June 19, 2012
President Obama has won kudos on college campuses by vigorously pressing Congress to block a scheduled doubling of interest rates on some federal student loans this summer – to the point that presumptive Republican presidential nominee Mitt Romney had no choice but to endorse the same stand.
Unless Republicans and Democrats can break a deadlock in and approve legislation to preserve the status quo, the interest rate on federally subsidized Stafford student loans will jump from 3.4 percent to 6.8 percent on July 1, raising the long-term cost of college for an estimated 7 million students and their parents.
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"We can't make higher education a luxury," Obama said this spring during a rally in North Carolina, "It's an economic imperative. Every American family should be able to afford it."
The dispute is over how to cover the $6 billion cost of extending the low interest rate for another year. While the election-year controversy is assuming crisis dimensions as lawmakers from both parties clamor to position themselves as champions of young voters, some experts say this is little more than pandering, and that the actual consequences of gridlock are relatively minor. For example:
The 3.4 percent interest rate was offered for the first time last year on subsidized Stafford loans to low and middle income undergraduates, and would only be made available for an additional year to a third of loan applicants under Obama’s and Romney’s approach. All other Stafford loans carry the higher 6.8 percent interest rate and would not be affected by the legislation.
If Congress approves the lower interest rate extension, the borrower would save a maximum of $800 to $1,000 over the life of the loan, assuming he borrows the $5,500 maximum available to a third or fourth-year student. That works out to about $9 a month. But the borrower does not have to begin paying the interest until after graduation.
Preserving the 3.4 percent interest rate for another year beginning in July would barely put a nick in the mushrooming student debt problem. Only 3 percent of the roughly $1 trillion of overall outstanding student debt will carry the 3.4 percent interest rate extension this year.
While the special low interest rate was designed to assist students from low and middle-income families, 12 percent of undergraduates who come from families earning $100,000 a year or more are also expected to qualify for these heavily subsidized college loans.
That’s because eligibility rules for subsidized loans take the cost of attending a college or university into account. This allows students from high-income families attending the most expensive educational institutions to qualify for the lower interest rate.
Conversely – and perversely -- students from families with lower incomes attending far less expensive community colleges and schools may not qualify for the 3.4 percent rate, and instead would have to pay the standard 6.8 percent rate.
The lower interest rate would not apply to students and their families who obtain loans from Sallie Mae and other private financial institutions. Those lenders typically charge higher fixed loan rates of 7 percent to 9 percent and have much tougher rules for qualifying for loans. They also impose harsher penalties for missing payments. Practically anyone can qualify for a Stafford loan of one sort or another, and the program offers borrowers considerable flexibility, forbearance and hardship deferrals in repaying the loan.
Jason Delisle of the liberal-leaning New America Foundation said Monday that the stakes involved in the battle over preserving the 3.4 percent interest rate are relatively small. He argues that Congress and the White House should focus more on developing less arbitrary interest rates for student loans and protecting the Pell Grant programs from cuts.
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“We’ve got a student loan system where Congress has sort of layered on benefit after benefit and subsidy after subsidy . . . for people who are in fact struggling,” said Delisle, director of the Federal Education Budget Project. “It’s sort of bizarre to me when the president spends weeks touring the country talking about just the interest rate for one year on one subset of loans. It’s just sort of really weird.”
Delisle said that the federal student loan program is a maze of complicated regulations, which makes it hard for many Americans to fully understand. “I guess that’s what allows the president to make a far bigger deal out of it than it actually is, because it’s too complicated.”
Matthew M. Chingos, governance studies fellow at the Brookings Brown Center on Education Policy, noted recently that the type of loans affected by the president's proposal--new subsidized loans--do not accumulate interest until after students leave college. So a student struggling to afford college would not get any relief now--they would just face somewhat lower loan payments down the road.
“There is no doubt that many college students and their families are being squeezed by rising college costs,” Chingos wrote.” And there are good reasons for the federal government to provide financial assistance to help low-income students afford college. But charging below-market interest rates on student loans is an inefficient and likely ineffective way to encourage college enrollment and completion because students don't pay any interest until after they leave college.”