The rate for subsidized Stafford?loans?is set to increase from 3.4 percent to 6.8 percent on July 1, due to Congressional inaction, just as millions of new college?students?start signing up for fall courses.
College student Frangy Pozo holds a banner at a 'Tear Up Your Debt' demonstration, during which students tear up mock tuition bills and loan papers to protest rising student loan debt, in Oct., in New Brunswick, N.J.
The Record/AP
EnlargeCongressional inaction could end up costing college?students?an extra $5,000 on their new?loans.
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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 $6 billion.
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?loansare not expected to see their?loan?rates increase unless they take out a new subsidized Stafford?loan.Students' nonsubsidized?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, 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?loansto 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.
House Republicans, led by Budget Committee Chairman Paul Ryan, R-Wis., have outlined a spending plan that would shift the?interest?rates back to their pre-2008 levels. Congress in 2007 lowered the rate to 6 percent for new?loans?started during the 2008 academic year, then down to 5.6 percent in 2009, to 4.5 percent in 2010 and then to the current 3.4 percent a year later.
Senate Democrats, led by Sen. Patty Murray, D-Wash., say their budget proposal would permanently keep thestudent?rates low. But their budget document doesn't explicitly cover the $6 billion annual cost. Instead, its committee report included a window for the Senate Health, Education and Pension Committee to pass astudent?loan-rate fix down the road.
But so far, the money isn't there. And if the committee wants to keep the rates where they are, they will have to find a way to pay for them, either through cuts to programs in the budget or by adding new taxes.
"Spending is measured in numbers, not words," said Jason Delisle, a former Republican staffer on the Senate Budget Committee and now director of the New America Foundation's Federal Budget Project. "The Murray budget does not include funding for any changes to?student?loans."
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. For those?students, the rates make significant differences in how much they have to pay back each month.
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.
For some, though, the?interest?rates seem arbitrary and have little to do with?interest?rates available for other purchases such as homes or cars.
"Burdening?students?with 6.8 percent?loans?when?interest?rates in the economy are at historic lows makes no sense," said Lauren Asher, president of the Institute for College Access and Success.
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