stafford-loans

Interest on government student loans set to double this summer

April 9, 2013 at 12:21 PM ET

The interest rate on new government-subsidized Stafford loans is set to double on July 1 – to 6.8 percent from 3.4 percent – unless Congress acts to stop it. And there’s no guarantee it will.

In his budget plan released on Wednesday, President Obama proposed having the interest rates on new Stafford loans tied to market rates.

Christian Walker, an economics and political science major at Northern Arizona University, needs Stafford loans to stay in school next year. He already expects to graduate with $50,000 in debt.

“Raising the interest rate on those loans just compounds the problem and increases the amount of money I’ll have to pay back after I graduate,” he said. 

It’s truly déjà vu for families who rely on Stafford loans to help pay for college. The interest rate hike was going to take effect last year, but faced with a nationwide backlash, Congress agreed to delay the increase for one year. So here we are again.

Student groups and college educators across the country have called on Congress to stop the rate hike, which would affect more than 7 million students. The consumer advocacy group U.S. PIRG estimates that doubling the interest rate on Stafford loans would add another $1,000 to the cost of each loan – and many students need one loan for each year of school.

Related:Will you be affected by an increase in student loan interest rates?

“The argument against it is the same as it was last year: The interest rate is way too high,” said Ethan Senack, U.S. PIRG’s higher education associate. “At a time when students and their families are already facing massive debt, this is a cost increase they simply cannot afford.”

The average student in this country already graduates with $26,600 in loan debt, according to the Project for Student Debt at the Institute for College Access & Success.

“It’s scaring everyone on campus,” said 19-year old Tori Uyehara, a freshman at Southern Oregon University. “We can’t afford the amount of interest we’re paying right now. Doubling the interest rate is just too much.”

What if the rate doesn’t go up as planned?

The non-partisan Congressional Budget office estimates the loss to the U.S. treasury would be nearly $6 billion a year.

But Terry Hartle, senior vice president of the American Council on Education (ACE) believes lawmakers should consider the interest rate spread when deciding what to do.

“The government is borrowing the money at about 2 percent and lending it at 3.4 percent," Hartle said. "They don’t need to get a 6.8 percent return."

The council, a trade association of about 2,000 public and private colleges and universities, wants Congress to keep the current interest rate and prevent student debt from increasing.

What can we expect?

As you might expect, Congress remains divided on this issue along political lines. Republicans think the rate should go up, Democrats don’t.

The Senate budget resolution, authored by Sen. Patty Murray (D-Wash.) would keep the interest at 3.4 percent.

"The cost of a college education has never been higher, and students across our country can't afford higher interest rates for Stafford loans," Sen. Murray said in an email to NBC News.  

Republicans in the House are talking about a long-term solution that would change the way the interest rates on Stafford loans are calculated.

At a recent hearing on student loans, Rep. John Kline (R-Minn.), chairman of the House Committee on Education and the Workforce, said he wanted to see government “move away from a system that allows Washington politicians to use student loan interest rates as bargaining chips, creating uncertainty and confusion for borrowers.”

One idea being discussed is to replace the fixed rate arbitrarily set by Congress with a variable rate tied to some market indicator, such as Treasury notes.

Supporters of this idea, including some educators, believe a floating rate would make more families eligible for these popular loans.

In his budget plan released on Wednesday, President Obama proposed having the interest rates on new Stafford loans tied to market rates. Because those rates would not be capped under the President's proposal, consumer advocates are not happy with it.

In a joint news release, a number of consumer groups said: "While the President’s budget keeps rates low in the near term, we’re disappointed that it risks sky-high interest rates in the long term."

A final word

T.J. Legacy Cole, a political science major at Florida Agricultural and Mechanical University, needs a Stafford loan to finish his last semester. He knows how important it is to balance the budget, but he hopes Congress will consider the big picture.

“They need to understand that education is the key to our future, not debt,” he said.

What do you think? Share your thoughts with me on Facebook.

Herb Weisbaum is The ConsumerMan. Follow him on Facebook and Twitteror visit The ConsumerMan website. 

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