Interest Rates on Subsidized Stafford Loans to Undergraduate Students

Interest Rates on Subsidized Stafford Loans to Undergraduate Students

Interest Rates on Subsidized Stafford Loans
to Undergraduate Students
David P. Smole
Specialist in Education Policy
January 10, 2013
Congressional Research Service
7-5700
www.crs.gov
R42515
CRS Report for Congress
Pr
epared for Members and Committees of Congress

Interest Rates on Subsidized Stafford Loans to Undergraduate Students

Summary
Subsidized Stafford Loans are one of the types of federal student loans made available through
the William D. Ford Federal Direct Loan (DL) program, authorized under Title IV, Part D of the
Higher Education Act of 1965 (HEA). These loans are only available to students who
demonstrate financial need. Since July 1, 2012, Subsidized Stafford Loans are available
exclusively to undergraduate students. The federal government “subsidizes” these loans by
relieving the borrower of the requirement to pay the interest that accrues while he or she is in
school and during other authorized periods.
Fixed interest rates apply to all Subsidized Stafford Loans made on or after July 1, 2006. During
the period from July 1, 2006, through June 30, 2008, Subsidized Stafford Loans to undergraduate
students were made with a fixed interest rate of 6.8%. The College Cost Reduction and Access
Act of 2007 (CCRAA; P.L. 110-84) set lower interest rates on Subsidized Stafford Loans made to
undergraduate students during the period from July 1, 2008, through June 30, 2012. Different,
incrementally lower fixed interest rates were set for loans made for each award year (AY) during
this period. A fixed interest rate of 3.4% applies to Subsidized Stafford Loans made to
undergraduate students during the final award year (AY) affected by the CCRAA amendments,
AY2011-AY2012, which ran from July 1, 2011, through June 30, 2012
The interest rate reductions made by the CCRAA did not apply to Subsidized Stafford Loans that
would be made on or after July 1, 2012. These loans were scheduled to be made with a fixed
interest rate of 6.8%. In the 112th Congress, there was broad support for extending, through June
30, 2013, the period during which Subsidized Stafford Loans would be made with a 3.4% interest
rate. However, the process of identifying and agreeing on offsets to the resulting increase in
mandatory spending proved difficult during a period in which the federal government faced
budgetary challenges. Provisions enacted by the Moving Ahead for Progress in the 21st Century
Act (MAP-21; P.L. 112-141) set a fixed interest rate of 3.4% for Subsidized Stafford Loans made
during the one-year period from July 1, 2012, through June 30, 2013 (AY2012-2013). The 3.4%
interest rate set by MAP-21 applies only to loans made for AY2012-2013. Under current law, all
Subsidized Stafford Loans made on or after July 1, 2013, will have a fixed interest rate of 6.8%.
Whether to allow the 6.8% interest rate scheduled to apply to loans disbursed on or after July 1,
2013, to take effect or to enact legislation that would establish a different interest rate or interest
rate formula is an issue that may be considered during the 113th Congress.

Congressional Research Service

Interest Rates on Subsidized Stafford Loans to Undergraduate Students

Contents
Subsidized Stafford Loans to Undergraduate Students .................................................................... 1
Interest Rates ............................................................................................................................. 2
Variable Rate Loans ............................................................................................................ 2
Fixed Rate Loans ................................................................................................................. 3
Legislation in the 112th Congress ..................................................................................................... 5
President’s FY2013 Budget Proposal ........................................................................................ 5
Congressional Action ................................................................................................................. 5
H.R. 4628, the Interest Rate Reduction Act ........................................................................ 6
S. 2343, the Stop the Student Loan Interest Rate Hike Act of 2012.................................... 6
MAP-21 (P.L. 112-141) ....................................................................................................... 6
Estimated Benefits to Borrowers of an Interest Rate Reduction ..................................................... 7
Who Borrows Subsidized Stafford Loans? ...................................................................................... 8
Distribution by Total Income ..................................................................................................... 9
Issues for Congress ........................................................................................................................ 10

Tables
Table 1. Stafford Loan Interest Rates in Effect During Repayment: 1993-1994 through
2013-2014 ..................................................................................................................................... 4
Table 2. Estimated Savings from an Interest Rate Reduction from 6.8% to 3.4% .......................... 7
Table 3. Distribution of Subsidized Stafford Loan Borrowers by 2006 Total Income:
AY2007-2008 ............................................................................................................................... 9

