Rising Concerns Over Student Loans, Public and Private

College students and their advocates are increasingly concerned about student loans, both those administered by the federal government and those made by private lenders.

On Tuesday, students rallied on Capitol Hill to protest a pending interest rate increase in subsidized loans made to low- and moderate-income undergraduates under the federal Stafford program. The rate is scheduled to increase to 6.8 percent from 3.4 percent for new loans made after June 30.

How can this be? A law called the College Cost Reduction and Access Act of 2007 reduced the interest rates on subsidized Stafford loans incrementally over four academic years, from 6.8 percent at the time to the current 3.4 percent.  But the rates are scheduled to jump back up on July 1, unless Congress acts to extend the current rate — a tall order, in the charged election year political climate. (Representative Joe Courtney, Democrat of Connecticut, has introduced a bill to extend the lower rate.)

Student advocates have been worried about the level of student debt. And they warn that the Stafford increase will further burden borrowers by adding thousands of dollars to the cost of financing a college degree. Rich Williams, higher education advocate with the U.S. Public Interest Research Group, said nearly 8 million students take out the loans each year.

Mark Kantrowitz, publisher of Finaid.org, said in an e-mail that the pending interest rate increase may be “the lesser of two evils” in the realm of student financial aid. The federal government loses money making student loans at 3.4 percent, he said, but makes a small profit at 6.8 percent. “So a key question is whether government subsidies should be directed at keeping interest rates low or undoing cuts in the Pell grant program,” he said. Pell grants are financial aid that also help lower-income students. But unlike loans, they don’t have to be repaid and thus may have more impact on a student’s decision whether to attend college than the interest rate on a loan.

Mr. Williams of PIRG argued that Congress must cast a wider net for financing, so it can pay for more Pell grants and keep loan rates low. “The idea that rates should double,” he said, “is offensive.”

Meanwhile, the new Consumer Financial Protection Bureau is seeking complaints about loans made by private lenders. Our colleagues at The Choice recently blogged about the new system.

The consumer watchdog agency seeks to help students who may be having trouble borrowing or repaying such a loan, including borrowers who may have defaulted and had the loan sent to a debt collector. Private loans are those that aren’t made or backed by the federal government. They tend to have higher interest rates and fewer borrower protections, like the right to defer the loan while serving in the military or the availability of repayment plans based on income.

The agency recently sent a letter to more than 6,000 university officials across the country, notifying them of the new complaint system, so they can direct students and alumni to the bureau for help. The bureau will coordinate with the Education Department, which oversees federal student loans, like those made under the Stafford and Perkins loan programs.

Once a complaint is submitted, the bureau said in a statement, it expected lenders to respond within 15 days with the steps they had taken or planned to take, and expected complaints to be closed in 60 days. Consumers will be given a tracking number and can check the status of their complaint on the bureau’s Web site. Consumers will have the option to dispute the lender’s resolution.

Have you ever had problems with a student loan, public or private? And will the pending Stafford rate increase affect you?