Last night, the Senate passed a bill to address the doubling of the interest rate on new subsidized Federal Stafford loans.
The Congressional Budget Office (CBO) estimated that the legislation will save the federal government $715 million over ten years, which would be applied to deficit reduction. Many feared that the multi-partisan Senate deal would fall apart because the CBO found that an earlier version would cost $22 billion over ten years.
Under the Senate-approved legislation, interest rates on new loans each July 1 would be based on the last 10-year Treasury auction in the previous May. The specific interest rates would be as follows:
- Undergraduate Students (Subsidized and Unsubsidized Federal Stafford Loans): 10-year Treasury + 2.05% with an 8.25% cap
- Graduate and Professional School Students ( Federal Stafford Loans and Federal Grad PLUS Loans): 10-year Treasury + 3.6% with a 9.5% cap
- Parents (Federal Parent PLUS Loan): 10-year Treasury + 4.6% with a 10.5% cap
Based on the current 10-year Treasury rate, this would yield interest rates of 3.9%, 5.4% and 6.4%, respectively, for new loans this year, made after July 1, 2013.
According to Mark Kantrowitz, publisher of Edvisors, “This is still an interest rate increase masquerading as a decrease. Interest rates are at historically low levels and have nowhere to go but up. We can expect interest rates to start increasing by about 1.5% per year in 2015.” These federal educational loan rates are expected to climb as the economy improves and it becomes more expensive for the government to borrow money. Thus, interest rates on new loans will probably exceed the current 6.8% rate in 2017 and certainly by 2020. “So, while students enrolling in college now will save money on their student loans, their younger siblings will pay a lot more. A few years from now students and parents will be demanding a return to fixed 6.8% interest rates.”
This student loan interest rate debate is more about the politics than the policy. It is a distraction from the real problem, which is the amount of debt, not the cost of the debt. On the same day the Senate negotiators crafted the current compromise, the Consumer Financial Protection Bureau reported that federal education debt alone has reached the $1 trillion milestone. Previously, the combination of federal and private student loans had reached $1 trillion. See http://www.consumerfinance.gov/speeches/student-debt-swells-federal-loans-now-top-a-trillion/
The failure of grants to keep pace with increases in college costs shifts more of the burden of paying for college from the federal and state governments to students and their families. Federal grants have decreased on a constant dollar per-student basis. State appropriations have likewise decreased for decades. Cuts in state appropriations are the primary driver of public college tuition inflation. Family incomes have been flat for a decade, forcing families to either borrow more or shift enrollments from higher-cost colleges to lower-cost colleges, such as from 4-year colleges to 2-year colleges (or to skip attending college altogether). This causes a reduction in Bachelor’s degree attainment, since only one fifth of students who intend to obtain a Bachelor’s degree but start at a 2-year college obtain a Bachelor’s degree within six years, compared with two-thirds of students who start at a 4-year college. These effects are felt most by low- and moderate-income students, who are increasingly being priced out of a college education.
So what are a student and his or her family to do?
Kantrowitz offers the following practical advice:
Save before college. Even if you start saving late, it will still save money. Every dollar you save is a dollar less you’ll have to borrow. Every dollar you borrow will cost about two dollars by the time you repay the debt.
Search for scholarships on free web sites like studentscholarshipsearch.com and scholarshippoints.com. Every dollar you win is a dollar less you’ll have to borrow in the form of a loan.
Use tuition installment plans to avoid long-term debt. These plans spread out the college bills into 9 or 10 equal monthly installments. So if you can afford to pay the college bill, just not all at once, these can make it more affordable while avoiding high loan interest rates.
Use education tax benefits, such as the American Opportunity Tax Credit, to reduce your tax bill based on amounts you spend on tuition, fees, and textbooks.
Live like a student while you are in school, so you don’t have to live like a student after you graduate. Tuition and fees are only half of college costs. Living expenses, including room and board, books and supplies, transportation and personal expenses are the other half. There are many ways to save besides enrolling in a less expensive college. You can live at home if you enroll at a nearby college or get a roommate to split the rent. Buy used textbooks or sell your textbooks back to the bookstore at the end of the semester. Visit home less frequently to save on travel costs. Minimize non-campus dining and entertainment costs. Students don’t like the cafeteria food, so they eat out or buy beverages from vending machines and specialty coffeehouses. A $10 pizza a week will cost $2,000 by the time you graduate, and if you use student loan money to pay for it, it will cost about $4,000 by the time you repay the debt. That’s a lot of pizza.
The Senate version of this interest rate legislation will be sent back to the House for approval before its August recess. The House of Representatives is expected to act quickly on the legislation (HR 1911).
David Levy is Associate Editor of the Edvisors Network. David brings 30 years of experience as Director of Financial Aid at some of the nation’s leading colleges, including the Scripps College, California Institute of Technology and Occidental College. He is respected by students, parents and financial aid professionals nationwide because of his extensive outreach and volunteer activities, his extensive knowledge of financial aid and his leadership in helping to simplify the aid application process.
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