Contacts
Author Contact Information........................................................................................................... 10

Congressional Research Service

Interest Rates on Subsidized Stafford Loans to Undergraduate Students

he William D. Ford Federal Direct Loan (DL) program, authorized under Title IV, Part D
of the Higher Education Act of 1965 (HEA; P.L. 89-329), as amended, is the primary
Tfederal student loan program administered by the U.S. Department of Education.1 Several
types of federal student loans are made available through the DL program to undergraduate and
graduate students and to the parents of dependent undergraduate students to help them finance
their postsecondary education expenses. These are Subsidized Stafford Loans, Unsubsidized
Stafford Loans, PLUS Loans, and Consolidation Loans. The terms and conditions of federal
student loans are specific to when the loan is made and may also depend on when a borrower first
obtained a federal student loan.2 This report examines the interest rates that are applicable to
Subsidized Stafford Loans borrowed by undergraduate students.
Subsidized Stafford Loans to
Undergraduate Students
Subsidized Stafford Loans are only available to students who demonstrate financial need. Since
July 1, 2012, Subsidized Stafford Loans are available exclusively to undergraduate students.3
With certain exceptions, the federal government “subsidizes” these loans by paying the interest
that accrues on the loans while the borrower is enrolled in an eligible program on at least a half-
time basis (in-school), during a six-month grace period that begins once a borrower first ceases to
be enrolled in school on at least a half-time basis,4 and during periods when a borrower is eligible
to defer making payments (deferment).5 For Subsidized Stafford Loans made between July 1,
2012, and June 30, 2014, (during award years (AY) 2012-2013 and AY2013-2014) the interest
will be subsidized during in-school and deferment periods, but not during the six-month grace
period.6 Students must begin repaying their loans at the end of the six-month grace period. For
individuals who are new borrowers7 on or after July 1, 2013, the period during which individuals

1 Until July 1, 2010, federal student loans were also made available through the Federal Family Education Loan (FFEL)
program, authorized under Title IV, Part B of the HEA. The FFEL program preceded the establishment of the DL
program and many of the terms and conditions of DL program loans are based on the terms and conditions that apply to
FFEL program loans. The SAFRA Act, part of the Health Care and Education Reconciliation Act of 2010 (HCERA;
P.L. 111-152), terminated the authority to make new loans under the FFEL program after June 30, 2010.
2 In general, loan terms and conditions are specific to the date on which the first disbursement of the loan is made.
However, certain loan terms and conditions are specific to the date on which the borrower first obtained a federal
student loan made under HEA, Title IV. For additional information on loans made through the DL program, see CRS
Report R40122, Federal Student Loans Made Under the Federal Family Education Loan Program and the William D.
Ford Federal Direct Loan Program: Terms and Conditions for Borrowers, by David P. Smole.
3 Authority to make Subsidized Stafford Loans to graduate and professional students was terminated by the Budget
Control Act of 2011 (BCA; P.L. 112-25). For additional information on BCA amendments, see CRS Report R41965,
The Budget Control Act of 2011, by Bill Heniff Jr., Elizabeth Rybicki, and Shannon M. Mahan.
4 A grace period is a six-month period beginning immediately after a student first ceases to be enrolled in school on at
least a half-time basis. During the grace period, borrowers are not required to begin repaying their loans. According to
amendments made by P.L. 112-74, interest will not be subsidized during the grace period on Subsidized Stafford Loans
disbursed between July 1, 2012, and June 30, 2014.
5 Deferment periods (discussed later in this report) are periods during which borrowers are able to suspend loan
repayment (e.g., if they are pursuing additional postsecondary studies, are performing qualifying military service, or are
experiencing an economic hardship).
6 Interest subsidies were eliminated on loans disbursed during this two-year period by the Consolidated Appropriations
Act, 2012 (P.L. 112-74). For additional information on P.L. 112-74, see CRS Report R42010, Labor, Health and
Human Services, and Education: FY2012 Appropriations, coordinated by Karen E. Lynch.
7 According to HEA, §103(12) New Borrower, “[t]he term ‘new borrower’ when used with respect to any date means
(continued...)
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Interest Rates on Subsidized Stafford Loans to Undergraduate Students

