Student Loan Rates Shouldn’t be Allowed to Rise
By Don Vickers
Recently, I joined U.S. Rep. Peter Welch of Vermont in urging Congress to halt a planned hike in the interest rate on subsidized Stafford loans (federal education loans that go to students with the greatest financial need). Unless Congress acts, the rate will rise from 3.4 to 6.8 percent on July 1.
Congress’ decision will have huge implications for students throughout the country. If the rate is allowed to increase, a college education is going to become even more out of reach for students who need our help the most.
Take the case of a student who borrows $23,000 for college, the maximum available to undergrads using subsidized loans, and repays the loans during the customary 10 years:
At 3.4 percent, the borrower would repay the principal plus $4,149 in interest, for a total of $27,149.
At 6.8 percent, the borrower would repay the principal plus $8,746 in interest, more than twice the amount accruing at 3.4 percent, for a total of $31,746.
If the student extends his or her repayment period — for example, because of unemployment or underemployment — the interest mounts. Under a 20-year repayment plan, a 3.4 percent rate translates to $8,650 in interest and a 6.8 percent rate costs $19,021 in interest — almost as much as the original amount borrowed.
Apart from the subsidized loan discussion, but no less important, are interest rate challenges facing other federal loan customers:
Undergrads with unsubsidized Stafford loans already pay 6.8 percent in interest. These “unsub” loans, in which interest accrues from the day the loan is made, are used by undergrads who do not qualify for a subsidy while attending school or who need more than they can receive in the subsidized program.
Grad students with Stafford loans also pay 6.8 percent.
Parents and grad students with PLUS loans, another type of federal loan available to supplement Stafford borrowing, pay from 7.9 to 8.5 percent in interest.
At his news conference, Rep. Welch was joined by several student and parent borrowers who, like VSAC, share his view that reasonable interest rates are vital to keeping higher education affordable. The same week, VSAC talked by phone with a father who was struggling to manage the federal PLUS loans he and his wife had taken out to help pay for two sons’ college educations.
It wasn’t so much the face value of the loans that had him concerned, but the interest rate. Given the high PLUS rate, the loans were costing the family $1,400 a month. Because no rate relief is in sight for this type of federal loan, the parent chose to pay off his PLUS loans by refinancing his home at about 3 percent interest. It frustrated him that he had to do this, but now the debt will cost him about a third of what he had been spending.
Ironically, the federal education loan programs were developed to provide students with access to low-cost financing and to enable parents to pay for their children’s education without putting their own homes and livelihoods at risk. The original goal was to provide rates and benefits that the private sector couldn’t match due to higher borrowing costs and underwriting restrictions.
So it is with sadness that we at VSAC hear from borrowers who feel forced to give up their federal loans for riskier forms of debt, or, in the worst case, to forego education altogether. Despite recent questions about the value of higher education, the depressed job market, the proper role for government in funding education, and whether students are borrowing responsibly, two things remain true.
Education beyond high school — not always a four-year degree, but some type of education or training — is still the best ticket out of poverty and toward a life of greater opportunity. And financial aid, whether in the form of grants, scholarships, or loans, will still be needed to help families make this important investment in the future. While we continue to debate the value of education and what more we can do to foster responsible borrowing, the federal government should not saddle students with unreasonable and unfair finance charges.