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.
“It makes political sense, but not economic sense,” Vedder said.
The price of college tuition has skyrocketed in recent decades. Between 1982 and 2007, tuition and fees increased 439 percent while the median family income rose 147 percent, according to a report from the National Center for Public Policy and Higher Education. The price of in-state tuition at a public university has increased by more than 5 percent annually in the past 10 years. It jumped 15 percent between 2008 and 2010 alone.
Cuts to state education budgets have played a significant role in increasing those costs, particularly in recent years. How much influence the expansion of access to federal aid has played is less certain; many insist it plays none. An analysis this year by the American Council on Education concluded there is no evidence to suggest it has, and that any relationship between the two is incidental, not causal.
What is certain is that with the price of tuition continuing to rise, pressure will remain on Congress to keep rates low.
“I think anybody in higher education, whether it’s people like me, college presidents, financial aid administrators, students, and parents, would really like some certainty and predictability,” said Terri Hartle, senior vice president for government and public affairs with the American Council on Education. “And that’s something we really haven’t had.”
Nebergall, 21, said she expects to owe $20,000 or more on her federal loans by the time she graduates, and about the same in private loans as well. While she and her long-term boyfriend would like to move in together when she finishes school, Nebergall doesn’t think they’ll be able to afford it. He pays about $250 a month in student loans himself.
She said a rate increase next year could have a big effect.
“It’s money I could put down on a security deposit on my own apartment,” she said. “It’s money I could be used to start my adult life.”