may borrow Subsidized Stafford Loans and the period during which the in-school interest subsidy
may be provided will be limited to 150% of the published length of their educational program.8
Subsidized Stafford Loans are a form of need-based federal student aid. To borrow a Subsidized
Stafford Loan, a student must establish financial need through federal need analysis procedures.
According to federal rules, the amount a student may borrow through a Subsidized Stafford Loan
is determined by subtracting the sum of the student’s expected family contribution (EFC) and
estimated financial assistance (EFA) from other sources (e.g., scholarships, grants, other loans,
and other assistance) from the cost of attendance (COA) of the school the student attends. Each
year, students may borrow Subsidized Stafford Loans in amounts up to the lesser of either the
amount that their school’s COA exceeds the sum of their EFC and EFA, or the annual loan limit
applicable to their class level. Currently, annual loan limits for Subsidized Stafford Loans to
undergraduate students are $3,500 for first-year students, $4,500 for second-year students, and
$5,500 for students in their third year of undergraduate studies or beyond. Students often borrow
more than one loan over a multi-year period of undergraduate study. Undergraduate students may
borrow up to a cumulative maximum of $23,000 in Subsidized Stafford Loans.
Interest Rates
The interest rates applicable to Subsidized Stafford Loans are established by statute. Applicable
interest rates have changed numerous times throughout the history of the federal student loan
programs, including changes between fixed interest rates and variable interest rate formulas. Like
many other loan terms and conditions, the interest rate or interest rate formula applicable to a loan
depends on when the loan is made. A brief history of interest rates and interest rate formulas that
have been applicable to Subsidized Stafford Loans since the establishment of the DL program is
provided below.
Variable Rate Loans
When the DL program was first established, Subsidized Stafford Loans were made with variable
interest rates. Loans disbursed on or after October 1, 1992, and before July 1, 2006, are variable
rate loans, on which rates adjust annually.9 The formulas used to calculate the variable interest
rates for these loans, many of which are still outstanding, are specified by statute and stay in
effect from the time the loan is disbursed through the life of the loan (provided that the loan is not
consolidated into a fixed-rate Consolidation Loan).10 The rates for these loans are determined
every June 1, and they become effective July 1 for the following 12-month period. The variable

(...continued)
an individual who on that date has no outstanding balance of principal or interest owing on any loan made, insured, or
guaranteed under title IV.”
8 These changes that limit the availability of the in-school interest subsidy were made by MAP-21.
9 For all Stafford Loans first disbursed on or after July 1, 1994, the applicable interest rate, and whether the rate is fixed
or variable, depends on the date the first disbursement of a borrower’s loan is made. Previously, applicable interest
rates depended largely on whether a borrower had outstanding loans at the time of borrowing an additional loan.
10 If a variable rate loan is consolidated into a new Consolidation Loan, the interest rate becomes fixed. At present, the
interest rate on Consolidation Loans is the weighted average of the interest rates in effect on the underlying loans, at the
time of consolidation, rounded up to the nearest higher one-eighth of 1%, and capped at 8.25%. Previously, other rate
setting formulas applied to Consolidation Loans.
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Interest Rates on Subsidized Stafford Loans to Undergraduate Students

