Interest rates for Federal Student Loans doubled today. The Senate broke for its Fourth of July holiday last Thursday without coming to a resolution, even a temporary one, on setting new requirements for Stafford Loans. Students wanting to begin college later this summer or in the fall will currently have to pay 6.8 percent over the lifetime of their loan.
Stafford Loans are the most popular, and previously the cheapest, way to finance a college education for many students who had no other way to pay for it. The federal student loan interest rate of 3.4 percent rate was a lifesaver for many middle and lower income families who want their children to make the most of the American dream.
Fortunately, while this is not the best situation, it is neither a financial meltdown nor is it permanent. The now doubled rates will mean an average of $2,600 in additional interest. While this is not a crushing amount by itself, when it is added to $23,000 in student loans that are supposed to be repaid over a ten year period following graduation, a student now looking for a job is just that much farther in a financial hole that he may not be able to climb out of. There is still time to fix this though. When Congress returns on 8 July, they have a range of options.
Some say the easiest path to take is to just extend the federal student loan interest rates of 3.4 percent and make it retroactive to any loan taken out beginning 1 July. This is being heavily pushed by Senator Tom Harkin (D-IA), the chairman of the Senate’s education panel. “Let’s put this off for a year.” is what he told reporters, in order so a permanent solution can be planned out and passed. Unfortunately for Sen. Harkin and his supporters, this idea is falling flat.
Last year, both Houses of Congress passed the same extension resolution to take it off the table during the Presidential election. The reasoning then was the same; to take the time when lawmakers would not be otherwise occupied with getting their party’s nominee elected or with their own re-election campaigns. Since then, only the President and the House of Representatives have presented a budget option or passed legislation for a permanent fix. The Senate majority could not even get their own party to develop a bill that mirrored the President’s budget option.
Upon return from vacation, the Senate could adopt a version of either the House Republican bill or President Obama’s 2012 budget proposal. Both of these options would tie future interest rates to the financial market fluctuations. Both the President’s and the House option would cap the interest rates, but at different levels. The House bill kept the top rate at 8.25 percent while the budget option would keep it slightly lower at just eight percent.
This is doubtful, as Senate Democrats refused to even discuss the 2012 budget option and have openly excoriated House Republicans for leaving students at the supposed mercy of the stock market. There was however one bipartisan bill put forth in the last two weeks before the holiday break. It may be the best option for a permanent solution.
This Senate bill was drafted by Joe Manchin (D-WV), Tom Coburn (R-OK) and Angus King (I-ME). In it, the rate for both Stafford Loans and unsubsidized loans would be set at 3.8 percent for this year. This rate would then vary from
year to year with the market. The difference with this bill is that the rate would be locked in for the life of the loan, unlike the House Republican bill which allowed the rate to change each year. This bill was just beginning to pick up support in the Senate and even had unofficial approval from the White House to press ahead. In fact, one of the strongest advocates for the student loan program, Elizabeth Warren (D-MA) had just voiced support for it. Unfortunately, it just came too late to be approved before the student loan rates increased.
Despite these setbacks, students and parents shouldn’t panic at this time. As mentioned, Congress has more than enough time to resolve Stafford Loan increases not just for this year, but for the long term health of the Federal Student Loan Program. This is simply too big an issue for both political parties to continue kicking down the road. Please contact us here at Student Debt Relief to stay on top of the latest news.