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Congress spars over student loans

By Christina Couch · Bankrate.com
Friday, July 12, 2013
Posted: 6 pm ET

Nearly two weeks after the interest rates on federal subsidized Stafford loans for low-income students doubled from 3.4 percent to 6.8 percent, Congress is still sparring to reach a compromise. And up until yesterday, it looked like it might. Earlier this week, the Senate tentatively approved a bill that would tie all Stafford loans to the rate of 10-year U.S. Treasury Notes plus a 1.8 percent markup with a cap of 8.25 percent. Graduate and federal Plus loans would come with a 4.5 percent markup over the rate of 10-year Treasury notes and be capped at 9.25 percent.

Reports indicate that the bipartisan deal had gathered the required support but was ultimately delayed yesterday after the Congressional Budget Office reported that the bill would cost an estimated $22 billion over ten years to implement, according to The New York Times. On Wednesday, the Senate also killed a separate bill that would extend the 3.4 percent interest rate on subsidized Stafford loans for another year.

"I am encouraged today that there seem to be reasonable (discussion on) these issues on Capitol Hill," says Heather Jarvis, an attorney specializing in student loan education. "But in general, I've been appalled really about how politics have taken the front seat in Washington as has been the case lately, and the needs of students and families have been subject to that circus."

According to Chris Lindstrom, higher education program director for the U.S. Public Interest Research Group, the current Stafford loan jump will add approximately $1,000 per loan to low-income students' debt load. For those who take out a new loan for each year of college, that means an extra $4,000 over a four-year tenure.

Mark Kantrowitz, senior vice president and publisher of Edvisors.com, a collection of college admissions and financial aid websites, says the Stafford interest hike isn't as bad as it sounds. "The monthly loan payment (on a subsidized Stafford loan) will go up by less than $7 over a 10-year term," he says. "It's not the end of the world."

The real problem, Kantrowitz contends, is the amount of debt students take on to earn their degrees, an issue that none of the bills currently floating through Congress address. Both Kantrowitz and Jarvis are also concerned that some proposals, including the Smarter Solutions for Students Act, which passed the House in May, will ultimately increase student debt instead of ameliorating it. Under Smarter Solutions, all Stafford loans would be tied to 10-year Treasury notes plus 2.5 percent with a rate cap set at 8.5 percent. Plus loans would come with a 4.5 percent markup and a 10.5 percent interest rate cap.

"(Smarter Solutions) would only be a better deal for students for a very short period of time" while interest rates remain low, says Jarvis.

A joint statement released this past May by the student research and advocacy groups The Education Trust and The Institute for College Access and Success asserted that under Smarter Solutions, students would save in the immediate future, but by the time this year's incoming freshmen class graduated, their interest rates would already exceed the current Stafford rate. Mark Kantrowitz described the bill and others like it as "essentially interest rate increases masquerading as decreases."

While Jarvis believes that a compromise is possible, Kantrowitz is skeptical that a deal will be reached at all. "There are so many differing opinions on this issue, and they're still fairly far apart on these issues that I think nothing is going to happen," Kantrowitz says.

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