Student Loan Rates To Remain Low, For Now

Students with federal loans breathed a collective sigh of relief Friday afternoon when Congress approved a bill that will keep interest rates low for another year.

The provision holds the rate on subsidized Stafford federal loans — which had been set to double on July 1 if Congress failed to act — at 3.4 percent for the coming academic year. The $6.7 billion provision is expected to save college students nationwide an average of $1,000 on their loan repayments, at a time when total student debt in America has soared. But is the fix good enough?

Not really, several higher education experts say.

“All this does is keep the debt problem from being exacerbated — it’s damage control,” said Patrick Callan, president of the Higher Education Policy Institute, a nonprofit research and analysis organization in San Jose, Calif. “We’re relying way too much … on debt to finance education. It’s really the prevention of a negative thing. It’s not going to make college any more affordable.”

Undergraduates are eligible to receive two types of Stafford loans: subsidized and unsubsidized. With the former, the government pays the interest while students are enrolled at least half time, and the rate is set at 3.4 percent. In the latter case, students accumulate interest while in school, at a current rate of 6.8 percent.

State funding cuts to public institutions, declining median family income and spiking tuition costs have caused student debt to soar in recent years. The Consumer Financial Protection Bureau found in March that total student debt in America had surpassed $1 trillion. Much of that comes from debt to private lenders, but students also borrowed $117 billion in federal loans last year.

President Barack Obama has campaigned for the extension of low interest rates. He is expected to sign the bill, which also includes a two-year transportation measure and a provision on federal flood insurance. The legislation cleared the House by a vote of 373 to 52, the Senate by 74 to 19.

In the short run, the measure will benefit many students across the nation. Student loan interest rates have historically risen and fallen, but moving from 3.4 to 6.8 percent in a single year would be a dramatic jump, said Terry Hartle, senior vice president at the American Council on Education.

Doubling the subsidized rate could also have discouraged students from seeking federal aid or pushed many toward cheaper public institutions or two-year community colleges, said Ronald Ehrenberg, director of the Cornell Higher Education Research Institute and a professor of labor relations and economics. In the immediate future, Ehrenberg said maintaining low interest rates will help students leave school with lower debt, which will give them more freedom to consider occupations for reasons other than salaries.

While the measure protects one type of federal aid, it could have adverse effects on other funds — particularly federal Pell grants, which unlike loans do not need to be repaid. Under an earlier proposal, Ehrenberg said, the government would have restricted the number of years students could receive subsidized loans and siphoned the extra money into Pell grant funding. The final bill approved by Congress will limit the length of time those loans are available, but will put the savings toward financing the interest rate provision.

The bill also does nothing to help the financial aid prospects for graduate and professional school students, who will lose their eligibility for subsidized Stafford loans beginning July 1, under the Budget Control Act of 2011. Hartle said this change could be seen as desirable, prompting graduate and professional school students to think more carefully about the costs of their education. But Ehrenberg said the lack of subsidized loans could discourage students from attending graduate school, which would not serve the nation’s interests.

Then again, this is all in the short run. Congress will have to reevaluate its decision on student loan rates in just one year, and it’s anyone’s guess what will happen then.


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