How the House and Senate student-loan proposals would affect Minnesotans

We may have a plan (Free HDR Photos via Flickr)

The Congressional impasse on how to change federal student-loan rates may soon be over.

The Senate appears to have reached a deal on a bill — up for a vote next week — and the House passed its own legislation in May.

What could the new rates mean for Minnesota undergraduate student borrowers?

I turned again to Tricia Grimes, analyst at the Minnesota Office of Higher Education. She offered some nifty financial analysis late last month when it appeared legislators would allow the interest rate on the federal subsidized Stafford student-loan to double from 3.4 percent to 6.8 percent.

She has some new calculations. But first a little background:

Both the House and Senate solutions would set the same interest rates for both subsidized and unsubsidized Stafford loans for undergraduates. (With subsidized loans, interest doesn’t accrue while the student is in school.)

Other types of loans are affected, but I’ll try to get to those another day.

The Senate deal would match the loan interest  rate to the 10-year treasury bill rate plus 2.05 percentage points. That means loans taken out this fall would have a rate of about 3.85 percent.

Grimes did some calculations for me.

In her examples, she used a student with loans totaling $30,000, because that’s a rounded-up average of what Minnesota students borrow for a bachelor’s degree. And all of her examples assume the standard 10-year repayment period. Students who choose a longer period would, of course, pay more in interest.

But she cautioned: Don’t take the numbers too literally.

Rates would likely change each year. They wouldn’t affect loans already taken out. But each new loan would have a new rate depending on whether the market has changed. Students usually take out multiple loans over their academic careers, she said, so they’d be juggling multiple rates. That makes it difficult to project just how much total interest they’ll be paying.

Still, she said, the estimates give an idea of how much money would be saved.

Here’s what she cooked up:

Current conditions

Under the current 6.8 percent rate, a student with such a loan would pay about $11,430 in total interest.

Senate deal

Under the Senate solution, a loans taken out under the market-based rate of 3.85 percent would pay $6,192 — about $5,238 less — if that rate remained.

But the Senate deal would reset rates each year, and estimates are the total rate could rise to 4.55 percent during the 2014-2015 school year. That would put total interest at $7,397 — again, assuming the rate remained the same.

The House bill

House numbers look similar.

A 4.4 percent rate this year would mean $7,137 over the life of a loan, but a 5 percent rate the following year would increase that to $8,183.

Future rates

But rates could rise higher, which is why lawmakers have proposed capping them — at 8.25 percent under the Senate deal and 8.5 percent under the House.

Under the Senate cap, interest would total $14, 155. Under the House cap, it would be $14,635.

That sounds sky-high.

But Grimes stressed that the rate probably wouldn’t reach such heights for years. The last time Treasury bill rates were high enough to hit the caps was toward the end of the Dot-com Boom in 2000.

She also said improved fortunes should make it easier for students to pay such rates:

“If rates go high, it will be a reflection of good things happening in the economy, such as low unemployment and high wages.”

Grimes said rates used to float with the market up till 2008, when they were fixed at 6.8 percent. Subsidized loans were brought down gradually to 3.4 percent in 2010. So the 3.4 percent rate that lawmakers have been battling over has been a recent, short-lived phenomenon.

If the Senate passes its bill next week, Grimes said, a committee will create a compromise bill with the House — or the House will simply pass the Senate plan.