Congress should use the ongoing debate over student loan interest rates and develop a long-term solution that would keep lending costs low for every student, area financial aid experts said.
Interest rates on subsidized student loans in the federal government’s direct lending program doubled July 1 from 3.4 percent to 6.8 percent, exceeding current market rates.
The issue already has forced area student financial aid offices and credit counselors in a difficult position with their students. On one side, a 6.8 interest rate on loans meant to help low-income students manage the increasing costs of higher education only will add to their financial hardship.
On the other side, the interest rate increase applies to only new subsidized loans issued after July 1, giving Congress time to rectify the issue before college students head back for the fall term and start receiving aid.
The government also pays the interest rates on subsidized loans, which represents a quarter of all federal student borrowing, while a student is in college and maintains part-time status.
At Northern Illinois University, most incoming freshmen who will receive subsidized loans for the first time won’t feel the effects of higher interest rates until graduation four years from now, said Rebecca Babel, the university’s student financial aid director.
“It is a very high interest rate and a very high cost, but it’s overblown in that people are interpreting that this affects all students’ loans and that this is the tipping point that makes college unaffordable,” Babel said.
Since 2010, the federal government has been in the student lending business, providing various forms of loans to graduate and undergraduate students. Students receiving subsidized loans can borrow a maximum of $23,000 in their lifetime.
The average student receives about $13,540 in subsidized loans in their college career, according to Congress’ Joint Economic Committee. The increase to a 6.8 interest rate would cost the average student $2,600 more on their loans, the committee estimates.
But interest rates on the government’s unsubsidized student loans already carry a 6.8 percent rate. The government’s PLUS loans, available to students who have borrowed the maximum on other loans, earn a higher interest rate of 7.9 percent. Both require students to pay interest while enrolled in college.
When the U.S. Senate recently failed to retroactively restore the lower interest rates on subsidized loans, senators were divided on a long-term solution that would lower rates on every loan in the government’s borrowing program.
A similar debate happened last summer during the heat of the presidential campaign that led to a short-term fix in Congress that extended the low interest rates on subsidized loans for a year.
The 10,000 NIU students who receive a mix of subsidized and unsubsidized loans would benefit greatly from a long-term solution that would keep all student loan interest rates in line with market rates and limit the costs of college, Babel said.
“If the Senate vote had passed [July 10], there would be big headlines that Congress fixes student loan rates ... but it only really tells a piece of the story,” Babel said. “It doesn’t tell the story that there is a bigger issue we need to tackle in keeping college a good investment for the future.”
At McHenry County College, nearly 580 community college students received about $1.5 million in subsidized loans during the 2012-13 school year, said Marianne Devenny, dean of enrollment services, which oversees MCC’s financial aid office.
She said students typically don’t realize the effects of higher interest rates on their loans until they graduate and start repaying them. But the office so far has been consulting the few students who have asked about the issue while also monitoring the debate in Congress.
“The severity is understood by the financial aid office and the administration of the college,” Devenny said. “We are all very concerned on how the long-term solution is going to affect students.”
Shauna Fischer, a counselor at Consumer Credit Counseling Services of McHenry County, also has been trying to educate the few student clients who have asked about the interest rate increase.
“That’s where the fear is. People don’t realize that it’s going to apply only to new loans, and not the existing loans out there,” she said. “The bigger issue is the overall cost of college.”