Stafford Loan Interest Rate Reduction: Background and Issues Page: 2 of 6
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Loans for undergraduate students over a five-year period beginning with academic year
(AY) 2007-2008. Under H.R. 5, interest rates would be reduced from the current fixed
rate of 6.8% to 6.12% for loans disbursed in AY2007-2008; 5.44% for loans disbursed
in AY2008-2009; 4.76% for loans disbursed in AY2009-2010; 4.08% for loans disbursed
in AY2010-2011; and 3.4% for loans disbursed in the first half of AY2011-2012 (through
December 31, 2011). Rates would then revert back to 6.8% for loans disbursed
subsequently, unless the rate reduction was extended through other legislation. Among
other things, H.R. 5 would also decrease the special allowance rate (SAP) for larger
lenders by 10 basis points (0.10%) and increase loan fees paid by lenders.
FFEL and DL Stafford Loans
Subsidized and unsubsidized Stafford Loans are made to undergraduate and graduate
students under both the FFEL and DL programs.1 Under the FFEL program, loans are
made by approximately 3,600 banks and other eligible lenders to students in attendance
at more than 5,000 institutions of higher education (IHEs). Loan capital for FFEL
program loans is provided by private lenders and the loans are guaranteed by the federal
government against loss due to borrower default. State and nonprofit guaranty agencies
administer the federal loan guarantee. To help ensure that private capital will consistently
be available for lending under the FFEL program, the federal government provides certain
incentives to lenders, most notably the SAP. The SAP is a market-indexed loan subsidy
payment made by the federal government to compensate lenders for the difference
between statutorily established borrower interest rates and a market rate of return.2
Under the DL program, the federal government provides loans directly to students
using federal capital (i.e., funds from the U.S. Treasury), and owns the loans. DL
program loans are originated either by the institution a student attends or by a contractor
of the U.S. Department of Education (ED). Loan servicing (i.e., billing borrowers,
collecting payments, collecting on defaulted loans) is done by ED contractors.
Approximately 1,100 institutions participate in the DL program. The DL program was
initially intended to replace the FFEL program, but now both programs operate alongside
one another. Each institution chooses whether to participate in the FFEL or DL program.
Subsidized and Unsubsidized Stafford Loans. There are two types of
Stafford Loans - subsidized and unsubsidized. Currently, the same interest rate applies
to both types of loans - 6.8% for loans disbursed on or after July, 1, 2006. Subsidized
Stafford Loans are available to undergraduate and graduate students to help them finance
their postsecondary education expenses. The federal government "subsidizes" these loans
by paying the interest that accrues while the student is enrolled in school on at least a
half-time basis, and during grace and deferment periods. Students must establish financial
need to qualify for subsidized Stafford Loans. Unsubsidized Stafford Loans are also
available to both undergraduate and graduate students. The major distinctions between
1 For additional information on the FFEL and DL programs, see CRS Report RL33673, Federal
Family Education Loan Program and William D. Ford Direct Loan Program Student Loans:
Terms and Conditions for Borrowers, by Adam Stoll. (Hereafter, CRS Report RL33673).
2 For a discussion of the SAP and other aspects of the administration of these loan programs, see
CRS Report RL33674, The Administration of the Federal Family Education Loan and William
D. Ford Direct Loan Programs: Background and Provisions, by Adam Stoll.
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Stafford Loan Interest Rate Reduction: Background and Issues, report, January 30, 2007; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc808160/m1/2/: accessed September 23, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.