Congress weighing proposal to halt fixed-rate student loans
For students with loans to pay off, times have never been better. And they may never be this good again.
Rates on federal student loans have fallen to around 3 percent – a 35-year low. Even better, students can lock in those rates, potentially saving thousands of dollars by ensuring their payments won’t increase even if interest rates do.
But a proposal in Congress could shut down the party. The measure would end the fixed-rate option, making all federal student loans issued after July 2006 subject to variable rates. Repayments would then rise and fall each year in sync with interest rates.
The change – just one part of the reauthorization of the mammoth Higher Education Act now wending through Congress – is intended to shift federal subsidies away from those who already have a degree, freeing up money for programs targeted at students who may be struggling to get to college at all.
The proposed change has split both Democrats and Republicans on the House Education and Workforce Committee. Chairman John Boehner, R.-Ohio, and Rep. Rob Andrews, D.-N.J., have introduced different versions, but other members oppose the proposal. Presumed Democratic presidential nominee Sen. John Kerry has also criticized it, saying variable rates would harm students and enrich lenders.
Education groups are also divided. The United States Student Association opposes the idea, but supporters include, along with lenders, the National Association of Student Financial Aid Administrators and College Parents of America.
“This is the most visible and contentious issue in the reauthorization,” said Terry Hartle, senior vice president of the American Council on Education.
His group supports variable rates but wants the rate capped at 6.8 percent. The current proposal would keep the existing cap of 8.25 percent.
The debate comes amid growing anxiety over college costs and student debt. Figures released last week by the Department of Education show the share of full-time college students who borrowed to pay for college rose from 30 percent in 1990 to 45 percent in 2000.
An estimated 7 million Americans receive more than $50 billion in federally backed student loans each year. For the average undergraduate borrower graduating this year, a variable rate loan would cost an extra $3,000 over 10 years, the Congressional Research Service estimated.
Yet when rates are falling, variable rates are good for borrowers. The CRS also found that in 13 of the past
18 years, average borrowers would have been better off with a variable rate – sometimes by as much as $4,000 over the course of a loan.
Backers of the change say variable rates also are more fair. All borrowers would pay the same rate, whether or not they were lucky enough to graduate and consolidate in a year when rates were low.
The government began allowing students to consolidate loans in 1986 as a convenience that would let them make a single monthly payment. But as interest rates have fallen in recent years, it has become a popular way for students to refinance debt at a cheaper rate.
That, in turn, has made the program more expensive for the government, which offers lenders a guaranteed rate of return. Millions of students have consolidated at low rates, forcing the government to pay lenders the difference.
A recent General Accounting Office report estimated that, simply on loans issued in 2003 under one of two major programs, subsidies would amount to $3 billion, up from $1.3 billion on loans issued in 2002.