The rate that undergraduates pay for student loans will double on July 1 while U.S. senators have departed for a one-week break without an agreement on what to do about the automatic increase.
The interest rate for subsidized Stafford loans, available to undergraduates from low-income families, will increase to 6.8 percent from 3.4 percent. According to Bloomberg, more than 7 million students borrow through this program. With disagreement among senators whether a floating interest rate or a one year freeze is the appropriate action, nevertheless Senators have postpone any type of fix until after the new rate takes effect next Monday. Senate leaders have agreed to schedule a July 10 procedural vote on S. 1238, a bill that would keep current rates in place until 2014, said Rhode Island Democrat Jack Reed.
Upon Senators return next week, key questions concerning student loan rates need to be asked:
– Should interest rates be frozen?
– Should interest rates be allowed to rise and fall by linking them to Treasury notes?
– If the rates are linked to Treasury notes, should there be a cap, or maximum rate that students can expect to pay?
– Should the interest rate be set exactly where the government breaks even, or should it be higher to bring in extra money for deficit reduction?
According to the Federal Reserve Bank of New York, the share of 25-year-old Americans with student debt increased to 43% last year from 25% in 2003. During this nine-year stretch, the average education-loan balance of people in that age group increased to $20,326 from $10, 649 – 91%, according the New York Fed. Consumer Financial Protection Bureau (CFPB), the federal agency that holds primary responsibility for regulating consumer protection, says in the aggregate student-loan debt totals almost $1.2 trillion. The most popular government loan is the Stafford, which is limited to students with lower incomes (Subsidized), and the interest rate is 3.4%, set by Congress. The government pays the interest during school. The interest rate will increase to 6.8 percent on new originations if Congress doesn’t act by July 1. Any undergraduate, regardless of income, can get an unsubsidized Stafford loan at a rate of 6.8%. Another type of direct federal loan, called PLUS, carries a rate of 7.9% for graduate students and parents of undergraduates.
A couple of weeks ago, Senator Elizabeth Warren, a democrat from Massachusetts and founder of the CFPB, presented a piece of legislation that would allow college students to take advantage of the low interest rate environment similar to banks on Wall Street. The legislation would allow the government to set the federally subsidized Stafford loan interest rate to 0.75 percent, the same rate the Federal Reserve use when leading money to financial institutions through their discount window. Senator Warren stated this when first introducing her bill:
“As a country, every time we advance money to the big banks at low interest rates, we invest in those banks. We should be making at least that same kind of investment in our students.”
With just one full working day left before the U.S. government doubles the rate, lawmakers are haggling over what to do about it. “The likelihood of students keeping the interest rate they had for the last two years is diminishing by the hour,” said Terry Hartle, senior vice president at the American Council of Education, the largest lobbying group for colleges and universities.
Getting an informal agreement on the concept of flexible rates was the easy part. The more challenging part of the negotiations, according to those involved, has been figuring out how much flexibility to build in, and how much profit the government should extract even though Senate Majority Leader Harry Reid has made it clear on the latter that government should not profit from this action….or inaction.
Related articles
- Student Loan Interest Rates On Verge Of Doubling (zerohedge.com)
- Interest Rates On Student Loans Set To Double Monday (boston.cbslocal.com)
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