Cutting Lender Subsidies

What's New

According to a new report by U.S. PIRG, first year college students starting this fall can expect to save several thousand dollars on their student loans under new interest rate changes beginning on July 1st. The report, Cutting Interest Rates, Lowering Student Debt Updated, finds that the average four-year college student starting school in 2008 with subsidized Stafford loans will save about $2,570 over the life of his or her loans.

The interest rate changes are the result of the College Cost Reduction and Access Act of 2007, passed last summer and signed into law by the President in September. Interest rates on subsidized Stafford loans will lower from 6.8% to 6.0% on July 1st, 2008.

Overview

Currently, the federal government operates two major programs to provide loans to help students pay for college: the private sector Federal Family Education Loan (FFEL) program and the government’s Direct Loan (DL) program.

President Bush’s recent budget reveals that the bank (FFEL) program costs taxpayers billions of dollars more each year to run than does the DL program. From 1992 to 2004, the cumulative taxpayer subsidy costs were $39 billion for FFEL loans, and only $3 billion for Direct Loans. For a typical college student’s debt of $20,000, the federal government spends nearly $2,200 more in subsidy costs for a loan through the FFEL program.