MHECStudent Loan Interest Rates:A Survey of Federal, State, andPrivate ProgramsRESEARCH BRIEFShaun Williams-WycheSMARCH 2019tudent loans can help fill cost gaps created byinsufficient grants, scholarships, and family income infunding a postsecondary education. Whereas receiptof grant aid does not require repayment, studentloans must be repaid with interest. Loans provide studentswith additional choices, such as living independently (insteadof living with parents and commuting) or working less hours ornot at all.1 However, concern has grown over the extent to whichstudents must rely on loans to finance their college education.Nationally, student loan debt rose to 1.5 trillion in 20182 andis currently the second-largest form of debt in the countryafter mortgage and home equity debt.3 Fifty-seven percent ofcollege graduates from the class of 2016-17 received studentloans, and the average debt was 27,293 (see Addendum). Loaninterest rates constitute one factor that can influence students’ultimate loan burden. This policy scan examines changes infederal student loan interest rates over time; the wide variationin interest rates for state-sponsored student loans; and interestrates for private student loans.FEDERAL STUDENT LOANSDirect federal loans provided by the U.S. Department ofEducation are available for undergraduate students, parents ofundergraduate students, and graduate students.4 Loans differ interms of whether borrowers must demonstrate financial needand whether interest accumulates during college enrollment oris paid by the U.S. Department of Education.JJ Direct Subsidized Stafford Loan:These loans are forstudents who demonstrate financial need. They arelimited to undergraduate students. Interest does notKEY INSIGHTSuu The federal government offers several loans at afixed interest rate. With the exception of Perkinsloans, interest rates of federal loans fluctuate eachyear because they are linked to the 10-year Treasurynote rate. The Treasury note rate increased between2017 and 2018, causing student loan interest rates toincrease as well. Direct undergraduate student loaninterest rates are currently at 5.1 percent.uu State-sponsored student loans are offered in 15states. The median starting interest rate was 5.15percent for fixed-rate loans and 4.07 percent forvariable-rate loans.uu Private loans accounted for nine percent of studentloan debt. The average fixed rate on a private studentloan was 9.66 percent, while the average variable rateon a private student loan was 7.81 percent.uu In addition to the type and level of the interest rate,students must consider other factors that can affectthe total cost of the loan, such as origination fees,repayment protection, income-driven repaymentoptions, and student loan forgiveness programs.accumulate while the student maintains at least parttime enrollment.5JJ Undergraduate Direct Unsubsidized Stafford Loan:Undergraduate students are not required todemonstrate financial need to receive this loan. Interestaccumulates while the student is enrolled.JJ Graduate Direct Unsubsidized Stafford Loan:Graduatestudents are not required to demonstrate financial needto receive this loan.6 Interest accumulates while thestudent is enrolled.Johnstone, D. (2005). Higher Educational Accessibility and Financial Viability: The Role of Student Loans.Board of Governors of the Federal Reserve System. (2018). Consumer Credit — G.19.3Federal Reserve Bank of New York. (2018). Household Debt and Credit Report.4Indirect student loans provided by private financial institutions but guaranteed by the federal government were eliminated through legislation in 2010.5Direct Subsidized Stafford Loans for graduate students became unavailable after July 1, 2012.6U.S. Department of Education. (2018c). Subsidized and Unsubsidized Loans.12Student Loan Interest Rates

