Brief relief, long-term questions on student loans

About $1.2 billion of the $6 billion cost of the low-interest rate extension comes from a GOP plan to limit federal subsidies on Stafford loans for undergraduates to six years.

Congress might have averted a doubling of interest rates on millions of new federal student loans, but the fix is only for a year, leaving students on edge over whether they’ll face a similar increase next summer.

“It’s scary,” said Faith Nebergall, a student at Indiana University whose loans currently total upward of $20,000. “And it’s unfair to kind of be kept in the dark as to how much money we owe.”

Under an agreement passed June 29, interest rates on new subsidized Stafford loans will remain at 3.4 percent for another year. That’s estimated to save 7.4 million students about $1,000 each on the average loan, which is usually paid off over 10 or more years.

In the short run, that means students can breathe a sigh of relief this summer. A year from now, however, those rates are set to rise to 6.8 percent. That automatic increase was approved by Congress when lawmakers signed off on a series of scheduled rate reductions five years ago.

“There are more struggling families, and they need some assurances to feel OK about getting young people into and through college,” said Kati Haycock, president of The Education Trust. “Congress aggravates everybody, creates lots of anxiety out there, and essentially gives us a one-year solution.”

The one-year extension of the low interest rate was included in a package of bills that also renew highway and flood insurance programs.

Though some rank-and-file GOP lawmakers have opposed letting the government set the student loan interest rates, Republican presidential challenger Mitt Romney and GOP congressional leaders had backed the one-year extension. The remaining dispute had been over how to pay for it.

About $1.2 billion of the $6 billion cost of the low-interest rate extension comes from a GOP plan to limit federal subsidies on Stafford loans for undergraduates to six years—and to three years for those completing an associate’s degree. Currently, the government charges no interest while students are still in school, even if it takes them longer than six years to graduate.

The remaining cost of the extension will be paid for by charging companies more to insure pensions and changing rules so companies take fewer tax deductions for their pension contributions, a plan suggested by Senate Majority Leader Harry Reid, D-Nev.

Richard Vedder, director of the Center for College Affordability and Productivity and an economics professor at Ohio University, said limiting federal subsidies on loans for undergraduates to six years could have the positive effect of encouraging more students to complete their degree in a timely manner, while also allowing some flexibility for students who work and have families and need more time to finish.

But he sees a negative impact down the road. Vedder argues that lower interest rates contribute to the desire to borrow money, which he says has the adverse effect of enabling schools to raise their tuition. Some students with poor academic records and for whom college might not be the best fight might be inclined to enroll anyway. That could aggravate problems in the labor market, where there are many unemployed and underemployed recent college graduates.