Estimated Budgetary Impact of Bills to Prevent the Scheduled Increase in Interest Rates on New Federal Student Loans

April 27, 2012

Under current law, starting on July 1, the interest rate on new subsidized student loans will rise from the 3.4 percent in effect this year to 6.8 percent. During the past few days, CBO has released cost estimates for House and Senate bills that would delay that increase for one year.

CBO’s estimates for the proposed legislation can be found here:

Subsidized loans currently carry a lower interest rate than so-called “unsubsidized” loans; in addition, subsidized loans do not accrue interest costs until the repayment period begins, usually six months after the student leaves school. CBO projects, that over the 2013–2022 period, subsidized loans will account for roughly one-quarter of total federal student loan volume.

Both bills would set the borrower’s interest rate on all new subsidized student loans at 3.4 percent beginning July 1, 2012, and ending June 30, 2013. Beginning July 1, 2013, the interest rate on new subsidized student loans would revert to 6.8 percent.

The President’s budget for 2013 also contained that proposal. CBO’s estimate can be found in this table (see line 2), which is part of the agency’s analysis of the President’s 2013 budget.

How Much Would It Cost to Keep the Interest Rate at 3.4 Percent for One Year?

The House and Senate bills would both increase direct spending for student loans by nearly $6 billion over the 2012–2022 period. Nearly all of the outlays would occur in 2012 and 2013.

How Would the Additional Spending be Offset and What Would the Net Budget Impact Be?

The House bill would offset that cost by including a provision that would reduce other federal spending, while the Senate bill would offset the student loan cost with a provision that would increase federal revenues.

The House bill would repeal, beginning July 1, 2012, the prevention and public health fund created by the Affordable Care Act—the 2010 health care legislation. Under current law, this fund provides grants to carry out prevention, wellness, and public health activities. Enacting this provision would reduce direct spending by $12 billion over the 2012–2022 period. On net, CBO estimates that House bill would increase budget deficits by $785 million over the 2012–2017 period and would reduce deficits by about $6 billion over the 2012–2022 period.

The Senate bill would require taxpayers with income above $200,000 ($250,000 for married taxpayers filing jointly) to include in earnings for calculating employment taxes their income from certain S corporations or partnerships, thus increasing revenues by a little more than $9 billion over the 2013–2022 period, according to the staff of the Joint Committee on Taxation. On net, CBO estimates that enacting the Senate legislation would increase budget deficits by about $2.3 billion over the 2012–2017 period and reduce deficits by about $3 billion over the 2012–2022 period.