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Summary

The federal government's student loan programs have been very successful, with two-thirds of all students or their families relying on loans provided or subsidized by the federal government. One of these student loan programs allows student borrowers to consolidate their previous loans into a single loan at a subsidized fixed rate based on the T-bill rate for a period of up to thirty years.

The authors find that this program produces inequities among students based on the interest rate environment when they graduate as well as large long-term costs for taxpayers, which are incurred whenever interest rates rise, forcing the government to subsidize the low fixed rates paid by those fortunate enough to consolidate during a period of low interest rates.

Based on simulations of the likely path of future interest rates, the authors find that rising interest rates will cost taxpayers at least $12 billion to subsidize the current $100 billion stock of debt outstanding under the largest loan program, the Federal Family Education Loan program.

Kevin A. Hassett is the director of economic policy studies and a resident scholar at AEI. Robert J. Shapiro is the chairman of Sonecon, LLC, a private economic advisory firm, and a nonresident senior fellow of the Brookings Institution and the Progressive Policy Institute.