The debate over interest rates for Stafford student loans has seen a messy few years. A recent Senate bill may lead to a compromise, but the landscape for students seeking help with their college costs still looks pretty rocky.
First, a bit of history for those of you who aren’t as familiar with the student loan situation as, say, students are.
Stafford loans are offered to students by the federal government to help them pay for the cost of attending college or grad school. Until July 1, 2013, the interest rate on subsidized Stafford loans (those based on need) was fixed at 3.4 percent. But on July 1, that rate doubled to 6.8 percent, due to Congress’s inability to decide what else to do with it.
The increase was not well received.
The new solution — already passed by the Senate and expected to pass in the House — will lower Stafford loan interest rates to 3.9 percent for undergraduate students, 5.4 percent for graduate students and 6.4 percent for borrowing parents. Though an improvement over the original change, these interest rates would remain effective only through the 2015 school year. After that, as the economy picks up and it becomes more expensive for the government to borrow money, rates would be subject to increase. (The loans are tied to the 10-year U.S. Treasury budget.)
So while those of us nearing graduation get the long end of the stick, new and future college students may end up paying an interest rate even heftier than the embittering 6.8. According to the Institute for College Access & Success, interest rates for undergrads are expected to exceed 6.8 percent by 2017, while rates for grad students are projected to pass it in just two years.
Fortunately, rates will only be able to climb as high as the caps written into the legislation — 8.25 percent for undergraduates, 9.5 percent for graduates and 10.5 percent for parents.
As an undergraduate, a student can accumulate up to $57,500 in loans. For those who move on to graduate school, that figure may increase to as much as $138,500.
Anyone who’s already graduated need not fret, as the rate change will only affect new loans — loans that current U.S. college students (there are more than 21 million of us) take out this year.
The struggle for low student loan interest rates is nothing new. Before the College Cost Reduction and Access Act, which gradually reduced the rate over a four-year span, the 6.8 percent rate applied to both unsubsidized and subsidized loans. Rates didn’t hit 3.4 percent until 2011. Ultimately, Congress decided the act reduced government revenue too drastically and scheduled its expiration date for the next year.
In 2012, both Mitt Romney and President Obama lobbied Congress to extend the low rate through June of this year, efforts that were regarded as no-brainer campaign ploys by some. The extra year won them brownie points among their respective student constituencies. But on July 1, both the good feelings and the low rates expired.
It’s worth noting that low interest on loans might provoke colleges to increase tuition. This idea, known as the Bennett Hypothesis, is based on a theory by former Secretary of Education William J. Bennett, who said, “If anything, increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase.”
Perhaps making the entire debacle irrelevant, or at least less pressing, is the Pay As You Earn Plan. The program lets borrowers repay loans taken after 2007 by paying 10 percent of their disposable income every month for 20 years, or 10 years for those with public service careers. After the applicable time frame runs out, all remaining debt is forgiven. Though you must demonstrate partial financial need to be eligible, the plan can be used for subsidized and unsubsidized loans taken out for undergraduate school as well as those taken out for graduate studies. Though some borrowers may end up paying a higher interest rate this way, it’s also possible to end up repaying less than the amount originally borrowed.
For now, so long as the House passes the student loan bill before the fall term, undergraduate students taking out Stafford loans this year can expect to pay the low-ish rate of 3.9 percent. Better than 6.8, yes, but still an incentive to start beefing up those scholarship applications.