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The Impact of the Student Loan Interest Rate Hike

Tuesday, April 24, 2012

 

Thousands of Massachusetts college students could see the cost of their student loans skyrocket in July.

The interest on federally-subsidized student loans is set to double July 1, when it will balloon from 3.4 to 6.8 percent. The hike will happen if the current law governing interest rates on the popular Stafford Loan program expires. In Massachusetts, the average student loan would go up about $1,000 for the 160,000 students statewide who depend on federal loans to help them realize the dream of a college degree. Nationally, the increase would impact 7.4 million borrowers.

Area schools opposed

Officials at area colleges such as Becker College and the College of the Holy Cross in Worcester are bracing for the worst, while hoping for the best.

“We are watching this issue carefully,” Kevin M.R. Mayne, vice president of enrollment management at Becker College, said in a statement to GoLocalWorcester. “It affects a significant number of our students and their families, and anything that affects affordability is a concern. We want to keep a Becker education an affordable reality for students.”

Lynne Myers, director of financial aid at Holy Cross, said officials there have been lobbying feverishly to retain the current, 3.4-percent interest rate, realizing how many students turn to them for financial aid.

"We hope that the federal government will review the student loan interest hike and come to a continued resolution to keep rates low," Myers said. "Federal loans are the best options for student borrowers, given the different protections and payment plans.

The efforts of schools to keep education affordable would be markedly easier if the current law stays in force. Bay State students would save a collective $165.3 million in interest on their federal loans.

New borrowers affected

The hike would affect only new borrowers, although not necessarily just new students, according to Cecilia Munoz, assistant to the president and director, Domestic Policy Council, who addressed media members during a White House conference call on Monday.

“I have a daughter who is a student,” Munoz said to a question of whether only new students would be affected by the increase. “Like a lot of other students, she takes out loans for the following year. We suspect many of these students will be doing that.”

President Barack Obama, already on the campaign trail, is hitting three colleges Tuesday to sound a call for Congress to keep the law in place. The law primarily affects low- to middle-income undergraduate students. There is some irony to the president’s push to keep federal interest rates on college loans down. Obama has proposed an increase in Perkins Loans for 2013. Another federal college loan program, a Perkins Loan is based on student need and carries a 5-percent interest rate. During Monday’s conference call, Munoz said that “is being looked at as a separate program.” It is, however, a subsidized loan, just like the subsidized Stafford Loan targeted for increase in July.

‘Access to education’

Colleges and universities know many of their students rely heavily on loans to help cushion the financial blow of a college education. Coupled with steadily rising tuition costs, student loans can be crippling for graduates, even though the government pays all interest on the federal Stafford Loan, while the student is in college.

“The major way for many individuals to get ahead today, particularly first-time students and working adults, is through access to education,” said David A. Ellis, Ph.D., senior vice president and CFO Becker College. “Steps to dramatically reduce that access, such as doubling the Stafford Loan interest rate and requiring immediate repayment in some loan cases, should be eliminated.”

The increase of interest on Subsidized Stafford Loans to 6.8 percent would bring it in line with the amount of interest charged on Unsubsidized Stafford Loans. Both are government programs that allow up to 10 years for repayment. The biggest attractions of a subsidized loan are that they are available to anyone demonstrating financial need and the government pays all interest as long as the student attends college at least half-time. Unsubsidized loans allow the borrower to defer payments only for six months after graduation or withdrawal. 

Options are available

Even if the rates go up, college students aren’t without a lifeline, according to Allesandra Lanza, director of corporate and public relations for American Student Assistance (ASA). The problem is many of them don’t realize they have options.

“It is really important to remember with your federal Stafford Loan, there are different repay options,” Lanza said. “There are a lot of options out there that lower your payments.”

With federal loans, for example, some payments are tied to income. Some also forgive the loan entirely, after 10 years of payments, if the graduate works in public service.

“(Borrowers) need to know they have options available to them,” said Lanza, adding it is incumbent upon the individual seeking the loan to negotiate the best loan terms available.

For example, federal loans are among the most advantageous for borrowers, because interest rates, while high, are still typically lower than those on private loans. Repayment options are also much more flexible, Lanza said. In fact, Holy Cross advises its students against applying for private loans to attend college, according to Myers.

Affordable education

As hard as they try to manage their college debt, students are finding it increasingly difficult to afford a college education. According to information provided by the White House, tuition and fees to U.S. colleges and universities have more than doubled over the past two decades. In 2010, graduates left college owing, on average, in excess of $25,000 – only slightly lower than the average owed in Massachusetts.

Adding insult to injury, the unemployment rate for recent college grads climbed to 9.1 percent in 2010 from 8.7 in 2009. Just as shocking was news that student loan debt has surpassed credit card debt for first time ever. The default rate on student loans is also high at 8.8 percent nationally, according to the ASA.

“It is higher than what it has been,” said Lanza. “It is the highest in the last decade.”

It is not, however, the highest it has ever been. In the early 1990s, Lanza said, the default rate was in the range of 20 percent. Still, the fact that it is climbing is cause for alarm, she said.

“It has been on a steady uptick for the past seven to eight years now,” Lanza said.

There’s even worse news: As Lanza noted, critics of those numbers contend they aren’t representative of the actual rate because they only take into consideration the first two years of repayment. The real percentages, she acknowledged, are likely much higher.

Deadline approaches

With the clock ticking and the deadline nearing for Congress, people like Myers at Holy Cross are urging students to voice their opinions and contact their federal representatives. One of those political figures has already made it clear where he stands on the interest rate hike. U.S. Republican Sen. Scott Brown sees the increase as yet one more obstacle between students and a long-lasting career once they finish college.

“I support extending the current interest rates for Stafford Loans,” Brown said in a statement, “especially given the dreadful economy and the news that half of today's college graduates either don't have a job or are working in jobs beneath their skill level.”

 

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