By ZACHARY COILE
San Francisco Chronicle
March 06, 2006
Congress narrowly passed a deficit-reduction bill last month that cut $12 billion from student loan programs, which was signed by the president. The new law will slash subsidies to lenders and raise interest rates on loans taken out by parents.
Lawmakers already had approved a steep increase in interest rates for Stafford loans, used by nearly 10 million students each year. Both rate increases take effect July 1.
Jessica Pierce, a senior at the Universit of California-Santa Cruz who has Stafford loans, said she was outraged by the changes approved by Congress.
"They're trying to balance the budget on the backs of students," said Pierce, who chairs the university's student union assembly.
The higher interest rates come as many students and parents are already struggling to cope with rising tuition costs. Department of Education figures suggest that at least 400,000 qualified students do not enroll in four-year colleges each year because of financial barriers.
The average debt of college graduates has jumped by 50 percent over the last decade, according to the Project on Student Debt, a nonprofit advocacy group. But for the last several years, low interest rates have helped students cushion the blow and reduce their monthly payments.
Education policy experts said the new cuts in subsidies to lenders and changes to interest rates will result in greater borrowing costs for many students and parents.
Students with Stafford loans, the most common type of federal loan, who have locked in variable rates as low as 4.7 percent this year will face higher monthly payments when those loans shift to a fixed rate of 6.8 percent in July.
The move to a fixed rate was first approved by Congress in 2002 with bipartisan support and the backing of many lenders and student groups, who believed the change would shield students from even higher variable rates. But now many students and parents oppose the change, fearing it will increase their monthly payments.
Mike Rau, whose 20-year-old daughter, Lisa, is a sophomore at San Francisco State University, is worried she will end up paying thousands of dollars more in interest on her Stafford loans.
"When she gets out of school and starts making payments, instead of it taking four years to pay off her loans it will take five or six years," said Rau, who is helping his daughter pay for college. "It saddles them with more debt for longer in their lives."
Lisa Rau, who is studying creative writing, communications and philosophy, is trying to save a portion of each paycheck from her 18-hour-a-week work-study job. But she is concerned that higher monthly interest payments will limit her options after college.
"It might have an impact on whether I go to grad school," she said. "If I don't have the money and I'm trying to pay off a lot of these loans and the interest rates are going up, that might be out of the question."
Financial aid experts said the move to a fixed interest rate will be painful for many borrowers in the short term, but could help students if variable rates continue to climb. As recently as the 2000-2001 academic year, the variable rate for Stafford loans exceeded 6.8 percent.
"The argument for fixed rates is that they are predictable for students and predictable for the government," said Sandy Baum, a senior policy analyst for the College Board and an economics professor at Skidmore College. But at a time when rates are still relatively low, "the idea that students are paying a higher rate than the market rate is a very unappealing one," she said.
As part of the new bill, Congress also increased the interest rate on loans paid by parents. Parent Loans for Undergraduate Students, better known as PLUS loans, had been scheduled to rise from the current rate of 6.1 percent to a fixed rate of 7.9 percent.
But lawmakers, seeking greater savings in the budget package, boosted the rate even higher, to 8.5 percent. The change is likely to make the loans less attractive to many parents.
"The question for parents is: Is it better to take out a PLUS loan or is it better to take out a home equity loan?" Baum said. "They need to look at all their options."
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