rates are calculated based on the bond equivalent rate of the 91-day Treasury bill,11 plus a
premium that differs depending on whether the borrower is in school or in repayment. For loans
made from July 1, 1998, through June 30, 2006, the borrower interest rate is based on the 91-day
Treasury bill, plus 1.7 percentage points for borrowers who are in school, grace, or deferment;
and the 91-day Treasury bill, plus 2.3 percentage points for borrowers who are in repayment.12
The maximum interest rate that may apply to Subsidized Stafford Loans and Unsubsidized
Stafford Loans disbursed during this period is capped at 8.25%.
Fixed Rate Loans
In 2002, legislation was enacted to transition to a fixed interest rate structure for student loans.13
P.L. 107-139 amended the HEA to specify that all Subsidized Stafford Loans and Unsubsidized
Stafford Loans made on or after July 1, 2006, would have a fixed interest rate of 6.8%. On
student loans with a fixed interest rate, the interest rate that is in effect at the time the loan is
made remains in effect until the loan is paid in full.
In 2007, the College Cost Reduction and Access Act of 2007 (CCRAA; P.L. 110-84) set
incrementally lower fixed interest rates on Subsidized Stafford Loans made to undergraduate
students during the four-year period from July 1, 2008, through July 1, 2012 (AY2008-2009
through AY2011-2012).14 Different, incrementally lower fixed interest rates were set for loans
made for each award year during this period. A fixed rate of 6.0% applies to loans made on or
after July 1, 2008, and before July 1, 2009 (AY2008-2009); a fixed rate of 5.6% applies to loans
made on or after July 1, 2009, and before July 1, 2010 (AY2009-2010); a fixed rate of 4.5%
applies to loans made on or after July 1, 2010, and before July 1, 2011 (AY2010-2011); and a
fixed rate of 3.4% applies to loans made on or after July 1, 2011, and before July 1, 2012
(AY2011-2012). The CCRAA interest rate changes did not apply to Subsidized Stafford Loans
that would be made to undergraduate students on or after July 1, 2012, which were scheduled to
be made with a 6.8% interest rate.
In 2012, the Moving Ahead for Progress in the 21st Century Act (MAP-21; P.L. 112-141) set an
interest rate of 3.4% on Subsidized Stafford Loans made between July 1, 2012, and June 30, 2013
(AY2012-2013). Under current law, Subsidized Stafford Loans made on or after July 1, 2013—
those for AY2013-2014 and future award years—will have a fixed interest rate of 6.8%.
Interest rates in effect during repayment on Subsidized Stafford Loans made since the
establishment of the DL program are presented below in Table 1.

11 Interest rates are adjusted annually based on the bond equivalent rate of the 91-day Treasury bill at the final auction
held prior to June 1.
12 Differential rates between in-school, grace, and deferment period, and the repayment period were established when
Stafford Loans were primarily made through the Federal Family Education Loan (FFEL) program because loan
servicing costs are lower during the in-school, grace, and deferment periods, when no payments are required. On
Subsidized Stafford Loans, a lower interest rate during in-school, grace, and deferment periods does not directly impact
the amount owed by the borrower, as the interest is subsidized by the government during these periods.
13 P.L. 107-139, An Act to amend the Higher Education Act of 1965 to establish fixed interest rates for student and
parent borrowers, to extend current law with respect to special allowances for lenders, and for other purposes.
14 These lower interest rates were offset by savings in mandatory spending generated by changes made to the FFEL
program. However, the savings were not sufficient to pay for reduced interest rates on loans made during subsequent
award years. For additional information on the CCRAA amendments to the HEA, see CRS Report RL34077, Student
Loans, Student Aid, and FY2008 Budget Reconciliation, by Adam Stoll, David P. Smole, and Charmaine Mercer.
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Interest Rates on Subsidized Stafford Loans to Undergraduate Students

Table 1. Stafford Loan Interest Rates in Effect During Repayment: 1993-1994 through 2013-2014
Variable Interest Rate Loans
Fixed Interest Rate Loans
Interest Rate
Disbursement Period
in Effect
(Jul. 1—
Oct. 1, 1992— Jul. 1, 1994— Jul. 1, 1995— Jul. 1, 1998— Jul. 1, 2006— Jul. 1, 2008— Jul. 1, 2009— Jul. 1, 2010— Jul. 1, 2011— Jul. 1, 2013—
Jun. 30)
Jun. 30, 1994 Jun. 30, 1995 Jun. 30, 1998 Jun. 30, 2006 Jun. 30, 2008 Jun. 30, 2009 Jun. 30, 2010 Jun. 30, 2011 Jun. 30, 2013 Jun. 30, 2014
1993-1994
6.22

