Student Loan Interest Rates to Double on July 1st
On July 1st, student loan rates are set to increase from 3.4 percent to 6.8 percent, effectively guaranteeing that an incoming freshman this fall will owe $5,000 more than a freshman in 2012. It’s a repeat of the same budget battle between House Republicans and President Obama that puts students in the cross-hairs, but this time, there’s a difference: no one is talking about it.
Without a congressional or presidential election this time around, politicians have been far quieter about this interest rate hike.
“What is definitely clear, this time around, there doesn’t seem to be as much outcry,” said Justin Draeger, president of the National Association of Student Financial Aid Administrators. “We’re advising our members to tell students that the interest rates are going to double on new student loans, to 6.8 percent.”
The interest rate increase will only affect new subsidized student loans, and will likely not affect outstanding Stafford loans at all. Non-subsidized loans and private, commercial loans, will be unaffected.
The problem in preserving the 3.8 interest rate comes in the form of a $6 billion price tag for taxpayers, and with both sides of the political aisle locked in a series of budget negotiations that have resulted in a months-long stalemate, little progress on this issue has been seen.
Budget Committee Chairman Paul Ryan’s Republican budget proposal has specifically called for the interest rates to double, thus returning them to the level seen prior to the 2008 academic year, when the then-Democratic Congress lowered the rates to 6 percent to help ease student financial burden in the face of higher tuition. Congress would then lower them again to 5.6 percent in the 2009 school year, 4.5 percent in 2010, and 3.4 percent in 2011.
Senate Democrats have stated that they intend to keep the 3.4 percent interest rate intact, but in the budget passed last week, no money has been earmarked to pay for it.
“Two ideas … have been introduced so far – neither of which is likely to go very far,” said Terry Hartle, lobbyist for colleges at the American Council on Education.
However, recent months have seen a stark escalation in the number of economists warning of just what could happen to the economy if student loan debt continues to rise. The Fair Isaac Corp. (FICO) reported in February that the average amount of student loan debt had become “unsustainable,” having grown from $17,233 to $27,253 between 2005 and 2012, marking a 58 percent increase in just seven years. This month, the New York Federal Reserve released a report stating that total student loan debt in the US had topped 1$ trillion for the first time in history, and also warned of a potential “domino effect” on the economy.
“Burdening students with 6.8 percent loans when interest rates in the economy are at historic lows makes no sense,” said Lauren Asher, president of the Institute for College Access and Success.
But in the days after the sequester, most lawmakers see any hope of finding the money to cover the current student loan rates and thus prevent them from doubling as being unlikely. While Congressional Democrats continue to make a push for keeping rates lower, with Rep. Karen Bass (D-Cal.) even introducing legislature to permanently cap the rates at 3.4 percent, but without the requisite $6 billion set aside to pay for it, any chance of preserving the current rate remains in doubt.
Tobin Van Ostern, deputy director of Campus Progress at the Liberal Center for American Progress, believes that “[a]t this point, I didn’t think we’d prevent them from doubling.”
“Having a deadline does help. It’s much easier to deal with one specific date,” Van Ostern said. “But if Congress can’t come together … interest rates are going to double. There tends to be a tendency for inaction.”