Interest rates on student loans could double or more under several scenarios being debated in Congress.
The U.S. House of Representatives on Thursday approved legislation that would tie interest rates to market rates, a move critics say will put a bigger burden on students. But the bill also would block an automatic doubling of interest rates that is set to occur on July 1. While the House bill is unlikely to make it through the Democrat-controlled Senate in its current form, if nothing is done, interest rates will double as scheduled later in the summer.
The bill, HR 1911, known as the Smarter Solutions for Students Act, would tie interest rates to a 10-year Treasury note, capping them at 8.5 percent or 10.5 percent depending on the type of loan. It passed the Republican-controlled House by a vote of 221 to 198, with all but four Democrats – including Rep. Scott Peters of San Diego County – voting no.
Representative Virginia Foxx, R-NC, co-author of the bill, said it provides a long-term, market-based solution to stabilize student loan rates.
“The Smarter Solution for Students Act puts an end to the temporary fixes that have failed to strengthen our nation’s student loan system and offers simplicity, rate caps and an assurance that interest rates are immediately in line with the free market – a need particularly acute in this jobless economy,” Foxx said.
Advocacy groups say the bill has the right goal of preventing the doubling of rates from 3.4 percent to 6.8, but is the wrong approach. HR 1911 actually leaves student borrowers open to even higher rates, rising to about 7.36 percent by the time this fall’s freshmen graduate, according to The Institute for College Access & Success, or TICAS, and The Education Trust.
“To make matters worse, the rate on every loan will change each year – like on credit cards and risky variable-rate mortgages that caused the financial crisis. This means the monthly payments required under most plans will change each year as well,” they wrote in a joint statement.
The University of California has also weighed in against HR 1911 and in support of efforts by some members of Congress to extend the current rate for another two years to give lawmakers and the White House time to work out a compromise bill.
“UC believes federal student loans are a public good and that there should be some level of federal benefit for low-income undergraduate and graduate students to help assure that students from a broad range of income levels can finance their postsecondary education,” Gary Falle, director of UC’s governmental relations office in Washington, D.C., wrote in a memo.
About 325,000 students who graduated from or left California colleges in 2010 had federal student loans, according to the latest figures from the U.S. Department of Education. Compared to other states, California ranks near the bottom of federal student debt and, for once, that’s a good place to be. The Project on Student Debt at the Institute for College Access and Success said California ranks 46th nationwide in average debt at public and private non-profit four-year colleges and universities, at about $18,879 per student. It’s slightly lower at UC and significantly less at California State University with an average of about $12,411. Both are well below the national average of $29,059 at public colleges and $23,065 at private non-profit colleges.
President Obama has another proposal that’s similar to the Republican House bill, but offers more stability for student borrowers. His would also establish interest rates based on the Treasury rate, but that amount would be set for the life of the loan.
One of the biggest concerns for California advocates is the amount of loans being taken out by students attending for-profit colleges, who are more likely to default on their repayments. According to TICAS, the average two-year default rate for students with federal loans who attended for-profit colleges in California is 13.4 percent, more than three times higher than the rate at private non-profit schools, and twice as high as at state colleges and universities.
A report by the Congressional Research Service, prepared for Rep. George Miller, D-Martinez, the ranking minority leader on the Committee on Education and the Workforce, found that a student who borrows the maximum of $27,000 in federal Stafford loans over four years would pay an estimated $7,033 in interest under the current rate, $10,867 if the rate is allowed to double on July 1, and $12,374 under HR 1911.
The additional money would go to help pay down the federal debt. In a letter to House Speaker John Boehner, R-Ohio, and Minority Leader Nancy Pelosi, a coalition of student groups wrote that this is the wrong way to go about raising revenue.
“We should not increase student debt to pay down the deficit,” the coalition wrote. “Students are already doing their part for deficit reduction by studying hard so they can earn more, pay more in taxes, and repay their student loans.”
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