1994-1995
7.43
7.43

1995-1996
8.92
8.25
8.25

1996-1997
8.26
8.25
8.25

1997-1998
8.26
8.25
8.25

1998-1999
8.26
8.25
8.25
7.46

1999-2000
7.72
7.72
7.72
6.92

2000-2001
8.99
8.25
8.25
8.19

2001-2002
6.79
6.79
6.79
5.99

2002-2003
4.86
4.86
4.86
4.06

2003-2004
4.22
4.22
4.22
3.42

2004-2005
4.17
4.17
4.17
3.37

2005-2006
6.10
6.10
6.10
5.30

2006-2007 7.94 7.94 7.94 7.14 6.80

2007-2008 8.02 8.02 8.02 7.22 6.80

2008-2009 5.01 5.01 5.01 4.21 6.80 6.00

2009-2010 3.28 3.28 3.28 2.48 6.80 6.00 5.60

2010-2011 3.27 3.27 3.27 2.47 6.80 6.00 5.60 4.50

2011-2012 3.16 3.16 3.16 2.36 6.80 6.00 5.60 4.50 3.40
2012-2013 3.19 3.19 3.19 2.39 6.80 6.00 5.60 4.50 3.40
2013-2014 TBDa TBDa TBDa TBDa 6.80 6.00 5.60 4.50 3.40 6.80
Sources: U.S. Dept. of Education, Office of Federal Student Aid, FFEL Variable Interest Rates; and CRS Report R40122, Federal Student Loans Made Under the Federal Family
Education Loan Program and the William D. Ford Federal Direct Loan Program: Terms and Conditions for Borrowers, by David P. Smole.
a. Variable interest rate yet to be determined.
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Interest Rates on Subsidized Stafford Loans to Undergraduate Students

Legislation in the 112th Congress
In the 112th Congress, numerous proposals were made to reduce the interest rate that applies to
Subsidized Stafford Loans made to undergraduate students below the fixed rate of 6.8% that was
scheduled to take effect for loans made on or after July 1, 2012. Most of these proposals were to
extend the 3.4% fixed interest rate that applies to Subsidized Stafford Loans made during the
period from July 1, 2011, through June 30, 2012 (AY2011-2012) to also apply to loans made
during the period from July 1, 2012, through June 30, 2013 (AY2012-2013). While there
appeared to be broad support for extending the period during which Subsidized Stafford Loans
would be made with a 3.4% fixed interest rate through June 30, 2013, the process of identifying
and agreeing on offsets to the resulting increase in mandatory spending proved difficult during a
period in which the federal government faced budgetary challenges.
President’s FY2013 Budget Proposal
As part of the President’s budget for FY2013, the Obama Administration proposed reducing the
interest rate that would apply to Subsidized Stafford Loans made to undergraduate students
during the period from July 1, 2012, through June 30, 2013, from 6.8% to 3.4%.15 The proposal
would not have affected loans made on or after July 1, 2013, which under current law are
scheduled to be made with a fixed interest rate of 6.8%. The Administration indicated that this
change would affect approximately 7.4 million borrowers.16 The Congressional Budget Office
(CBO) estimated that this change would lead to an increase of $6.0 billion in mandatory
spending.17 At the same time, the Administration also proposed eliminating the interest subsidy on
Subsidized Stafford Loans for borrowers who remain in school beyond 150% of their program
length.18
Congressional Action
A brief summary of legislation that was considered during the 112th Congress to lower the interest
rate on Subsidized Stafford Loans made to undergraduate students is provided below.

15 U.S. Department of Education, FY2013 Justification of Appropriation Estimates to the Congress, “Student Loans
Overview,” at http://www2.ed.gov/about/overview/budget/budget13/justifications/r-loansoverview.pdf.
16 U.S. Department of Education, “President Obama Calls on Congress to Prevent Student Loan Interest Rates from
Doubling,” The Official Blog of the U.S. Department of Education, April 21, 2012, http://www.ed.gov/blog/2012/04/
president-obama-calls-on-congress-to-prevent-student-loan-interest-rates-from-doubling/; and unpublished data made
available by the U.S. Department of Education.
17 Congressional Budget Office, CBO’s Reestimate of the President’s 2013 Mandatory Proposals for Postsecondary
Education, March 2012, http://www.cbo.gov/sites/default/files/cbofiles/attachments/
43101_HigherEducation_PresidentsFiscal2013PoliciesReestimated.pdf.
18 U.S. Department of Education, FY2013 Justification of Appropriation Estimates to the Congress, “Student Loans
Overview,” at http://www2.ed.gov/about/overview/budget/budget13/justifications/r-loansoverview.pdf.
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Interest Rates on Subsidized Stafford Loans to Undergraduate Students

