Student Loan Interest May Increase for Some

I read this article on the "DiamondBack" University of Marylands student newspaper,

Americans want long-term solutions from a Congress that has been unwilling to negotiate over the last two years, but some compromises could come with a high price tag for students.

After a politically charged debate this summer telegraphed the bitter divide between Republicans and Democrats, Congress eventually agreed to extend a provision that freezes subsidized student loan interest rates at 3.4 percent. But that extension expires next summer — and if Congress wants to avoid the same partisan gridlock that stalled important legislation during the last two years, it will have to bring a longer-term solution to the table.

Some of the alternatives only seem to come to the detriment of the 9.4 million borrowers taking out subsidized loans — those with higher financial need — by imposing higher interest rates and uncertainty in what the rate would be year to year.

Rather than freezing the rate at 3.4 percent, Sen. Tom Coburn (R-Okla.) instead proposed students paying rates equivalent to what the U.S. pays on its own debt — 1.6 percent — plus three percentage points, which would translate to students paying 4.6 percent on subsidized loans.

“Stopgap measures have been the norm on a multitude of issues in Washington lately, but one thing that is consistent among them is that short-term fixes are rarely the answer to the problem,” wrote David Ward, a spokesman for the bill’s co-sponsor Sen. Richard Burr (R-N.C.), in an email. “Not only will this bill bring loan payments down for students, but by indexing student loan rates to a market rate, we provide a long-term solution to this issue.”

For the 8.8 million students who took out unsubsidized loans at the 6.8 percent rate, the move would be a financial relief. They are poised to dole out less on repayments in the low-interest-rate environment, which is likely to stay for at least a couple of years with Federal Reserve Chairman Ben Bernanke pledging to keep rates low until at least 2015.

“I foresee that interest rates will stay in the current neighborhood for at least the next couple of years,” said finance professor David Kass.

But lower-income borrowers, who are likely comfortable with the 3.4 percent rate, will see a significant jump in their repayments.

“That could deter people” from going to college, said finance professor Elinda Kiss. “That could be the straw that breaks the camel’s back.”

It also adds a level of uncertainty for student borrowers, who won’t know what the rates are going to be at any given time, Kiss added. With the fixed rates, students won’t be getting any surprises.

Federal loan interest rates would be subject to fluctuations in the economy. When the economy becomes more stable, interest rates will go up, and students will have to make bigger repayments on their loans. The trade-off, Kass said, is that higher-paying jobs would be more readily available in a high-interest-rate environment to “relieve the burden of repaying the loans.”

But high interest rates won’t always translate to high-paying jobs after graduation. A recession or unexpected economic downturn, which citizens have seen in the last decade, would leave rates locked in at a high rate in the midst of a shaky job market.

“We do have economic cycles,” Kass said. “If there is a cyclical recession … that would certainly be a much bigger burden on the students who took out the higher interest rate loans.”

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About defaultprevention

Default Prevention Specialist since 1998.
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