Although Congress did keep the student loans interest rates at their current levels, there are still several issues that they will need to deal with this year. Interest rates will increase for the 2014-2015 school year, loan counseling needs to be overhauled and recent changes to PLUS loans are having some unexpected affects.
The break that students received for their 2013-2014 loans is not permanent. “Rates are going to go up, that’s a given.” says Mark Kantrowitz, a financial aid expert and publisher at Edvisors. Since this increase will affect the rates for Graduate PLUS Loans, Parent Direct PLUS Loans and Stafford Loans, it is going to affect a huge percentage of all students taking out a Federal student loan.
While the market based system agreed upon for future Federal Student Loan interest rates garnered enough support to keep those loans at prior year numbers, the slightly improving economy will see the 10 Year Treasury note yields increase from their current three percent. The rate for this year’s loans won’t be calculated until June 1st.
Not If, But How Much?
The only thing that Kantrowitz and other experts can’t agree on is how much. Some expect it to stay fairly flat while others believe the ten year treasury note may climb as high as 3.75 percent. Regardless, since the rate on June 1st of 2013 was merely 2.16 percent, every student taking out one of these Federal loans will be paying a higher rate.
I’m Going To Owe What?!
Loan counseling for Federal Student Loans is required before and after the loan is issued, but does not appear to serve any useful purpose. When interviewed by US. News in July of 2013, Simon Tam (MBA student at Marylhurst in Oregon) related that “There was no opportunity to interact all. It simply involved checking off boxes saying I agree to certain terms.” He’s got some fairly high powered support in the U.S. Senate though.
Tom Harkin (D-IA) has introduced The Smarter Borrowing Act to rewrite loan counseling; making it more complete. The key portion of the law is to require any school that has a student with federal loans to send annual notices to them on the amount, interest rate and eventually, methods to begin repayment. It will also put colleges with very high default rates to go further with counseling by including instruction on creating a budget and the basics on finances so that each student actually understands the terms of their loan and doesn’t just check a box in order to go to school.
More Legislation On The Way
Mark Krantowitz believes that Senator Harkin’s Bill is a good solution to increasing student knowledge. It has enough support from both parties to be included in the re-authorization of the Higher Education Act that needs to be passed and signed into law before the end of 2014. Getting that done has been very difficult in the past however. Krantowitz reminds us that “The last re-authorization was originally supposed to occur in 2002. They [Congress] passed thirteen extension bills until it was finally passed in 2008 and this Congress is at least as contentious.”
But More Rules Sometimes Mean More Problems
Three years ago, the Department of Education placed further requirements of lenders for PLUS Loans, both Graduate and Parent Direct. Applicants could no longer have previous loans charged off or sent to collections in their credit history for five years in addition to the existing restrictions on bankruptcy, foreclosures and loans delinquent for more than 90 days. Thousands of previously eligible students and their families have been denied loans since then. The problem here is that the Department of Education doesn’t have the authority to make those kinds of changes; that falls to the Congress.
The issue is finally supposed to be taken up in February. The final result may see the changes overturned, passed into law or replaced with different requirements. These requirements may have the Department using FICO scores and debt-to-income percentages to decide PLUS Loan eligibility. While this is a more accurate picture of an applicant’s financial status and will therefore reduce the number of lenders defaulting by not giving them the loan in the first place, it also closes off one more avenue for parents and students to use to get to college.
The first of these issues isn’t one that should be changed again. Tying the loan interest rates to a leading economic indicator actually puts more stability into the Federal Student Loan Program. It is however one of the reasons why Loan Counseling needs to be improved and made into something useful for students and their loan co-signers. PLUS Loans have needed to be reworked for some years, but it has to be done in accordance with the law and structure of the student loan system. Check back with us here at Student Debt Relief to stay on top of these and other student loan issues in the coming year.