Direct Unsubsidized Stafford Loan Interest Rate – Between 1995 and 2017, outstanding federal student loan debt increased more than sevenfold, from $187 billion to $1.4 trillion (in 2017 dollars). In this report, the Congressional Budget Office examines the factors that contributed to this increase, including changes in student loan policies and how they affected borrowing and repayment:
Unless otherwise specified in this report, the years referred to are the federal fiscal years that run from October 1 to September 30 and are determined by the calendar year in which they end. Some years are identified as academic years that run from July 1 to June 30 and are also identified by the calendar year in which they end.
Direct Unsubsidized Stafford Loan Interest Rate
All credit amounts are in 2017 dollars unless otherwise stated. To convert the dollar amounts, the Congressional Budget Office used the Bureau of Economic Analysis’ Consumer Personal Expenditure Price Index.
Why Are New Student Loan Interest Rates Rising?
The primary source of historical information on payments, balances, and repayments was the National Student Loan Data System, the Department of Education’s central database for administering the federal student loan program. analyzed longitudinal data for a random sample of 4 percent of this data set collected in late 2017. As a result, the numbers presented in this report may differ slightly from the numbers provided by the Department of Education, which are based on in the full set of administrative data.
Additionally, while the Department of Education may not provide default rates for the same specific categories of borrowers analyzed in this report, the estimated average default rate is several percentage points higher than the default rates reported by the Department of Education . This is likely to be the result of differences in the way the Department for Education defines repayment groups.
The size and number of federal student loans, which provide financing to make higher education more affordable, have grown over the past few decades. In 2017, the most recent year for which detailed information was available, $96 billion in new student loans went to 8.6 million students, compared with $36 billion (in 2017 dollars) to 4.1 million students in 19951. Between 1995 and 2017 The outstanding balance of federal student loan debt increased more than sevenfold, from $187 billion to $1.4 trillion (in 2017 dollars).
In this report, the Congressional Budget Office examines the factors that have contributed to the rise in student loans and the impact of changes in student loan policy on borrowing and repayment. Because the report focuses on the period from 1995 to 2017, it does not cover the impact of the Coronavirus Relief, Assistance, and Economic Security (CARES) Act, which was passed on March 27, 2020.2
Student Loan Debt Summary
Between 1995 and 2017, students could borrow under two major federal student loan programs: the Federal Family Education Loan (FFEL), which guaranteed loans made by banks and other lenders before 2010, and the William D. Ford, through which the federal government issued loans. directly since 1994. Both programs operated in parallel until 2010, guaranteeing or issuing loans to students under almost identical conditions.
The Direct Lending Program continues to offer a variety of loan types and repayment plans. Loans are limited to a maximum amount (which varies depending on the type of loan) and are granted at an interest rate that depends on the type and year of the loan. Once borrowers graduate, they repay the loan according to one of the repayment plans available. The required monthly payments are determined by the loan amount, interest rate and repayment schedule. Borrowers who repeatedly fail to make required payments are considered to be in default on their loan, at which point the government or lender may try to recover the debt through other means, such as garnishment. Under certain repayment plans, qualified borrowers can have the loan balance forgiven after a certain period of time – 10, 20 or 25 years.
The volume of student loans increased because the number of borrowers increased, the average amount they borrowed increased, and the rate at which the loans were paid off decreased. Some aspects of student loans—particularly loan limits, interest rates, and repayment plans—have changed over time, affecting loans and repayments, but the main drivers of this growth have been factors beyond the direct control of policymakers. For example, between 1995 and 2017, the total number of students attending higher education and the average cost of education increased significantly.
Much of the overall increase in loans was the result of a disproportionate increase in the number of students borrowing to attend for-profit schools. Total student loan debt at for-profit schools rose sharply from 9 percent of total student loan payments in 1995 to 14 percent in 2017. It rose from 2 percent to 12 percent.) Additionally, students attending schools for-profits were more likely to leave the school holidays without completing their programs and do worse in the labor market than students who attended other types of schools; they were also more likely to default on their loans.
What Is The Stafford Loan Interest Rate?
The parameters of federal student loans available to borrowers have changed periodically, and these changes have affected loan and default trends. Between 1995 and 2017, policymakers introduced new loan types and repayment plans (some of which provide for loan forgiveness after a certain period) and adjusted the parameters of existing loan types and repayment plans. This report focuses on changes in the loan parameters that matter most to borrowers—loan limits, interest rates, and repayment plans—and the effects of those changes on lending and default.
There were two major federal student loan programs. The first was the Federal Family Education Loan Program, which guaranteed loans made by banks and nonprofit lenders from 1965 to 2010. In 1994, Congress established the William D. Ford Federal Direct Loan Program, which which issued student loans directly from funds secured by the Treasury Fund. Both programs operated in parallel during the 2010 academic year, guaranteeing or issuing student loans on nearly identical terms and offering different loan types and repayment options. Federal student loans usually have more favorable terms for borrowers than loans offered by private lenders.
The Health and Education Reconciliation Act of 2010 eliminated the new FFEL loans. Last year, the FFEL program guaranteed 80 percent of new loans issued and accounted for about 70 percent of total debt. Since then, all new federal student loans have been issued through the Direct Loan Program.3 In 2020, Direct Loans accounted for approximately 80 percent of outstanding debt.
The Direct Loan Program offers three types of loans: Subsidized Stafford Loans, Unsubsidized Stafford Loans, and PLUS Loans. Loans vary depending on eligibility criteria, maximum loan size limits, interest rates and interest calculation rules:
What Is A Good Interest Rate?
When borrowers graduate, they automatically switch to a standard repayment plan that amortizes the loan principal and accrued interest over 10 years. Other repayment plans and various means to suspend or reduce payments are available and are expanding over time. For example, borrowers can choose a graduated repayment plan or an IDR plan. In a graduated repayment plan, the required monthly payments increase over time with the expectation that the borrower’s income will also increase over time. In IDR plans, borrowers’ payments are based on their income and can go to zero if their income falls below a certain threshold. After choosing a plan and beginning repayment, borrowers can apply for a deferment or rollover, which temporarily reduces or suspends their payments.4
Borrowers who miss a required monthly payment and do not receive a deferment or default from their loan servicer are considered 30 days delinquent. Borrowers who continue to miss payments and are 270 days late are declared in default by the government on their loans. If borrowers default, they lose eligibility for further federal assistance until the default is resolved and the default is reported to the consumer credit reporting agencies.
Unlike balances on some other types of loans, student loan balances are usually not discharged when the borrower files for bankruptcy. It is generally expected that the government or its contractor will attempt to recover the loan balance in various ways, such as through the award of wages, tax or social security refunds, or civil litigation. Typically, with these funds, as well as through voluntary repayment of delinquent loans, the government eventually pays off most of the remaining balance of defaulted loans.
When borrowers don’t pay enough to cover the interest on the loan—for example, if the payment required on the IDR plan is small, if they receive a deferment or forbearance, or if they default—their loan balance increases. (For subsidized loans, deferrals temporarily stop interest accrual, so balances on these loans don’t grow during periods of default.) Of borrowers who entered into default in the five-year period between 2010 and 2014, 56 percent had a balance sometime between the time they defaulted and 2017. Of borrowers whose balances increased, 78 percent received a temporary deferment or forbearance, 44 percent
Types Of Financial Aid
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