Interest Rate On Stafford Loans - 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 contributed to that growth, including changes in student loan policies and how they affected borrowing and repayment:
Unless otherwise indicated in this report, the years referred to are federal fiscal years, which begin October 1 through September 30 and are indicated by the calendar year in which they end. Some years are identified as academic years, from July 1 to June 30 and are also indicated by the calendar year in which they end.
Interest Rate On Stafford Loans
All loan amounts are in 2017 dollars unless otherwise noted. To convert the amounts to dollars, the Congressional Budget Office used the price index for personal consumption expenditures from the Bureau of Economic Analysis.
Predicting Future Student Loan Interest Rates
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 that data set, drawn in late 2017. Therefore, the numbers presented in this report may differ slightly from the numbers reported by the Department of Education that are based on the full administrative data set.
Additionally, while the Department of Education may not provide delinquency rates for the same specific categories of borrowers analyzed in this report, the average delinquency rate estimate is several percentage points higher than the delinquency rates reported by the Department of Education. This is likely the result of differences in how the Department for Education defines repayment cohorts.
The volume and number of federal student loans, which provide financing to make higher education more affordable, have grown in recent decades. In 2017, the most recent year for which detailed information was available, $96 billion in new federal student loans were disbursed to 8.6 million students, compared to $36 billion (in 2017 dollars) issued to 4, 1 million students in 1995.1 Between 190175 and the balance22 of outstanding federal student loan debt increased more than sevenfold, from $187 million to $1.4 trillion (in 2017 dollars).
In this report, the Congressional Budget Office examines the factors that have contributed to the growth in the volume of student loans and the effects 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 effects of the Coronavirus Relief, Economic Security (CARES) Act, which was enacted on March 27, 2020.2
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Between 1995 and 2017, students were able to borrow through two major federal student loan programs, the Federal Family Education Program (FFEL), which guarantees loans issued by banks and other lenders through 2010, and the William Federal Direct Loan Program D. Ford, through which the federal government issued loans directly since 1994. The two programs operated in parallel until 2010, either guaranteeing or issuing student loans under nearly identical terms.
The direct loan program continues to offer various types of loans and repayment plans. The loan is limited to a maximum amount (which varies by loan type) and is extended at an interest rate specific to the loan type and year. After borrowers complete their education, they repay their loan according to one of the repayment plans available. The required monthly payments are determined by the amount borrowed, the interest rate and the repayment plan. Borrowers who do not make the required payments are considered to be in default, at which point the government or the loan provider may try to recover the owed funds through others, such as by garnishing wages. Under certain repayment plans, qualified borrowers can have their remaining loan balance forgiven after a specific time period: 10, 20 or 25 years.
The volume of student loans grew because the number of borrowers increased, the average amount they borrowed increased, and the rate at which they paid back their loans decreased. Some student loan parameters, particularly loan limits, interest rates, and repayment plans, have changed over time, affecting borrowing and repayment, but the main driver of that growth has been factors outside the direct control of servicers. politicians For example, total high school enrollment and the average cost of tuition increased substantially between 1995 and 2017.
Much of the overall increase in debt was the result of a disproportionate increase in the number of students who took out loans to attend for-profit schools. Total loans to attend for-profit schools increased substantially, from 9 percent of total student loan disbursements in 1995 to 14 percent in 2017. It grew from 2 percent to 12 percent.) Additionally, students who attended for-profit schools were more likely to drop out of school without completing their programs and fared worse in the tax-labor market than students who attended other types of schools; they were also more likely to default on their loans.
Guide To Student Loan Interest Rates
The federal student loan parameters available to borrowers have changed periodically, and those changes have affected loan and default patterns. Between 1995 and 2017, policymakers introduced new loan types and repayment plans (some of which allow for loan forgiveness after a certain time) and adjusted the loan type parameters of existing loans and repayment plans. This report focuses on changes in loan parameters that are most relevant to borrowers (loan limits, interest rates and repayment plans) and the consequences of these changes on loans and defaults.
There were two main federal student loan programs. The first was the Federal Family Education Loan program, which guaranteed loans issued by banks and nonprofit lenders between 1965 and 2010. In 1994, Congress established the William D. Ford Federal Direct Loan Program, which issued student loans directly with funds provided by the Treasury. Both programs operated in parallel until the 2010 school year, guaranteeing or issuing student loans under nearly identical terms and offering a variety of loan types and repayment options. Federal student loans generally have terms that are more favorable to the borrower than loans offered by private lenders.
The Health and Education Reconciliation Act of 2010 eliminated new FFEL loans. In its last year, the FFEL program guaranteed 80 percent of new loans issued and rose to about 70 percent of total outstanding balances. Since then, all new federal student loans have been made through the Direct Loan Program.3 In 2020, Direct Loans accounted for approximately 80 percent of the outstanding loan balance.
The Direct Loan Program offers three types of loans: Subsidized Stafford Loans, Unsubsidized Stafford Loans, and PLUS Loans. Loans vary in terms of eligibility criteria, maximum loan size limits and interest rates and rules on how interest accrues:
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When borrowers complete their schooling, they automatically enroll in the standard repayment plan, which repays the loan principal and accrued interest over a 10-year period. Other repayment plans, as well as various tools to stop or reduce payments, are available and have expanded 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 be as low as zero if their income falls below a certain threshold. After choosing a plan and beginning repayment, borrowers can request a payment deferment or forbearance, which temporarily reduces or stops their payments.4
Borrowers who do not have a monthly payment due and have not obtained a deferment or forbearance from their loan servicer are considered 30 days delinquent. The government declares that borrowers who continue to default on payments and remain delinquent for 270 days. When a borrower defaults, they lose eligibility for further federal aid until the default is resolved and the default is reported to the consumer credit reporting agencies.
Unlike balances on other types of loans, student loan balances are typically not discharged when the borrower files for bankruptcy. The government or its contractor must try to recover the loan balance through various means, such as wage garnishments, withholding of taxes or Social Security benefits, or civil litigation follows. Usually, through those means, as well as through voluntary repayment of defaulted loans, the government eventually recovers most of the remaining balance of defaulted loans.
When borrowers don't pay enough to cover the interest on their loan, for example, when the payment required in an IDR plan is small, when they receive a deferment or forbearance, or when they default, their loan balance increases. (For subsidized loans, deferment temporarily stops interest accrual, so the balances on those loans don't grow during the deferment periods.) Of borrowers who entered repayment in the five-year period between 2010 and 2014, 56 percent it had an increase in its balance to some extent. point between when they went into repayment and 2017. Of borrowers whose balances increased, 78 percent had received a deferral or temporary forbearance, 44 percent
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