In 21st century America, a college education is critical for individual success and the strength of our nation. Higher education is associated with better health, greater wealth and more vibrant civic participation, as well national economic competitiveness in today’s global environment. As the need for a college degree has grown, however, so has the cost of obtaining that education. The result is increased reliance on loans to pay for college.

In 2007 Congress passed the College Cost Reduction and Access Act. The bill included several provisions to lessen the burden of student debt including:

• -More than two billion dollars a year in additional funding for the Pell Grant program. The Pell Grant helps more than 5 million lower-income students each year.

• -A new Income-Based Repayment program that allows student loan borrowers to repay their federal loans as a percentage of their income. 

• -Reductions in interest rates on subsidized Stafford student loans.

About 5.5 million students borrow subsidized Stafford loans every year. Of those borrowers, nearly 3.3 million attend four-year public or private non-profit institutions. The vast majority of these borrowers come from low- and middle-income families. According to the Congressional Research Service, 75% of traditional-aged borrowers with subsidized Stafford loans come from families with incomes below $67,374. The median income for an American family of four is $65,000.

Cutting Interest Rates

The College Cost Reduction and Access Act reduces interest rates on subsidized Stafford loans for undergraduates. Loans originated during the next four years are set at fixed interest rates of 6.0% in 2008-2009, 5.6% in 2009-2010, 4.5% in 2010-2011, and 3.4% in 2011-2012. After graduation, students can consolidate their loans into one loan at the weighted average of the interest rates of their various loans.  Interest rates are reset on July 1st for the following school year.

Findings: Lower Interest Rates Will Save Students Thousands of Dollars

By lowering interest rates on subsidized Stafford loans, Congress saved college students thousands of dollars over the life of their loans. We found:

• - The average four-year college student starting school in 2008 with subsidized Stafford loans will save about $2,570 over the life of his or her loans.

• - The average savings for freshmen starting school in 2008 vary slightly from state to state, ranging from $2,820 for a student in California to $2,340 for a student in West Virginia (Table ES-1).