H.R. 4628, the Interest Rate Reduction Act
The House passed H.R. 4628, the Interest Rate Reduction Act, which contained language to
reduce the interest rate from 6.8% to 3.4% on Subsidized Stafford Loans made to undergraduate
students during the period from July 1, 2012, through June 30, 2013. H.R. 4628 would not have
changed the interest rate of 6.8% scheduled to apply to loans made on or after July 1, 2013. To
offset the increase in mandatory spending, H.R. 4628 would have repealed the Prevention and
Public Health Fund (PPHF) authorized under Section 4002 of the Patient Protection and
Affordable Care Act (ACA; P.L. 111-148), as amended, and would have rescinded the balance of
unobligated monies made available for the fund.19 Under existing law, PPHF funds are to be
transferred by the Secretary of Health and Human Services (HHS) to “programs authorized by the
Public Health Service Act [PHSA], for prevention, wellness, and public health activities including
prevention research, health screenings, and initiatives, such as the Community Transformation
grant program, the Education and Outreach Campaign Regarding Preventive Benefits, and
immunization programs.” H.R. 4628 was not considered by the Senate.
S. 2343, the Stop the Student Loan Interest Rate Hike Act of 2012
As an alternative to H.R. 4628, the Senate considered S. 2343, which contained language to
reduce the interest rate from 6.8% to 3.4% on Subsidized Stafford Loans made to undergraduate
students during the period from July 1, 2012, through June 30, 2013. It would not have changed
the interest rate of 6.8% scheduled to apply to loans made on or after July 1, 2013. To offset the
increase in mandatory spending, S. 2343 would have amended the Internal Revenue Code of 1986
(IRC), as amended, and the Social Security Act (SSA), as amended.20 These amendments would
have required taxpayers with modified adjusted gross income in excess of $250,000 to pay self-
employment taxes (Social Security and Medicare) on certain income currently exempt from self-
employment taxes if that income was received from a professional service partnership or a
professional service S corporation in which at least 75% of gross income was attributable to three
or fewer shareholders.21 The Senate failed to pass S. 2343.
MAP-21 (P.L. 112-141)
Legislation to lower the interest rate on Subsidized Stafford Loans was incorporated into a larger
surface transportation reauthorization bill, H.R. 4348, the Moving Ahead for Progress in the 21st
Century Act (MAP-21), and enacted as P.L. 112-141. MAP-21 lowered the interest rate scheduled
to apply to Subsidized Stafford Loans made during the period from July 1, 2012, through June 30,
2013 (AY2012-2013) from 6.8% to 3.4%. It did not make any change to the 6.8% interest rate
scheduled to apply to Subsidized Stafford Loans made on or after July 1, 2013. Also, to partially
offset the increase in mandatory spending resulting from the reduction in student loan interest
rates, for individuals who are new borrowers on or after July 1, 2013, the MAP-21 amendments
restrict both the period of eligibility to borrow Subsidized Stafford Loans and the period during

19 For information on the budgetary effects of H.R. 4628, see CBO, “Estimate of Budgetary Effects of H.R. 4628, the
Interest Rate Reduction Act, as Introduced on April 25, 2012,” April 26, 2012.
20 For information on the budgetary effects of S. 2343, see CBO. “Estimate of Budgetary Effects of S. 2343, the Stop
the Student Loan Interest Rate Hike Act of 2012, as Introduced on April 24, 2012,” April 25, 2012.
21 For additional information on S corporations and how they might be affected by S. 2343, see CRS Report R40748,
Business Organizational Choices: Taxation and Responses to Legislative Changes, by Mark P. Keightley.
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which the in-school interest subsidy may be provided to 150% of the published length of their
educational program.
Estimated Benefits to Borrowers of an
Interest Rate Reduction
The value of an interest rate reduction to a borrower depends primarily on the amount borrowed
and the duration of the period over which the borrower repays the loan. The Administration
estimates that approximately 7.4 million undergraduate students will borrow Subsidized Stafford
Loans during the period from July 1, 2012 through June 30, 2013.22 During FY2013, which
roughly corresponds to this period, the Administration estimates that the average loan amount will
be approximately $3,385.23 Table 2 presents estimates of the potential savings to borrowers in
total interest paid as a result of the reduction in the interest rate on Subsidized Stafford Loans
from 6.8% to 3.4%. Figures are shown for the estimated average loan amount and maximum
amounts that undergraduate students may borrow based on their class level.
Table 2. Estimated Savings from an Interest Rate Reduction from 6.8% to 3.4%
Borrower savings over the life of the loan
Max. Loan
Max. Loan
Max. Loan
3rd year or
Average Loan
1st year
2nd year
Higher

(FY2013)a
Undergraduate Undergraduate Undergraduate
6.8% Subsidized Stafford Loan

