EFC Observations On Rising Federal Student Loan Interest Rates and the Value of State-Based Nonprofit Organizations

You have seen the headlines by now. Federal student loan interest rates are set to increase a whole percentage point next award year compared to 2023-24. For the first time in over a decade, undergraduate borrowers will take out federal loans with an interest rate greater than 6 percent. Federal Parent PLUS Loan borrowers can expect to pay 9.08 percent interest and will get charged an origination fee of over 4.2 percent.

This rise in interest rates places a greater burden on students and families who are already grappling with the high cost of postsecondary education. Against this backdrop, state-based and nonprofit higher education finance organizations are emerging as vital resources to make college more affordable and accessible.

Impact of Higher Federal Student Loan Interest Rates

Higher rates mean college gets more expensive as borrowers will pay more in interest over the life of the loan. Undergraduate and graduate students borrowing from the federal government can protect themselves from the effects of higher rates by repaying their debt according to an income-driven repayment plan. But parents borrowing on behalf of their dependent children do not have access to this same safety net. For many parents, higher interest rates translate into larger monthly payments and higher overall debt. The financial strain on families can deter students from going to college or force them to compromise on their ideal choice of institution. This is where EFC members can make a huge difference.

The Role of State-Based and Nonprofit Higher Education Finance Organizations

EFC is the national trade association of state-based and nonprofit higher education finance organizations. EFC members have a long-standing commitment to improving postsecondary education access, success, and affordability. They offer a wide range of free resources and support services, helping millions of individuals annually to expand their skillsets and improve their lives. A key aspect of their mission is to ensure that students and families are well-informed about their financing options.

Importantly, many EFC members have low-cost, consumer-friendly loan programs. These entities offer parents a compelling alternative to the federal Parent PLUS Loans or for-profit student loans. Many students have unmet need even after receiving free aid like the Pell Grant and scholarships and maximizing their federal Stafford loan eligibility. These families could significantly reduce the cost of college by borrowing a nonprofit student loan.

The Advantages of State-Based Nonprofit Student Loan Programs

EFC members that offer a private loan program follow a set of guiding principles that promote borrower success. Borrowers can expect a high level of accountability from nonprofit, state-based organizations. Besides first-rate customer service, there are distinct advantages to borrowing a nonprofit student loan:

1. Lower Interest Rates: EFC members have access to tax-exempt financing, and they pass these savings directly to borrowers. As seen on EFC’s website, EFC members’ loan programs typically offer interest rates lower than for-profit lenders and the Parent PLUS Loan program. Since 1976, EFC estimates that nonprofit, state-based lenders have saved borrowers over $1.2 billion in interest payments by using tax-exempt bond financing.
2. Consumer-Friendly Terms: These loans are designed to be borrower-friendly. EFC members’ public purpose mission is to help families not maximize profits for shareholders. State-based, nonprofit loan programs offer clear terms and conditions without hidden fees and penalties.
3. Holistic Support: EFC members are not just lenders. They offer comprehensive support services that guide borrowers through the entire process of financing their education, ensuring that they maximize their free financial aid and understand all their options before choosing the most beneficial path forward.

Legislation to Better Support Families: State-Based Education Loan Awareness Act

EFC understands that no one likes taking on education debt, but student loans are a reality for many families. Our society must do a better job informing families of all their options to reduce the financial burden of college. EFC’s nonprofit members have limited ways to let consumers know that there are affordable student loan options out there. Unfortunately, for-profit companies with multi-million-dollar marketing budgets flood the market. Too many consumers are not aware that there could be a better option for them in the nonprofit marketplace.

To address this knowledge gap problem, members of Congress have introduced the State-Based Education Loan Awareness Act. The legislation would:

• Give students and families information about nonprofit and state-based loan programs provided those loan programs have rates more generous than the federal student loan programs.
• Improve college affordability, particularly for middle-class families most affected by inflation and rising tuition costs.

EFC strongly supports this Act. It sets families up for success by making sure they have comprehensive information about how to fund their postsecondary education. The bill would reduce the overall cost of borrowing for higher education and maximize student success.

EFC Members Are Ready To Help

Rising federal student loan interest rates are newsworthy for a reason. It has never been more important to make sure students and parents are aware of responsible alternatives to Parent PLUS Loans and for-profit student loans that can alleviate the stress of paying for college.

Some EFC members offer affordable student loans to help students access postsecondary education and pursue their academic and professional goals. We hope you join us in supporting the State-Based Education Loan Awareness Act, which levels the playing field and fosters a more equitable higher education system.