Mandatory Spending
Function 500 - Education, Training, Employment, and Social Services
Remove the Cap on Interest Rates for Student Loans
CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.
| Billions of Dollars | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2021– 2025 |
2021– 2030 |
|
| Savings Estimated Using the Method Established in the Federal Credit Reform Act | |||||||||||||
| Change in Outlays | |||||||||||||
| Remove the cap on graduate and PLUS loans | * | * | * | * | -0.1 | -0.2 | -0.4 | -0.6 | -0.9 | -1.1 | -0.1 | -3.3 | |
| Remove the cap on all loans | * | * | * | * | -0.1 | -0.3 | -0.6 | -0.9 | -1.3 | -1.6 | -0.1 | -4.8 | |
| Savings Estimated Using the Fair-Value Method | |||||||||||||
| Change in Outlays | |||||||||||||
| Remove the cap on graduate and PLUS loans | * | * | * | * | * | -0.2 | -0.3 | -0.5 | -0.7 | -0.8 | * | -2.5 | |
| Remove the cap on all loans | * | * | * | * | -0.1 | -0.2 | -0.4 | -0.7 | -0.9 | -1.2 | -0.1 | -3.5 | |
This option would take effect in July 2021.
By law, the costs of federal student loan programs are measured in the budget according to the method established in the Federal Credit Reform Act. The fair-value method is an alternative approach that more fully accounts for market risk; it is included in this table for informational purposes.
* = between -$50 million and zero.
Through the William D. Ford Federal Direct Loan Program, the federal government lends money directly to students and their parents to help finance postsecondary education. The loans are issued with fixed interest rates, which are determined in the year of disbursement and then remain constant for the life of the loan. Those fixed interest rates are set equal to the 10-year Treasury note rate (in the year of disbursement) plus a certain number of additional percentage points depending on the type of loan. For undergraduate subsidized and unsubsidized loans, the interest rate is the 10-year Treasury note rate plus 2.05 percentage points, with a cap of 8.25 percent. For unsubsidized loans to graduate students, the interest rate is the 10-year Treasury note rate plus 3.6 percentage points, with a cap of 9.5 percent. Finally, for PLUS loans, which are additional unsubsidized loans to parents or graduate students, the rate is the 10-year Treasury note rate plus 4.6 percentage points, with a cap of 10.5 percent.
This option includes two alternatives. The first would remove the interest rate cap on all graduate loans and PLUS parent loans. The second would remove the interest rate cap on all federal student loans. Both alternatives are projected to lower the government’s costs because there is some possibility that the 10-year Treasury note rate will rise enough so that the interest rate caps could constrain the rates on student loans under current law, even though that outcome does not occur in the Congressional Budget Office’s 10-year economic projections.