A r c h i v e d  I n f o r m a t i o n

FOR RELEASE
CONTACTS: Stephanie Babyak and Jane Glickman
(202)401-1576

June 18, 1998

 Effective July 1, interest rates on new federal student loans will drop almost a full percentage point from the current rate, saving hundreds, even thousands, of dollars for borrowers over the long term.

In February, Vice President Gore introduced a plan to go forward with a scheduled loan interest rate reduction promised to students in a 1993 law, while offering private lenders a reasonable return and protecting taxpayers. The low student rate was adopted as part of a temporary, three-month measure recently enacted by Congress as part of the Transportation Equity Act for the 21st Century that was signed into law by President Clinton on June 9.

For new Federal Stafford loans with a first disbursement between July 1 and September 30, 1998, the interest rate will drop from 8.25 percent to 7.46 percent during repayment (7.66 percent to 6.86 percent while the student is in school). The new rate applies to Federal Family Education Loans (FFEL) and Federal Direct subsidized and unsubsidized Stafford loans.

Under the new rates, a typical 4-year college student with a $12,000 average debt would save $650 in interest over a standard 10-year repayment period. A graduate student borrowing $60,000 would save $3,200 in interest. [See editors' note below.]

The three-month provision will allow Congress and the administration additional time to reach agreement on a permanent interest rate change to be included in legislation reauthorizing the Higher Education Act (HEA). I urge Congress to act quickly on the reauthorization of the HEA to enact a long-term solution on student loan interest rates. Our goal is to preserve savings for borrowers striving to further their education, while offering lenders a reasonable return and protecting taxpayers at the same time," Riley said.

The administration continues to oppose provisions that would provide lenders with excessive subsidies -- estimated by the administration at $2.7 billion over the next five years -- especially during this time of generally low commercial loan interest rates and record banking industry profits. In fact, the Congressional Budget Office and U.S. Treasury Department determined that these provisions could provide returns substantially higher than banks' recent surging overall profit levels. Instead, the administration has proposed to lower lender subsidies and move toward a market-based mechanism for setting interest rates for lenders.

In addition, the Administration has also called for the following as part of the HEA reauthorization:

• the High Hopes for College" initiative that would create partnerships between colleges and low-income middle schools to inspire more young people to complete secondary school and pursue a college education;
• a reduction in the student loan origination fee by one percentage point next year and eliminating these fees entirely by 2003 for the most needy students;
• an expansion in student aid eligibility for distance learning students at degree-granting schools while ensuring quality through improved accreditation;
• the Learning Anytime, Anywhere Partnership program (LAAP), a $30 million initiative to support pilot projects that use distance learning and other technologies to deliver quality postsecondary education to students who face time and place constraints; and,
• the deferral of interest on student loans for up to three years for borrowers performing community service for low wages.

NOTE TO EDITORS: Savings were calculated using projected interest rates by the Office of Management and Budget for loans with a 10-year maturity at the new interest rate.

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