Student loan interest rates set to increase on July 1 if Congress doesn’t act

Many students will pay more for their education next year if Congress doesn’t act by July 1.

Federal student loan interest rates are set to double at the beginning of the next fiscal year, from 3.4 percent to 6.8 percent on subsidized Stafford loans, effectively raising the cost of a college education by $1,000 for students who need loans, according to the United States Public Interest Research Group.

The rates were set to double last July 1, but Congress, in the midst of an election year, voted June 29 to extend the rates one year.

Now, government leaders are looking for a more permanent solution to the interest rates.

In his recent budget proposal, President Barack Obama suggested tying student loan rates to market interest rates. Rates for subsidized loans will be 1 percent higher than the 10-year Treasury yield rates for subsidized loans, while the increase will be 3 percent for unsubsidized loans and 4 percent for graduate loans. With Thursday’s rates, this would mean a decrease in the rates of subsidized loans (from 3.4 percent to 2.7 percent), unsubsidized loans (from 6.8 percent to 4.7 percent), and direct graduate loans (from 6.8 percent to 5.7 percent). Many Republicans have supported this idea, but some have suggested capping the interest rates if the Treasury yield rate gets too high.

“Right now, we are kind of at historic lows in terms of our interest rates being very low, so right now it would be a benefit to the students, but in three or four years, when the interest rate changes nationally, (it may not be),” said Dan Mann, director of financial aid. “If we go strictly to a variable interest rate, is there a possibility that it would always just be a variable interest rate, or should there be a cap put on at some point? Those are the questions that are being asked and debated at this point in time.”

Congress has presented a few alternatives to Obama’s proposal.

Rep. Karen Bass, D-Calif., has sponsored the Student Loan Fairness Act (House Resolution 1330)to permanently extend the current rates. Her bill also proposes that borrowers with student loans are absolved of their debt after paying 10 percent of their annual income for 10 years. So far, 43 representatives have co-sponsored the bill. This bill is currently under consideration by three different committees: House Education and the Workforce, House Financial Services and House Ways and Means.

Meanwhile, senators Tom Coburn, R-Okla.; Lamar Alexander, R-Tenn.; and Richard Burr, R-N.C., have proposed the Comprehensive Student Loan Protection Act (Senate Bill 682), which would change the interest rate on student loans to the 10-year Treasury yield rates plus 3 percent. This proposal would raise the interest rate on subsidized Stafford loans to 4.73 percent, based on Thursday’s yield rates. This bill is currently under consideration by the Senate Committee on Health, Education, Labor, and Pensions.

Rep. Rodney Davis, R-13, hasn’t declared which plan he supports.

“Congressman Davis believes that we must ensure that education loans are affordable and accessible to our nation’s students,” Andrew Flach, Davis’ spokesman, said in an email. “We must also look at ways to control the skyrocketing increases in tuition costs and make sure that students can actually find jobs upon graduation so they can pay back their loans. However, as we move forward, Congress must ensure that their actions do not ultimately make it more difficult for students to obtain education loans.”

Federal government profiting off student loans

The federal government benefits in several ways from letting the current interest rate cuts expire. At the higher interest rate, the government would receive increased revenue with similar administration costs.

According to the Congressional Budget Office, the federal government will make $34 billion off student loans in 2013, a number that will only increase with higher interest rates.

Currently, the federal government will make 12.5 cents for every dollar of subsidized loans it gives out, 33.3 cents for every dollar of unsubsidized loans, 54.8 cents for every dollar of graduate student loans and 49 cents for every dollar of parent loans.

Overall, in fiscal year 2012, the federal government lent the University $244 million in loans for a profit of $99.8 million when the loans are repaid — a profit of 40.8 percent.

If the rates were to increase, it is likely that the subsidized loan would make 33.3 cents for every dollar lent, like the unsubsidized loans, resulting in an increased profit of more than $10.5 million.

Limitations of student loans

If the interest rate increases, it will have an effect on every student who borrows from the federal government, and students can do little to respond.

“You’re basically tied to whatever the student loan rates were at the time you took out the loan, and that is what you end up paying,” Mann said. “There’s no advantage to not borrowing. I mean, if you need to borrow to go to school, this is the cost that it is going to be to borrow. We hope that won’t make a huge impact on students in the long run, and we hope it doesn’t affect their decision about attending college.”

The average debt for 2012 graduates of the University was $24,657, compared with $22,975 for 2011 graduates. It is likely that this number will continue to increase if interest rates go up.

One alternative to federal direct loans are private student loans. These loans may have a lower interest rate but usually don’t offer the full benefits of a federal loan, Mann said.

He said private loans often require co-signers and may be more difficult to pay back.

“In general, we tell students and families that (private loans) should be kind of their last option in terms of how they can borrow,” Mann said. “It is true that some students are able to get lower interest rates at this time on private alternative loans, but they may not have all the benefits that you would find with the direct loan program.”

These benefits include the possibility of consolidation after graduation, fixed interest rates and possible forgiveness for working in public service.

Although students are basically stuck with the federal interest rate, they still have a few choices to make when it comes to student loans.

“We want students to be wise customers and to understand their financial aid package and the implication of student loan borrowing, and they should only borrow what they need to actually go to school and pay their education expenses,” Mann said.

Students can accept just the necessary parts of the federal loans when they receive their financial aid award letter in the spring. If students accept the entire loan, the extra cash will be charged at a 6.8 percent interest rate.

In the end, the fate of student loan interest rates will be decided by Congress.

“It will be interesting to see what happens in Washington, D.C.,” Mann said. “The president is obviously interested in this because they have talked about this, and I think that they felt like what they did last June with the July 1, 2012, date, was a temporary fix, and I think they are trying to get out of doing a temporary fix each year and trying to look at what is the best long-range option. It will be interesting to see what they come up with.”

Johnathan can be reached at hetting2@dailyillini.com.