Summary: This bill would set the interest rates of all new and existing federal direct student loans to 2% on the unpaid principal balance. The bill would only apply to existing loans with an interest rate above 2%. A notice would be sent to borrowers with existing loans with the opportunity to opt-out within 90 days of receiving the notice. Borrowers with Federal Family Education Loan (FFEL) program loans would have the option to consolidate into the Direct Loan program to access the 2% rate. The Secretary of Education would be required to notify borrowers and loan servicers of the change and establish a complaint resolution process to address any errors or delays.
Background: Existing law currently sets the fixed interest rates of federal direct loans annually through a formula that involves the high yield of 10-year Treasury notes at auction, an add-on percentage that varies depending on loan type, and whether the student is an undergraduate or graduate. Loans first disbursed between July 1, 2025 and July 1, 2026 carry interest rates between 6.39% and 8.94%. The average UC undergraduate who takes out loans has $17,200 of debt at graduation. In the 2024-25 academic year, 51,947 UC undergraduates (21.9%) had loans from the federal government with a total of $609,009,190 paid out.
Organizations in Support: American Youth Association, National Association for College Admission Counseling (NACAC), National Association of Secondary School Principals (NASSP), National Association of Student Financial Aid Administrators (NASFAA), National Education Association, Young Invincibles
Recommendation: Support. Reducing the interest rate of student loans helps borrowers reduce long-term costs, pay down their principal faster, improve their financial stability, and potentially improve their credit.
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