business (the “big guy”) and its usurious lenders as a means by which to undermine efforts of governmental controls (regulation) that would, in this case, make student loans more affordable for us, the “little guy”: the right wing sees every measure in our favor as coming out of its profit; the “public welfare” and other moral angles don’t mitigate this simple perception of theirs.

    It’s not the size of government that matters, but the efficacy of it: is it doing the right thing, and doing it effectively and efficiently (and size by itself has nothing whatsoever to do with efficiency)? And it’s not the idea of government at fault here, but the people who happen to be presently running it: if you keep voting for the friends of the credit industry (like President Bush and enough like-minded members of Congress), then don’t complain about the failure of Democrats to remedy the matter.

    (Besides, the private sector IS in the student loan business!!! The very reason we’re b*tching about federal student loans is that private loans are so uncompetitive that they don’t even draw our attention. Think, people: what kind of rates do you expect will apply to private student loans where, unlike with the examples given here of cars and boats, everyone is expected to be eligible regardless of income and credit history?)

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  3. Jeff says on June 12, 2008 at 1:36 pm:

    “Jonathan Simmons says ‘I completely agree with this post and it’s one reason why I believe that small government is better than big government.’ ”

    Uh, Jonathan…what does the size of government have to do with this? It’s not the size at play here, but the partisan make-up of congress: Republicans continually nix Democratic efforts to make college affordable — in this case, to further reduce loan rates (not an opinion; check the voting record for the last year — as well as presidential veto threats to pro-student bills finally passed by the newly-Democratic House). Without the government handling this, there would BE no student loan system. And what loans WERE made available to students would be from the private sector. And — use your head people — private sector loans for needed items are NOT as cheap as those for discretionary items like cars and boats (remember, mortgages, by contrast, ARE based on federal rates and not an example of “small” government, whatever that means). When the private sector runs loans for non-discretionary items like education, without federal guidance, well…check out the rates the private sector offers students on consumer credit — WELL above 20%. What’s sad is that, based on some of these posts, people can leave college with a big student loan but no indication of having received an education.

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  4. Bill says on May 11, 2008 at 10:17 pm:

    The rate will be decreasing to 6.0% for subsidized loans after July 1st.

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  5. Jean says on May 5, 2008 at 3:27 pm:

    I agree Monica. It just did not seem right to me that I received a lower interest rate on my car loan last year than the rate on my student loans. Perhaps the government needs to completely rethink how they calculate federal student loan rates. The 6.8% fixed rate seems high compared to times (like now) when the T-bill rate is low. Since the T-Bill rate can fluctuate so much, there should be another way. I personally prefer fixed rates on loans. However, if the FFELP is really meant to relieve some of the financial burden for students, then the rate needs to be lower than 6.8%.

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  6. Monica says on April 17, 2008 at 8:52 am:

    Maybe it is time for the government to make an adjustment to the rate. It is not fair to try and put the economic burden on students (6.8%) who are trying to earn an education and be tax paying contributors. You can buy luxury items NOW such as boats for rates less than 6.8%, why are the gov hitting students who are currently non-wage earners hard in the pocket?

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  7. Fact checker says on March 31, 2008 at 9:14 pm:

    http://www.forecasts.org/3mT.htm
    91 Day T-Bill 1.33%

    It didnt stay at 0.21 for long…and remember that 6.8 is still better than 5% + 2.3 1 year ago. Looking at long term I think 6.8 (just a nudge above mortgage rates) was better.

    And before you make quick judgements, also remember this. We are in a recession. When we come out of this (2 – 3 years), your T-bill will probably be higher (probably around 3-4%)

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  8. Tom says on March 30, 2008 at 8:36 am:

    Time to lever up a little more on the house purchase to pay off the student loans. Should save about 1.25% (.85% after incentive adjustment). Only risk involves kicking the bucket in the near term.

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  9. danny says on March 25, 2008 at 3:03 pm:

    I agree. Name one program that the government has run successful and not put loads of money into it.

    Reply To This Comment
  10. Jonathan Simmons says on March 21, 2008 at 7:46 am:

    I completely agree with this post and it’s one reason why I believe that small government is better than big government.

    Reply To This Comment

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