New Report: Cutting Interest Rates in Half Would Save Working and Middle Class Arizona Students Thousands of Dollars in Debt

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Arizona PIRG

A Congressional proposal to cut student loan interest rates in half will save the average lower and middle income borrower $4,420 over the life of their loans, according to Cutting Interest Rates, Lowering Student Debt, a new report by the Arizona Public Interest Research Group (Arizona PIRG).

The Congressional proposal, which the U.S. House approved yesterday, would lower interest rates on undergraduate subsidized Stafford loans over the next five years until they are cut in half to 3.4% starting in 2011. In 2004-2005 more than 5.5 million students took out subsidized Stafford loans to pay for college.

“Over the past decade we have asked Arizona’s college students to shoulder a heavy burden of debt to pay for college,” said Ross Meyer, Undergraduate Student Body President at Arizona State University (ASU). “Cutting interest rates on student loans will help millions of lower and middle income students and their families by saving them thousands of dollars in student loan payments.”

In 2004-5, 33,049 Arizona students at four-year colleges took out subsidized Stafford loans. The average borrower graduated with $14,801 in loan debt.

“Cutting interest rates for student loans is the right thing to do and meets two important goals,” said U.S. Representative Harry Mitchell, a co-sponsor of the legislation. “It helps families pay for college as the cost of tuition continues to rise and it works to ensure that we will have a steady stream of well-trained college graduates to grow Arizona’s economy for years to come.”

By lowering interest rates on subsidized Stafford loans, Congress would save Arizona college graduates thousands of dollars over the life of their loans:

  • The average four-year college student in Arizona starting school in 2007 with subsidized Stafford loans would save $2,440 over the life of his or her loans under the proposed legislation.
  • When the interest rate cut is fully phased in, the average four-year college student in Arizona starting school in 2011 with subsidized Stafford loans will save $4,730 over the life of his or her loans.

About 5.5 million students borrow subsidized Stafford loans every year. Of those borrowers, 3.3 million attend four-year public or private non-profit institutions. According to the Congressional Research Service, 75% of traditional-age subsidized Stafford borrowers come from families with incomes of $67,000 or less. The median income for an American family of four is $65,000.

“Lowering interest rates on loans is a great first step towards providing students and families with a more affordable college education,” said Alexandra Glorioso, Campaign Coordinator for Students for Arizona PIRG. “We call on Congress to continue helping students pay for college by increasing need-based federal student aid and by passing broad protections for student borrowers, such as limits on the percent of income that can be required for student loan repayment.”

The policy proposal analyzed by Arizona PIRG would cut the fixed interest rate on subsidized Stafford loans for undergraduates from 6.8% to 3.4% over the next five years. Loans originated during the intervening five years will be set at fixed interest rates of 6.12% in 2007-08, 5.44% in 2008-09, 4.76% in 2009-10, 4.08% in 2010-11, and 3.4% from 2011 forward. After graduation, students would be able to consolidate their loans into one loan at the weighted average of the interest rates of their various loans.

All federal Stafford loans receive two forms of government support: the federal government covers the cost of the loans to lenders in case of student default and provides financial subsidies to insure lenders make a profit. Stafford loans are considered “subsidized” when the government pays the interest charges on the loan while the student is in school.