Fed ruling might lower student loan interest rates

Nathan Halverson

To help the struggling economy, last week the Federal Reserve Board lowered the federal fund rate by half a percentage point.

Although analysts don’t agree on how effective the move will be, it could be cause for celebration among students.

The reason: There is a strong correlation between student loan interest rates and the federal fund rate because of how the Department of Education determines the student rate. For example, if the student rate was set today, it would save students thousands of dollars.

On average, undergraduates at the University rack up $14,400 in student loan debt, and graduate students borrow $32,000.

The interest rate on student loans is set annually in June by taking the three-month Department of the Treasury bill rate and adding a small percentage to it. In June, the Treasury-bill rate was 1.76 percent, and the Department of Education added 2.3 percentage points to get the current Direct Loan interest rate of 4.06 percent.

The Treasury-bill rate closely parallels the federal fund rate. So when the federal fund rate is lowered, the Treasury bill rate usually decreases and student loan rates are set lower in June.

Last Monday, the Treasury-bill rate was 1.41 percent and the effective federal fund rate was 1.71 percent. After the federal fund rate was cut half a percentage point Wednesday, the Treasury-bill rate dropped to 1.2 percent.

So if the Department of Education were to set students’ rates today, it would be at 3.5 percent. And with some analysts predicting 3 percent inflation this year, students will be paying a very small real price for taking out loans.

Student loans are already at a low rate. The previous rate, cut in June from 5.99 percent to 4.06 percent, was the largest that associate director of the University’s loan program Jim Kennedy said he’d ever seen.

He said since June there has been an increase in students consolidating their loans.

“I would predict if it goes down even lower, there will be another high-activity period for consolidation,” Kennedy said.

Even if they have different interest rates, students can consolidate most of their student loans, which freezes the rate.

Kennedy recommends students not consolidate their loans until after graduation because they can only consolidate once.

However, the consolidation program might be in jeopardy.

President George W. Bush’s administration tried unsuccessfully to eliminate a fixed-rate consolidation program in an effort to balance the education budget.

Democrats, headed by the late Sen. Paul Wellstone, defeated the bill in the Senate.

But now that Republicans have control of the Senate, some University officials fear Republicans might try again.

“That is a big issue,” Kennedy said.

He said the Republicans would like to eliminate Direct Loans from the University, forcing students to go through banks to get money.