At present, different fixed interest rates apply to each of the types of loans currently being made. Under current law, Direct Unsubsidized Loans are being made with a fixed rate of 6.8%, and Direct PLUS Loans are being made with a fixed rate of 7.9%. These include proposals to temporarily extend the current 3.4% interest rate on Direct Subsidized Loans as well as long-term proposals to establish a new interest rate structure for all loans made through the Direct Loan program during AY2013-2014 and future years. This is followed by brief descriptions of proposals that have been made during the 113 th Congress to either temporarily extend the authority to make Direct Subsidized Loans with a fixed 3.4% interest rate or to establish a new interest rate structure for Direct Loans made during AY2013-2014 and future years. For each proposal, information is presented showing a summary of the proposed interest rate structure, projections of future interest rates, and estimates of the interest expenses typical borrowers might be expected to pay if currently projected interest rates applied for future years. Legislation in the 113th Congress

In the 113 th Congress, numerous proposals have been made to amend or extend current policy for establishing the interest rates that borrowers pay on federal student loans made through the Direct Loan program. President's FY2014 Budget Proposal

President Obama's FY2014 budget would establish a market-indexed, fixed interest rate structure for all Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans made during AY2013-2014 and future years. On May 23, 2013, the House passed H.R. S. 953 would not affect the interest rate on other loans, nor loans made in future years. S. 897, the Bank on Students Loan Fairness Act

S. 897 would authorize a new source of funding for purposes of making Direct Subsidized Loans; and would establish a new fixed interest rate structure for Direct Subsidized Loans made during AY2013-2014 only. 1911 , the interest rate on Direct Subsidized Loans and Direct Unsubsidized Loans to undergraduate students would be the 10-year Treasury note rate, plus 2.05 percentage points, with a cap of 8.25%; the interest rate on Direct Unsubsidized Loans to graduate and professional students would be the 10-year Treasury note rate, plus 3.60 percentage points, with a cap of 9.50%; and the interest rate on Direct PLUS Loans to graduate and professional students, and to parent borrowers, would be the 10-year Treasury note rate, plus 4.60 percentage points, with a cap of 10.50%. On July 24, 2013, the Senate amended and passed H.R. Potential Market Indices for Student Loan Interest Rate Policy Options

Several of the proposals introduced in the 113 th Congress would index borrower interest rates to market rates. 1911 , S. 1003 , and the Senate amendment to H.R. In contrast, S. 897 would set the borrower rate for Direct Subsidized Loans made during AY2013-2014 only at the rate of the Federal Reserve discount window primary credit rate. The estimated monthly payment would be $634. 1911, the Bipartisan Student Loan Certainty Act of 2013

			Undergraduate Dependent Borrower

Under the Senate amendment to H.R. Cost to the Government

There are a series of costs associated with making student loans. Since 2006, federal student loans have been made with fixed interest rates. For the student loans currently being made through the Direct Loan program, fixed interest rates are specified in a manner that does not adjust to account for variations in market conditions, nor borrower repayment risk. Interest Rate Structure

Throughout the history of the federal student loan programs, there have been two prevalent structures used for setting the rates borrowers pay: statutorily specified fixed interest rates and market-indexed variable interest rates. It also presents technical notes detailing assumptions that were made in the analysis of the student loan interest rate policy options examined in this report.
The interest rates that borrowers pay on federal student loans made through the William D. Ford Federal Direct Loan program are specified in statutory language of the Higher Education Act of 1965, as amended. For the past two years, one type of loan—Direct Subsidized Loans—has been made with a fixed interest rate of 3.4%. Effective July 1, 2013, Direct Subsidized Loans began to be made with a fixed interest rate of 6.8%. Direct Unsubsidized Loans are currently being made with a fixed interest rate of 6.8% and Direct PLUS Loans are currently being made with a fixed interest rate of 7.9%.
In the 113th Congress, numerous proposals have been made that would affect the interest rates that borrowers pay on student loans made through the Direct Loan program. These include long-term proposals to establish a new interest rate structure for all Direct Loans made during future years, and short-term proposals to temporarily extend the authority to make Direct Loans at the rates currently in effect. Several of the long-term student loan interest rate proposals would amend the Direct Loan program to index student loan interest rates to market indices, such as the rate on 10-year Treasury notes. Some policy options would establish a market-indexed, fixed interest rate structure, while others would establish a market-indexed, variable interest rate structure.
In his FY2014 budget, President Obama proposed a market-indexed, fixed interest rate structure that would apply to Direct Loans made in future years. On May 23, 2013, the House passed H.R. 1911, which would establish a market-indexed, variable interest rate structure for new Direct Loans.
Numerous proposals were introduced in the Senate. Some bills would make short-term changes to student loan interest rates and would affect only Direct Subsidized Loans. S. 953 would extend for two years the authority to make Direct Subsidized Loans with a fixed interest rate of 3.4%. S. 897 would set the borrower interest rate on new Direct Subsidized Loans made only during the upcoming federal student aid award year at the Federal Reserve discount window primary credit rate. Other bills would establish a new market-indexed, fixed interest rate structure for Direct Loans made in future years. These include S. 1003 and the Senate amendment to H.R. 1911. On July 24, 2013, the Senate passed the amendment to H.R. 1911.
This report describes and analyzes student loan interest rate proposals that have been made in the 113th Congress to establish new policies for setting the interest rates that borrowers will pay on loans made through the Direct Loan program. The report compares and contrasts selected loan interest rate policy options and provides information on proposed student loan interest rate structures, projections of future interest rates, and estimates of future costs to the government. The report also presents estimates of borrower repayment amounts associated with the different interest rate proposals based on case simulations for three types of typical borrowers: undergraduate dependent students, undergraduate independent students, and parent borrowers.
Finally, the report highlights some of the perennial tensions that often arise when student loan interest rates are debated. Should federal student loan programs provide below-market or fair-market interest rates to borrowers? What value is ascribed with providing borrowers predictable fixed monthly payments as opposed to payments that may vary in accordance with market conditions? To what extent should the federal government seek to subsidize loans or borrower repayment and for what subset of borrowers should subsidies be available?