Amount borrowed
$3,385
$3,500
$4,500
$5,500
Interest during grace periodb
$115
$119
$153
$187
Balance at start of repayment
$3,500
$3,619
$4,653
$5,687
Total interestc
$1,448
$1,498
$1,926
$2,354
Total principal and interest
$4,833
$4,998
$6,426
$7,854
Monthly paymentc
$40
$42
$54
$65
3.4% Subsidized Stafford Loan

Amount borrowed
$3,385
$3,500
$4,500
$5,500
Interest during grace periodb
$58
$60
$77
$94
Balance at start of repayment
$3,443
$3,560
$4,577
$5,594
Total interestc
$681
$704
$905
$1,106
Total principal and interest
$4,066
$4,204
$5,405
$6,606

22 U.S. Department of Education, “President Obama Calls on Congress to Prevent Student Loan Interest Rates from
Doubling,” The Official Blog of the U.S. Department of Education, April 21, 2012, http://www.ed.gov/blog/2012/04/
president-obama-calls-on-congress-to-prevent-student-loan-interest-rates-from-doubling/.
23 Estimated average Subsidized Stafford Loan to undergraduate students for FY2013; U.S. Department of Education,
FY 2013 Department of Education Justifications of Appropriation Estimates to the Congress, “Student Loans
Overview,” p. R-21.
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Interest Rates on Subsidized Stafford Loans to Undergraduate Students

Max. Loan
Max. Loan
Max. Loan
3rd year or
Average Loan
1st year
2nd year
Higher

(FY2013)a
Undergraduate Undergraduate Undergraduate
Monthly paymentc
$34
$35
$45
$55
Estimated Savings

Difference in total interestc
-$768
-$794
-$1,021
-$1,248
Difference in monthly paymentc
-$6
-$7
-$9
-$10
Source: CRS analysis.
Notes: Values are not discounted to reflect the time value of money.
a. Estimated average Subsidized Stafford Loan to undergraduate students for FY2013. U.S. Department of
Education, FY2013 Department of Education Justifications of Appropriation Estimates to the Congress,
“Student Loans Overview,” p. R-21.
b. The borrower is responsible for paying the interest that accrues during the grace period on al Subsidized
Stafford Loans disbursed between July 1, 2012, and June 30, 2014.
c. The minimum monthly payment according to a standard repayment plan is $50, which may result in a loan
being repaid in less than 10 years. However, most borrowers obtain more than one loan resulting in the
combined repayment amount being more than $50 and sufficient to result in a full 10-year amortization. For
purposes of comparison, these figures are all based on a full 10-year amortization.
On the estimated average loan amount of $3,385, a reduction in the interest rate from 6.8% to
3.4% results in savings of approximately $768 in total interest paid on a loan repaid according to
a standard 10-year repayment plan. This amounts to savings of approximately $6 per month. For
a student who borrows $5,500, the maximum amount that a student in the third year of
undergraduate study or beyond may borrow, the interest rate reduction results in savings of
approximately $1,248 in total interest paid, and approximately $10 per month.
Who Borrows Subsidized Stafford Loans?
In AY2010-2011, 7.6 million undergraduate students borrowed Subsidized Stafford Loans.24 The
U.S. Department of Education (ED) estimates that over 7.4 million undergraduate students will
borrow Subsidized Stafford Loans in AY2012-2013.25
The most recent data available that show demographic and socioeconomic characteristics of
borrowers are from the 2007-2008 National Postsecondary Student Aid Study (NPSAS:08).
NPSAS:08 data showing the distribution of Subsidized Stafford Loan borrowers for AY2007-
2008, by 2006 total income, are presented in Table 3. The table also shows average EFCs and
average amounts borrowed for borrowers in selected income bands. Data are presented separately
according to income bands for undergraduate dependent students and undergraduate independent
students.26 Borrowers are divided approximately equally between the two categories of students.

