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Will student loan rates double?

By Christina Couch · Bankrate.com
Thursday, May 30, 2013
Posted: 9 am ET

Student loan debt passed the $1 trillion mark last year according to the Consumer Financial Protection Bureau, and things don't look like they're going to ease up for starving students any time soon. Currently interest rates on subsidized Stafford student loans -- the federal loans designed for qualified low-income students -- are scheduled to double as of July 1 from their current rate of 3.4 percent to 6.8 percent. If it happens, the increase will impact nearly 8 million students and tack on an additional $1,000 over the life of their loans, reports the U.S. Public Interest Research Group. Exactly how much each student will be affected will vary according to the amount they borrowed and their repayment schedule.

There are several alternative strategies in the works. Last week, the House of Representatives passed H.R. 1911, the Smarter Solution for Students Act sponsored by Reps. John Kline, R-Minn., and Virginia Foxx, R-N.C. The bill would cap interest rates at 8.5 percent and permanently tie rates on new subsidized and unsubsidized Stafford loans to the 10-year Treasury note's interest rates plus 2.5 percent. Plus loans for graduate students and parents would also be tied to the Treasury note rate plus 4.5 percent, with a cap of 10.5 percent. In a statement about the bill released last Thursday, Foxx said:

"The Smarter Solution for Students Act puts an end to the temporary fixes that have failed to strengthen our nation's student loan system and offers simplicity, rate caps and an assurance that interest rates are immediately in line with the free market -- a need particularly acute in this jobless economy."

The Congressional Budget Office estimated that under the new bill, interest rates on Stafford and Plus loans would stay under the projected increase for the 2014-2015 school year, but increase to about 7 percent by 2023-2024.

Not all believe the bill actually is a smarter solution. The Institute for College Access and Success, or TICAS, praised Kline and Foxx for seeking a permanent resolve for the ongoing debate about student loan interest rates, but criticized the bill for tying student loans to the ups and downs of the financial markets and for increasing the cost of student loans in the long run.

"If passed, (H.R. 1911) will lead to higher rates on all types of federal student and parent loans than if Congress did nothing at all," TICAS stated.

President Barack Obama has proposed similar legislation in his 2014 budget. Under the president's bill, all Stafford and Plus loans would be tied to the 10-year Treasury note interest rate plus a nearly 1 percent cushion for subsidized loans, a nearly 3 percent add-on for unsubsidized ones and nearly 4 percent for Plus loans. His budget would also extend the income-based Pay As You Earn repayment plan to all qualified borrowers. Pay As You Earn currently only applies to borrowers "who were new borrowers as of Oct. 1, 2007, and had received a Direct Loan disbursement on or after Oct. 1, 2011."

The Senate is working on its own proposals. The Bank on Students Loan Fairness Act proposed by Sen. Elizabeth Warren, D-Mass., would temporarily set the rate on subsidized Stafford loans at the same rate that banks can borrow funds from the Federal Reserve, which is currently 0.75 percent. The bill would last one year and would only apply to new borrowers. About 20 colleges and several nonprofit organizations, including the American Federation of Teachers and the Association of Independent Colleges and Universities in Massachusetts, have endorsed the bill.

A second bill sponsored by Sens. Jack Reed, D-R.I., and Tom Harkin, D-Iowa, would freeze subsidized Stafford loans at their current 3.4 percent rate for the next two years. The Reed-Harkin Student Loan Affordability Act of 2013 is funded by closing tax loopholes that affect tax-deferred retirement accounts, corporate offshore accounts and oil and gas industry taxes. Reed is also the co-sponsor of the Responsible Student Loan Solutions Act of 2013, which would set student loan interest rates according to the cost of operating those programs. Loans administered under the bill would have an adjustable rate with caps for subsidized Stafford loans set at 6.8 percent and caps for unsubsidized and parent loans set at 8.25 percent.

Regardless of which of these bills passes, all sides want a long-term solution to the student loan interest dilemma in order to prevent surprise interest rate hikes and wasting valuable legislative time treading the same ground year after year.

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