Federal student loan rates are set to double Monday as Congress left town without coming to an agreement on how to avert the long-scheduled rate spike.
The partisan finger-pointing continued through week’s end as both parties offered competing plans to keep federally subsidized Stafford loan rates from soaring above the current 3.4 percent, but talks collapsed without a last-minute deal.
The Republican-run House passed a plan in May to tie the price of future loans to the price of Treasury bills rather than having Congress set it. Meanwhile, Senate Democrats promised a vote July 10 — after the July 4 recess — on a one-year freeze on the loan rate that could apply retroactively.
The effects will be felt by the more than 220,000 Georgians who attend college using Stafford loans.
Georgia State University said the change would affect about 14,400 of its students. Kennesaw State University estimated the new interest rate would affect about 12,000 of its students.
The schools are the second- and third-largest public colleges in the state and enroll many first-generation students who must balance work with school.
The average student borrower in Georgia graduates with more than $20,000 in debt. Should the interest rate on Stafford loans double, students with $20,000 in debt would see annual interest costs increase by nearly $400, according to a report from the Consumer Financial Protection Bureau. That’s an additional $4,000 on the standard 10-year repayment schedule.
As college costs increase and other financial aid options decrease, loans are unavoidable for many college students.
“Higher rates will inevitably lead additional students to decide to drop out or never enroll in the first place,” said Tim Renick, vice provost at Georgia State. “Precisely when we are trying as a state and as a nation to increase the number of students who complete college we would be creating another roadblock to success.”
The rate change only affects new student loans originating this fall and beyond.
Colleges are starting to hear from concerned parents, but financial advisers say they can offer little advice.
“It is just going to impact them negatively,” said Ron Day, director of financial aid at Kennesaw.
Adding to the confusion is that colleges need to know the rates in order to begin originating loans for the fall, said Day, who is national chairman of the National Association of Student Financial Aid Administrators.
“Just let us know what it’s going to be so we can start the process and students can prepare for what their costs will be,” he said.
The loan rates used to be 6.8 percent, but that changed in 2007 with the College Cost Reduction and Access Act that gradually reduced the rate to 3.4 percent over a four-year period. Congress struck a last-minute deal in 2012 to extend the rate for another year.
The House Republicans’ bill would set student loan rates at 2.5 percentage points more than a 10-year Treasury note, allowing them to fluctuate on the open market with a cap of 8.5 percent. Today that would mean about a 5 percent interest rate.
Democrats say that in the long run as rates rise, this would end up being a worse deal for students than even the 6.8 percent rate. But President Barack Obama proposed a similar solution in his budget plan, which would set loan rates at 0.93 percentage points above 10-year Treasuries without a cap.
“Earlier this year, the president called for a market-based interest rate for student loans,” House Speaker John Boehner said in a statement. “House Republicans responded by passing one. Senate Democrats responded with scorn and inaction.”
Leading Senate Democrats are set to offer a one-year freeze on the 3.4 percent rate and offset the cost by closing a tax loophole for inherited individual retirement accounts and 401(k)s. U.S. Sen. Tom Harkin, D-Iowa, the Education Committee chairman, said he will work to pass a long-term bill eventually.
“However, rushing through a shortsighted, long-term proposal that will burden millions of future college students and their families with higher, unrestricted interest rates — and ask these same students to pay additional interest to reduce the deficit — is simply not right or fair,” Harkin said in a statement.
Colleges already are updating their websites and sending students messages about the coming changes. While colleges tell students about interest rates and repayment plans, most borrowers focus on how much money they stand to receive now, not what they must pay back after graduation.
“I don’t think the typical 18-year-old knows to ask the question about interest rates,” Day said.
Colleges are stepping up fundraising efforts to provide more scholarships to students. Georgia State awarded about 70 percent more needs-based scholarship money last year than it did the previous year.
Georgia State is also hiring and training financial counselors who will work full time with students and their parents to make sure that students are making sound financial choices in funding their education and are using the money in a prudent fashion.
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