New college student-loan rates may double

Stafford loan rates will double in July to

Stafford loan rates will double in July to 6.8 percent, unless Congress acts. This is the Stanford University in Palo Alto, Calif. Photo Credit: AP, 2012

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WASHINGTON -- Congressional inaction could end up costing college students an extra $5,000 on their new loans.

The rate for subsidized Stafford loans is set to increase from 3.4 percent to 6.8 percent on July 1, just as millions of new college students start signing up for fall courses. The difference between the two rates adds up to nearly $6 billion for taxpayers.

Just a year ago, lawmakers faced a similar deadline and dodged the rate increase amid the heated presidential campaign between President Barack Obama and Republican challenger Mitt Romney. But that was with the White House up for grabs and before Washington was consumed by budget standoffs that now seem routine.

"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 new rates apply only to those who take new subsidized loans. Students with outstanding subsidized loans are not expected to see their loan rates increase unless they take out a new subsidized Stafford loan. Students' unsubsidized loans are not expected to change, nor are loans from commercial lenders.

But it translates to real money for incoming college freshmen who could end up paying back $5,000 more for the same maxed-out student loans their older siblings have.

House Education Committee chairman John Kline (R-Minn.), and the committee's senior Democrat, George Miller of California, prefer to keep rates at their current levels but have not outlined how they might accomplish that goal. Rep. Karen Bass (D-Calif.) last week introduced a proposal that would permanently cap the interest rate at 3.4 percent.

Adding another perspective to the debate, President Obama will release his budget proposal on April 10.

Neither party's budget proposal in Congress has money specifically set aside to keep student loans at their current rate. The House Republicans' budget would double the interest rates on newly issued subsidized loans to help balance the federal budget in a decade.

Senate Democrats say they want to keep the interest rates at their current levels, but the budget they passed last week does not set aside money to keep the rates low.

In any event, neither side is likely to get what it wants. And that could lead to confusion for students as they receive their college admission letters and financial aid packages.

"Two ideas . . . have been introduced so far -- neither of which is likely to go very far," said Terry Hartle, the top lobbyist for colleges at the American Council on Education.

Some two-thirds of students are graduating with loans exceeding $25,000; 1 in 10 borrowers owes more than $54,000 in loans. And student-loan debt now tops $1 trillion.

The Congressional Budget Office estimates that of the almost $113 billion in new student loans the government made this year, more than $38 billion will be lost to defaults, even after Washington collects what it can through wage garnishments.

The net cost to taxpayers after most students pay back their loans with interest is $5.7 billion. If the rate increases, Washington will be collecting more interest from new students' loans.

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