Student borrowing costs may be going up

Rate on subsidized federal loan could double after July 1

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On July 1, the interest rate on subsidized federal student loans will double on borrowing made after that date -- unless Congress passes new legislation.

For each of 7.4 million borrowers, that means adding an extra $1,000 onto the life of an average loan if the interest rate is 6.8 percent, instead of its current 3.4 percent, according to the White House. But keeping the rate where it is would cost $6 billion a year, the White House said.

The push-and-pull of this issue promises to be lively in Congress, as lawmakers tackle the deficit, and on the campaign trail, as candidates solicit votes from the middle class and college students.

President Barack Obama today will visit three college campuses -- the University of North Carolina at Chapel Hill, the University of Colorado at Boulder and the University of Iowa in Iowa City -- to promote his effort to keep the interest rate the same.

In a phone news conference Monday, Cecilia Muñoz, assistant to the president and director of his Domestic Policy Council, noted that student loan debt now outstrips credit card debt, and that tuition and fees have more than doubled over two decades. She said making college financially accessible is important to the economy and can help to put students on the path to the middle class.

Republican presidential candidate Mitt Romney, who was campaigning Monday in Pennsylvania, also embraced the low-interest extension.

"I support extending the temporary relief on interest rates for students," Mr. Romney said, although he did not offer specifics on how the extension should be paid for or how long it should last. He said he supports the extension because of "extraordinarily poor conditions in the job market."

House Republicans oppose legislation to temporarily extend low-interest rates. But a senior GOP staff member said they were studying ways to extend the program.

Some Republicans have objected to another temporary measure to extend the lower rates without cutting spending to pay for them. "I have serious concerns about any proposal that simply kicks the can down the road and creates more uncertainty in the long run, which is what put us in this situation in the first place," said Rep. John Kline, R-Minn., chairman of the House Committee on Education and the Workforce.

The last time the interest rate on federal subsidized student loans was reduced was after the Democrats pledged in 2006 to slash student loan interest rates, then 6.8 percent, in half, said Mark Kantrowitz of Cranberry, publisher of finaid.org. "When time came to implement it," he said, "they realized how expensive it would be."

Instead of all student loans, Congress -- in the College Cost Reduction and Access Act of 2007 -- gradually lowered the interest rate on just the subsidized federal Stafford loans starting in 2008-09, reaching 3.4 percent in 2011-12. The legislation approved then calls for the rate to rise back to 6.8 percent after June 30, unless other legislation is passed.

The interest rate on unsubsidized federal Stafford loans is 6.8 percent. For subsidized Stafford loans, the federal government pays interest while the student is attending school.

Also, starting July 1, graduate and professional students will not be able to get new subsidized Stafford loans. The terms for loans already made do not change.

Richard Esposito, director of financial aid at Duquesne University, hopes that legislation passes, although a plan calling for a lower rate for just year would be a "short-term fix," he said. "I think it's very important. [The higher rate] just creates more debt for the students when they leave school."

Mr. Kantrowitz said he was concerned that federal money for higher education is becoming a "zero-sum game, where more money for one program means less for the other."

He noted that Pell grants, which help low-income students with higher education costs, are at the same maximum level of $5,550 as they were in 2010-11 and are to rise by $85 in 2013-14. Pell funding was cut $8 billion last year and nearly $2 billion this year, and now faces a funding shortfall, he said. "If you're trading off a one-year extension of a 3.4 percent interest rate versus cuts to Pell, letting the interest rates rise is the lesser of two evils," Mr. Kantrowitz said.

The maximum amount of subsidized Stafford loans varies by year, starting with $3,500 in the first year, with a maximum total of $23,000 by graduation.

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Associated Press and the Los Angeles Times contributed. Education writer Eleanor Chute: echute@post-gazette.com or 412-263-1955. First Published April 24, 2012 1:00 PM


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