U-M shares the benefit of its low cost of borrowing (current cost of U-M debt is 2.3%) with students by raising money in the capital markets to fund the issuance of low interest student loans.
The average U-M student graduates with $27,828 dollars of student debt. The cost of this debt burdens students and their families, negatively impacts post-graduate opportunities, and slows the economic recovery. U-M should utilize its strong balance sheet and stellar credit rating to help minimize these costs for students.
Bonds are typically used to fund buildings, but U-M should also use bonds to fund brains. U-M is one of only three public universities to enjoy AAA and Aaa ratings from S&P and Moody’s, respectively. This enables U-M to borrow money at extraordinarily low interest rates – rates that should be passed on to students and their families through the issuance of bonds by U-M to raise funds for student loans made available to the students and families.
An interest rate of 2.3% (or even 3% to cover costs, etc.) is significantly lower than the most favorable government student loans. For example, the interest rates for subsidized Stafford Loans, Federal Perkins Loans, and Federal PLUS Loans are 3.4%, 5.0% and 7.9%, respectively. Interest rates charged by private lenders are significantly higher than these rates.
To illustrate the benefits of this approach, the average U-M student with $27,828 dollars of debt paying an assumed average interest rate of 6.0% and 10 year loan term will owe a total amount of $37,073.65 in cumulative payments (including $9,245.65 of interest). In contrast, the same student with this amount of debt funded by a Go Blue Bond with an assumed interest rate of 3.0% and 10 year loan term would owe a total amount of $32,245.09 (including $4,417.09 of interest). In this scenario, the Go Blue Bond would save the student $4,828.56 dollars. For graduate school students the savings are far greater. When fees are considered in the analysis (lower for the Go Blue Bond), the savings increase even further.
In addition to cost savings, the Go Blue Bond would allow U-M to expand eligibility criterion and increase loan amounts for low cost student loans to include more working families. Moreover, U-M would enjoy complete flexibility in terms of loan forgiveness, terms, fees, etc. that would benefit students and their families.
This idea requires an analysis of the debt capacity of U-M to avoid jeopardizing the AAA/Aaa credit rating, alignment of the term/maturity of the Go Blue Bond with the student loans that it funds, default frequency of U-M student debt, and administrative costs.
 Current cost of U-M debt is approximately 2.3% on the current portfolio of $1.8 billion, according to U-M Chief Financial Officer Timothy Slottow (See page 5 of the Minutes of the June 2012 Regent Meeting approved by the Regents July 19, 2012).
 The Institute for College Access & Success – http://www.college-insight.org.
 The other two public universities are the University of Virginia and University of Texas.
 Loan analysis from www.fastweb.com/content/loan_payments_calculator.