Much attention is being paid to President Barack Obama's proposed changes to Social Security and Medicare, but the president's budget also suggests a big change to federal student loans, Bloomberg Businessweek reported.
The Department of Education's draft budget shows that Obama wants the interest rate on federal loans to reflect market rates annually. Most student loans have an interest rate of 6.8 percent, with a subsidized rate of 3.4 percent for needy undergraduates. Congress set the loan rates in 2001, and in 2007 voted to lower the subsidized rates.
But the economy has changed since then, and rates haven't been adjusted to reflect the country's low-interest-rate environment.
The president proposes to set student loan interest rates each year based on the government's borrowing costs. For subsidized loans, the rate would be 0.93 percentage points above the rate on a 10-year Treasury bond; unsubsidized loans would be two percentage points higher, and graduate student loans three percentage points higher.
Based on a 10-year Treasury note with a 1.8 percent rate, this would put subsidized loans at around 2.75 percent, unsubsidized loans at 4.75 percent, and graduate student loans at 5.75 percent, all of which are lower than the current fixed rates.
If Obama's proposal doesn't go through, and Congress doesn't make other changes, the rates on subsidized loans are set to double to 6.8 percent this summer.