JJ Direct PLUS Loan:Demonstrating financial need is notinterest rate on new subsidized Stafford loans to undergraduatestudents. The law reduced the interest rate from 6.8 percent in2006 to 3.4 percent in 2011.9 The interest rate on undergraduateunsubsidized loans remained fixed at 6.8 percent until itconverged with the rate of subsidized loans at 3.86 percent in2013-14.10required, and it is available to graduate students andparents of undergraduate students. Loan eligibility iscontingent on the applicant’s credit history.7 Interestaccumulates while the student is enrolled.JJ Perkins Loan: Theseloans were available throughIn 2013, the Bipartisan Student Loan Certainty Act was passedinto law. The law set interest rates for all federal student loansexcept for Perkins loans to a new market-based fixed rate eachacademic year linked with the 10-year Treasury note yield.11During the years after the Great Recession of 2007-09, thedemand, and consequently price, for these bonds increased,which decreased the bond yield to record lows. Due to recentstrong economic and wage growth, investor demand forgovernment bonds has been decreasing, causing bond pricesto fall, bond yields to rise, and student loan interest rates toJune 30th of 2018 at participating institutions to bothundergraduate and graduate students who demonstratedfinancial need.8 Interest does not accumulate while thestudent maintains at least part-time enrollment.The interest rates for federal student loans are determined bycongressional legislation. All federal student loans have a fixedinterest rate, meaning the interest rate will not change once theloan is disbursed. As seen in Figure 1, these fixed interest rateshave changed over time. In 2007, the College Cost Reductionand Access Act was passed into law, which phased in a reducedIincrease.12.FIGURE 1. Federal Student Loan Rates 2006-20189%8%Interest 142015201620172018YearDirect Subsidized StaffordUndergraduate Direct Unsubsidized StaffordGraduate Direct Unsubsidized StaffordPLUSPerkinsSource: U.S. Department of Education. (2018). Interest Rates and Fees. Interest rates are for new borrowers takingout loans from July 1, of the given year through June 30, of the following year.U.S. Department of Education. (2018b). PLUS Loans.U.S. Department of Education. (2018a). Perkins Loans.9College Cost Reduction and Access Act, Pub. L. No. 110-84, 121 Stat. 784. (2007). Under the terms of the law, the rate would revert to 6.8 percent in2012 unless Congress acted, which it did by extending the 3.4 percent rate an extra year.10U.S. Department of Education. (2018d). Interest Rates and Fees.11Bipartisan Student Loan Certainty Act of 2013, Pub. L. No. 11-28, 127 Stat. 506. (2013).12U.S. Securities and Exchange Commission. (2018). Interest rate risk —When Interest rates Go up, Prices of Fixed-rate Bonds Fall. Investor Bulletin.782Student Loan Interest RatesMIDWESTERN HIGHER EDUCATION COMPACT

STATE STUDENT LOANSscore, and loan eligibility may depend upon a willing co-signer.Many college students also have the option of receiving astudent loan through a state-sponsored student loan program.A state student loan program offers loans through either astate agency or a state-chartered, not-for-profit organization.These loans have interest rates that are usually lower thanthose of private student loans. Accordingly, most state loanprograms are restricted to residents.13 State student loansare currently available to students in 15 states (see Table 1).14Because they are not originated by the federal government,every state student loan program uses its own unique methodto determine interest rates. While all federal loans have afixed interest rate, state student loans can have either fixed orvariable interest rates. In some states, the specific interest ratefor a given loan is partly dependent on the borrower’s creditInterest rates vary considerably across state student loans. Atthe low end, students pay a rate of one percent in Georgia. Atthe upper end, Indiana has the highest fixed interest rate withstudents potentially paying up to 11.15 percent. Indiana andIowa both have a maximum potential variable interest rate at21 percent over the life of the loan. Indiana also has the widestrange for both fixed (6.41 percent to 11.15 percent) and startingvariable (3.46 percent to 8.19 percent) interest