Interest rate could double on some student loans

The fixed interest rate on Stafford federal subsidized loans, held by nearly 8 million undergraduates, is set to double on July 1, a few months before the start of the new school year.

President Obama has asked Congress to block the rate hike for current and future Stafford loan recipients, but legislation aimed at keeping it permanently at 3.4% has stalled in Congress.

Obama’s fiscal 2013 budget would freeze the interest rate at 3.4% for a year.

“We’re saying to Congress, now is not the time to make school more expensive for young people,” Obama said last month when he unveiled the budget. “And they can act right now to make that change.”

Advocates aren’t sure if there’s enough support in Congress to prevent the interest rate from doubling to 6.8%.

If the rate does double, recipients would pay an extra $5,000 over 10 years if they borrow the maximum $23,000, said Rich Williams, a higher-education policy analyst at the U.S. Public Interest Research Group.

Hannah Rencher, a 20-year-old junior at Colorado State University and a Stafford loan recipient, said Congress should block the rate increase.

“Right now, the best thing students can be doing is going to school,” she said. “There are a whole lot of great potential students who may be discouraged from going to school now if their families can’t help them pay.”

The government pays the interest on Stafford loans while recipients are in school. To qualify, recipients must show financial need and meet income restrictions. They usually qualify for Pell Grants, which pay $5,500 a year but don’t cover the full cost of tuition, fees and living expenses.

Anyone can apply for unsubsidized Stafford loans, which carry a 6.8% fixed interest rate.

While Republicans want to help more students attend college, “we recognize this goal cannot be accomplished solely at the federal level,” according to Jennifer Allen, spokeswoman for the House Education and Workforce Committee headed by Rep. John Kline, R-Minn.

“We believe states and institutions should act responsibly and look for opportunities to streamline and reduce costs for students,” she wrote in an email, adding that Republicans recently passed bills aimed at lowering college costs by dismantling some federal regulations.

South Carolina Rep. Trey Gowdy, a Republican member of the education committee, said “artificially suppressing” interest rates is an incentive for colleges to keep tuition rates high.

“If they can find more than $1 million a year to pay their football coach, and they have endowments that are incredible, then they can find a way to let indigent students attend their schools without going so far into debt,” Gowdy said.

Advocates say many lawmakers balk at the cost of keeping the interest rates at 3.4 percent.

The White House and congressional Republicans provided different cost estimates, an illustration of how far apart they are.

The White House’s Office of Management and Budget estimates it would cost $3.7 billion keep the current rate for five more years. Republicans on the House education panel say it would cost $6 billion to keep that rate for just one year.

Advocates say Congress is focused on other priorities and interest-rate legislation may languish indefinitely.

“We’re just going to have to see how much public pressure there is to keep this subsidized Stafford loan interest rate low,” said Justin Draeger, president of the National Association of Student Financial Aid Administrators. “I think that’s ultimately what will motivate Congress to take this up.”

Williams at U.S. PIRG said Congress shouldn’t force the most vulnerable college students to pay more at a time when states are slashing higher education budgets and colleges and universities are raising tuition.

Fifteen years ago, about one-third of undergraduate students borrowed money for college. Their average debt load was about $12,000, Williams said. Today, more than two-thirds of the nation’s undergraduates borrow money and graduate with about $25,000 in loans, he said.

Christie Leighton, associate director of student financial services at Colorado State University, worried about the chilling effect of higher interest rates on future enrollments.

“Would the possibility of more debt… dissuade students from even coming?” she said. “We don’t know that for sure, but we do know it would be something they’d think about before enrolling.”

Contributing: Sarah Kyle, The (Fort Collins) Coloradoan.