Even as Congress moves to prevent undergraduate student loan rates from doubling, lawmakers have decided to eliminate two federal subsidies that will increase the cost of higher education.
One would hit the same college students who are benefiting from the interest rate freeze. Though their rates will be only 3.4 percent, they will be responsible for paying that interest as soon as they throw their graduation caps in the air — a change that is expected to cost them more than $2 billion.
Meanwhile, students hoping to earn the advanced degrees that have become mandatory for many white-collar jobs will no longer be eligible for federally subsidized loans. That means graduate students are facing an $18 billion increase in interest rate payments over the next decade, about three times the amount at stake in the debate over undergrad interest rates.
Both measures will take effect Sunday.
Each are the consequences of hard-fought political battles and unhappy compromises in the past year over broader issues such as the federal budget and the national debt ceiling. But they have left students such as Mechelle Sieglitz, who is working toward a masters of divinity, with tough choices about how to pursue their academic goals without jeopardizing their financial security.
“I’ve barely been able to subsist on my $20,000 salary from working full time as it is; requiring me to pay interest has always been out of the question,” she wrote in an e-mail.
Student loans have emerged as a political flashpoint as government estimates put the nation’s debt burden at more than $1 trillion. On Capitol Hill, the debate has centered on preventing the interest rate on federally subsidized Stafford loans issued after July 1 from doubling from 3.4 percent to 6.8 percent. Roughly 7 million students are expected to be affected, and Senate leaders said Tuesday that they have reached an agreement on how to cover the $6 billion price tag.
But the freeze will last only one year, and little attention has been paid to what will happen to those loans once students graduate.
College students who take out subsidized Stafford loans over the next year will enjoy the lower interest rate — but that rate will be charged to their bill as soon as they finish school. Previously, the federal government covered the interest for six months after graduation. The change occurred as part of negotiations over the budget in December.
In addition, those low interest rates will last only until next summer. That means students applying for federal loans next year will be hit with the worst of both worlds: a higher interest rate that is charged right after graduation.
“It really makes the loans kind of unpredictable and hard to understand for students and families when these changes are happening through the budget process,” said Megan McClean, managing director of policy and federal relations for the National Association of Student Financial Aid Administrators, a trade group.
The outlook for students pursuing advanced degrees is even more grim.
The interest-rate subsidy for graduate students is disappearing altogether, a casualty of spending cuts ordered during last summer’s debate over the national debt ceiling. Instead, students will have to pay any interest that accrues on their federal loans while they are in school and immediately afterward.
The change comes as government data show the average annual cost for a master’s degree and professional programs in law and medicine has jumped by double digits. Enrollment in graduate programs has risen by 33 percent since 2001 to 2.8 million students.
Julie Morgan, associate director for post-secondary education at the Center for American Progress, said that the choice during the debt ceiling debate was whether to continue the graduate loan subsidy or cover a shortfall in Pell Grants that help low-income students attend college. The latter won.
“It’s a difficult question because as some experts point out . . . they’re a back-end benefit to students,” she said of the interest-rate subsidy. “They do save them money . . . but they don’t encourage students to attend school.”
Sieglitz said she recently learned that she would have to rely on unsubsidized federal loans for her last year of divinity school, putting tuition out of reach. So she took on a teaching job and is hoping to save enough money to finish her education later.
“Though I’ve been able to find ways around the system, I know a lot of kids are not going to be as fortunate and will have to drop out to avoid mounting tuition and shrinking options,” she wrote.