rates. While thereare significant differences in interest rates across states, moststates have interest rates within three percentage points ofboth types of undergraduate Stafford loans. Even so, for moststate student loan programs, students can potentially pay ahigher interest rate than they would under the undergraduateStafford loan program.ITABLE 1. Interest Rates of State Student Loan ProgramsStateFixed InterestRateStartingVariableInterest RateMaximumVariableInterest RateLoan NameLending OrganizationAlaska6.65% to 6.90%n/an/aFamily Education LoanAlaska Commission onPostsecondary EducationAlaska5.15% to 8.50%n/an/aAlaska Supplemental EducationLoanAlaska Commission onPostsecondary EducationConnecticut4.95%n/an/aGovernor M. Jodi Rell and CreditUnion League of ConnecticutStudent Loan ProgramConnecticut Higher EducationSupplemental Loan AuthorityGeorgia1.00%n/an/aStudent Access LoanGeorgia Student Finance CommissionIndiana6.41% to 11.15%3.46% to 8.19%21.00%INvestEd Student LoanINvestEdIowa5.50% to 6.30%n/an/aCollege Family LoanIowa Student LoanIowa5.50% to 7.22%5.63% to 7.85%21.00%Partnership LoanIowa Student LoanKentucky3.80% to 6.99%n/an/aKentucky AdvantageEducational LoanKentucky Higher Education StudentLoan CorporationMaine4.99% to 7.49%n/an/aMaine LoanFinance Authority of MaineMassachusetts4.50% to 7.20%n/an/aMEFA LoanMassachusetts EducationalFinancing Authority15Minnesota6.00%4.30%No maximumSELF LoanMinnesota Office of Higher EducationNewJersey4.79% to 7.20%n/an/aNJCLASS LoanHigher Education Student AssistanceAuthorityNorth Dakota5.45%3.84% to 4.84%10.00%DEAL LoanBank of North DakotaRhode Island4.24% to 6.49%4.33% to 6.58%21.00%RISLA LoanRhode Island Student Loan AuthoritySouth Carolina3.99% to 7.99%3.63% to 7.68%12.00%Palmetto Assistance LoanSouth Carolina Student LoanTexas5.30%n/an/aCollege Access LoanTexas Higher Education CoordinatingBoard16Vermont5.90% to 7.55%n/an/aVermont AdvantageVermont Student Assistance Corp.Source: Author’s analysis of provider websites. (September 2018).Edvisors. (2018). State Loans.Arkansas, Michigan, New York, and North Carolina have state student loan programs that are currently suspended.15The Massachusetts Educational Financing Authority also operates the Massachusetts No Interest Loan program, which provides zero-intereststudent loans to those who demonstrate financial need.16StudentLoanHigherInterestRatesThe TexasEducationCoordinating Board also operates the Texas B-On-Time Loan program which provides zero-interest student loans tothose who demonstrate financial need.13143

PRIVATE STUDENT LOANSWhen students cannot completely cover the costs of collegeITABLE 2. Starting Interest Rates for Selected PrivateStudent Loan Lendersafter exhausting grants, scholarships, federal student loans,LenderFixed Interest RateVariable InterestRateand state student loans, private student loans are anotherCitizens One5.25% to 12.19%4.04% to 11.91%Discover5.99% to 13.99%3.99% to 12.99%Sallie Mae5.74% to 11.85%4.12% to 10.98%SunTrust5.35% to 14.05%3.88% to 12.88%Wells Fargo5.94% to 11.26%4.57% to 10.51%option. Banks and other financial institutions provide privatestudent loans without any financial backing from the federalor state government. Private loans accounted for nine percentof student loan debt in 2015.17 Table 2 displays the interestrates of some of the largest private student loan lenders. In2017, the average fixed rate on a private student loan wasSource: Author’s analysis of provider websites. (September 2018).9.66 percent, while the average variable rate on a privatestudent loan was 7.81 percent.18 Several factors affect therange of interest rates available for private loans, while othersinfluence the rates offered to individual borrowers.19Factors that determine the range of rates include:JJ Thesupply and demand of credit: an increase in thedemand for money or credit will create pressure toraise interest rates, while a decrease in the demand willreduce them.JJ Thecost of servicing the loan.JJ Thelender’s cost of raising capital.JJ Aprofit margin on each loan that provides the