24 U.S. Department of Education, unpublished data on AY2010-2011 Direct Loan Volume, by Academic Level.
25 U.S. Department of Education, unpublished data on Subsidized Stafford Loans for AY2012-2013.
26 For information on how student dependency status is determined, see CRS Report R40122, Federal Student Loans
Made Under the Federal Family Education Loan Program and the William D. Ford Federal Direct Loan Program:
Terms and Conditions for Borrowers, by David P. Smole.
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Interest Rates on Subsidized Stafford Loans to Undergraduate Students

For undergraduate dependent students, income bands are based only on the total income of a
student’s parents. For undergraduate independent students, income bands are based on the total
income of the student and, if married, the income of the student and the student’s spouse.
Distribution by Total Income
The majority of Subsidized Student Loans come from low-income families and middle-income
families.27 When considering dependent students, just over one-quarter of Subsidized Stafford
Loan borrowers in AY2007-2008 were from families with total incomes of less than $30,000; and
nearly half were from families with total incomes of less than $50,000. However, slightly more
than half of dependent student borrowers were from families with total incomes of $50,000 or
more; with one-eighth being from families with total incomes of $100,000 or more. For
independent students, incomes tend to be lower and borrowing was concentrated among those
with incomes between $10,000 and $50,000.
Table 3. Distribution of Subsidized Stafford Loan Borrowers by 2006 Total Income:
AY2007-2008
Average EFCs and average amounts borrowed, by type of borrower
Undergraduate Student Borrowers
Average
Average Amount
Income Band
Percent in
Expected Family
Borrowed in
(2006)
Income Band
Contribution
AY2007-2008
Dependent studentsa
$100,000 or more
12.5%
$19,223
$3,291
$80,000 to $99,999
11.1%
$13,472
$3,341
$70,000 to $79,999
7.9%
$10,812
$3,359
$60,000 to $69,999
8.9%
$8,613
$3,453
$50,000 to $59,999
10.9%
$5,984
$3,551
$40,000 to $49,999
10.7%
$4,248
$3,597
$30,000 to $39,999
11.8%
$2,637
$3,624
$20,000 to $29,999
12.0%
$1,241
$3,512
$10,000 to $19,999
7.9%
$446
$3,493
Less than $10,000
6.4%
$199
$3,394
Total 100.0%
$7,117
$3,466
Independent studentsb
$50,000 or more
11.3%
$11,810
$3,111
$30,000 to $49,999
19.7%
$4,531
$3,321
$20,000 to $29,999
17.4%
$2,977
$3,238

27 According to the U.S. Census Bureau, 2006 American Community Survey (ACS), median family income in the past
12 months in 2006 was $58,526. (2006 ACS, Table S1903).
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Interest Rates on Subsidized Stafford Loans to Undergraduate Students

Undergraduate Student Borrowers
Average
Average Amount
Income Band
Percent in
Expected Family
Borrowed in
(2006)
Income Band
Contribution
AY2007-2008
$10,000 to $19,999
22.7%
$1,491
$3,231
$5,000 to $9,999
13.3%
$228
$3,279
Less than $5,000
15.7%
$31
$3,269
Total 100.0%
$3,112
$3,249
Source: CRS analysis of U.S. Department of Education, National Center for Education Statistics, National
Postsecondary Student Aid Study, 2007-2008, (NPSAS:08) data.
a. Total income of the parents of dependent students.
b. Total income of independent students and, if married, their spouse. Does not include the income of parents.
Issues for Congress
The decision to extend the 3.4% fixed interest rate to apply to Subsidized Stafford Loans made
during AY2012-AY2013 was widely supported. However, the process of identifying and agreeing
on offsets to the resulting increase in mandatory spending proved difficult during a period in
which the federal government faced budgetary challenges.
The interest rates that will be applicable to future Subsidized Stafford Loans is an issue that may
be considered during the 113th Congress. Under current law, all Subsidized Stafford Loans
disbursed on or after July 1, 2013, are scheduled to have a fixed interest rate of 6.8%. This is
double the rate that applies to the Subsidized Stafford Loans that are now being made. For future
years, Congress might consider options for Subsidized Stafford Loans that include allowing the
scheduled 6.8% interest rate to take effect, enacting legislation that would establish a different
interest rate or interest rate formula,28 or terminating the availability of this loan type.29

Author Contact Information

David P. Smole

Specialist in Education Policy
dsmole@crs.loc.gov, 7-0624

28 For example, see Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options, March 10,
2011, Mandatory Spending—Option11: Change the Interest Rate Structure for Student Loans, p. 32.
29 For example, see The National Commission on Fiscal Responsibility and Reform, The Moment of Truth, December
2010, Recommendation 4.3: Eliminate In-School Subsidies in Federal Student Loan Programs, p. 45.
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