lenderwith an adequate return.Factors that affect rates offered to individual borrowersinclude:JJ Theborrower’s credit history.JJ Thelength of time to repay the loan.JJ WhetherJJ TheJJ Aor not there is a cosigner on the loan.likelihood of the loan being repaid.risk premium that compensates the bank for defaultrisk inherent in the loan.FINAL REMARKSStudent loan interest rates vary a great deal depending on thetype of loan and the lender. Congress has changed the methodfor determining federal student loan interest rates over theyears, most recently by linking the interest rate for all federalloans to the 10-year Treasury note rate (except the now defunctPerkins loan program). Interest rates have begun to increase dueto the decreasing demand for government bonds. State studentloans have considerable variation in interest rates as well as howrates are set. Students pay a higher interest rate, on average,with private student loans than they do for federal and stateloans.Given the variety of student loans described, students mustdecide which types of loans are the best to borrow whenpaying for their education. In addition to the type and level ofthe interest rate, students should also consider factors suchas origination fees, repayment protection, income-drivenrepayment options, and student loan forgiveness programs,which can affect the total cost of the loan.Type of Interest RateFor many state and private student loans, students have a choicebetween taking out a loan with a fixed rate or variable rate. Sincea fixed interest rate does not change over the life of the loan,personal budgeting during repayment is more manageable. Also,a fixed rate provides insulation from market-driven increasesin interest rates. Conversely, whereas a variable rate introducessome unpredictability in personal budgeting, it does allow theConsumer Bankers Association. (2015). Private Student Loan Facts.Brown, M. (2017). The State of Private Student Loans. Lend Edu. The average rate was calculated from 80,000 private student loan applicationsprocessed by LendEDU between 2016 and 2017.19Diette, M. (2000). How Do Lenders Set Interest Rates on Loans? Federal Reserve Bank of Minneapolis.17184Student Loan Interest RatesMIDWESTERN HIGHER EDUCATION COMPACT

borrower to save money if market conditions lead to a relativelylower interest rate.Loan Origination FeesLoan origination fees (which cover the cost of approving andprocessing the loan) are not negligible. For example, Staffordloans have an origination fee of 1.07 percent while PLUS loanshave an origination fee of 4.26 percent. From the perspective ofstudents, paying origination fees is tantamount to paying intereston money they never received for their education.20Repayment Protection and ForgivenessAnother factor to consider is the type of repayment protectionprovided by the loan. Three of the most common protectionsare deferment, forbearance, and income-based repayment.Deferment and forbearance both allow the borrower totemporarily stop payments, though interest does not accrueduring deferment periods (except for unsubsidized federalloans).21 Accrued interest during a forbearance period will beadded to the loan’s principal balance. While a deferment ismore advantageous, borrowers must meet more stringentcriteria related to unemployment, economic hardship, collegeenrollment, or military service. Additionally, federal loans provideincome-driven repayment options. Income-driven repaymentallows the amount of each monthly payment to be based on apercentage of a borrower’s discretionary income instead of theamount owed.22 A final factor worth considering is whether loanscan be discharged through a loan forgiveness program.23Pingel, S. (2018, June 21). Personal communication. Education Commission of the States.U.S. Department of Education. (2018e). Deferment and Forbearance.22U.S. Department of Education. (2018f). Income-Driven Plans.23Wiederspan, M. (2018). Understanding State Loan Forgiveness and Conditional Grant Programs. MHEC Policy Brief.2021Student Loan Interest Rates5

ADDENDUMPercentage of College Graduates with Debt and Average Debt of Graduates at Four-Year Public Institutions2010-1162013-142016-17StatePercent ofgraduates withdebtAverage debt ofgraduatesPercent of graduateswith debtAverage debt ofgraduatesPercent ofgraduates withdebtAverage debt ofgraduatesAlabama51% 25,53851% 29,16350% 32,307AlaskaN/AN/A50% 9,23846% 25,682Arizona49%N/A57% 26,27454% 23,948Arkansas54% 29,25854% 27,51452% 25,136California50% 30,58153% 28,46350% 20,382Colorado56% 27,13057% 28,59353% 26,351Connecticut69% 36,46165% 37,526N/AN/ADelawareN/AN/A62%N/A62% 34,144Florida47% 33,23752% 31,62048% 21,626Georgia56% 31,35962% 30,97756% 27,625Hawaii40%N/A45%N/A45% 24,233Idaho66%N/A71%N/A60% 27,317Illinois61% 30,28966% 30,05659% 27,723Indiana60% 32,28160% 32,96155% 27,761Iowa65% 32,19862% 33,43957% 27,312Kansas62% 30,95163% 25,74957% 27,281Kentucky57% 24,93363% 24,99464% 28,697Louisiana42% 34,98844% 29,61849% 25,970Maine78% 25,75080% 28,79676% 34,092Maryland54% 31,21256% 31,78353% 28,047Massachusetts72% 30,56375% 30,71973% 30,679Michigan60% 33,02961% 32,65156% 30,910Minnesota70% 35,01069% 35,89368% 29,467Mississippi54% 26,38360% 28,87558% 30,561Missouri67% 26,86062% 26,23560% 26,990Montana64% 30,64666% 27,21157% 28,137Nebraska60% 31,76161% 32,26752% 22,278Nevada44%N/A46%N/A49% 22,064New Hampshire79% 35,49281% 29,29579% 35,657New Jersey64% 31,98169% 29,15061% 32,390New MexicoN/A 27,33448% 26,47653% 20,830New York54% 32,70854% 31,34054% 26,380North Carolina53% 27,34562% 29,00461% 25,575North Dakota83% 28,060N/AN/AN/AN/AOhio66% 35,10065% 33,83662% 29,465Oklahoma53% 26,71054% 29,80348% 25,370Student Loan Interest RatesMIDWESTERN HIGHER EDUCATION COMPACT

Oregon60% 29,78659% 27,87054% 26,676Pennsylvania71% 33,96272% 33,99671% 36,704Rhode Island74% 36,46571% 35,67175% 31,442South Carolina53% 29,51758% 30,57857% 30,958South Dakota75% 34,66767% 35,69374% 29,801Tennessee51% 23,51260% 27,21158% 23,769Texas56% 31,64959% 34,07455% 24,587Utah51%N/A54%N/A47% 19,763Vermont60% 31,90964% 32,12257% 29,012Virginia56% 32,63757% 25,37054% 29,523Washington53% 29,60955% 30,10649% 21,559West Virginia63% 35,25369% 30,36475% 26,940Wisconsin64% 35,00968% 33,63863% 28,171Wyoming47%N/A46%N/A47% 22,524U.S.57% 31,60360% 30,71757% 27,293Source: Institute for College Access and Success (2018). College InSight Database.Note. Estimates have been adjusted for inflation (CPI).Student Loan Interest Rates7

Midwestern Higher Education Compact (MHEC)Legislatively created, the Midwestern Higher Education Compact’s purpose is to105 Fifth Avenue South, Suite 450Minneapolis, MN 55401612-677-2777 or [email protected] greater higher education opportunities and services in the Midwestern region.Collectively the 12 member states work together to create solutions that build highereducation’s capacity to better serve individuals, institutions, and states by leveragingthe region’s resources, expertise, ideas, and experiences through multi-state:convening, programs, research, and contracts.Compact Leadership, 2018-19PresidentVice-ChairPast ChairMs. Susan G. HeegaardMs. Olivia Madison,Mr. Tim Flakoll, Provost,Professor Emerita and DeanTri-College University andEmerita of Library Services,North Dakota Governor’sIowa State UniversityDesigneeChairDr. Ken Sauer, SeniorAssociate Commissionerand Chief AcademicTreasurerOfficer, IndianaDr. David Eisler, President,Commission forFerris State UniversityHigher EducationAUTHOREDITORShaun WilliamsWycheMidwestern HigherEducation CompactAaron S. HornVice President of PolicyResearch, MidwesternHigher [email protected] thisSeriesThis brief examines a criticalstate policy issue identifiedthrough the CollegeAffordability ResearchInitiative. Additionalresources are available andfinance COPYRIGHT 2019 MIDWESTERN HIGHER EDUCATION COMPACT.Student Loan Interest RatesRESEARCH BRIEF

Supplemental Loan Authority Georgia 1.00% n/a n/a Student Access Loan Georgia Student Finance Commission Indiana 6.41% to 11.15% 3.46% to 8.19% 21.00% INvestEd Student Loan INvestEd Iowa 5.50% to 6.30% n/a n/a College Family Loan Iowa Student Loan Iowa 5.50% to 7.22% 5.63% to 7.85% 21.00% Partnership