WASHINGTON — Incoming college freshmen could end up paying $5,000 more for the same student loans their older siblings have if Congress doesn’t stop interest rates from doubling.
Sound familiar? The same warnings came last year. But now the presidential election is over and mandatory budget cuts are taking place, making a deal to avert a doubling of interest rates much more elusive before a July 1 deadline.
“What is definitely clear, this time around, there doesn’t seem to be as much outcry,” said Justin Draeger, president of the National Association of Student Financial Aid Administrators. “We’re advising our members to tell students that the interest rates are going to double on new student loans, to 6.8 percent.”
That rate hike only hits students taking out new subsidized loans. Students with outstanding subsidized loans are not expected to see their loan rates increase unless they take out a new subsidized Stafford loan. Students’ non-subsidized loans are not expected to change, nor are loans taken from commercial lenders.
The difference between 3.4 percent and 6.8 percent interest rates is a $6 billion tab for taxpayers — set against a backdrop of budget negotiations that have pitted the two parties in a standoff. President Barack Obama is expected to release his budget proposal in the coming weeks, adding another perspective to the debate.
Last year, with the presidential and congressional elections looming, students got a one-year reprieve on the doubling of interest rates. That expires July 1.
Neither party’s budget proposal in Congress has money specifically set aside to keep student loans at their current rate. House Republicans’ budget would double the interest rates on newly issued subsidized loans to help balance the federal budget in a decade. Senate Democrats say they want to keep the interest rates at their current levels but the budget they passed last week does not set aside money to keep the rates low.
In any event, neither side is likely to get what it wants. And that could lead to confusion for students as they receive their college admission letters and financial aid packages.
“Two ideas … have been introduced so far — neither of which is likely to go very far,” said Terry Hartle, the top lobbyist for colleges at the American Council on Education.
House Republicans, led by Budget Committee Chairman Paul Ryan, have outlined a spending plan that would shift the interest rates back to their pre-2008 levels. Congress in 2007 lowered the rate to 6 percent for new loans started during the 2008 academic year, then down to 5.6 percent in 2009, down to 4.5 percent in 2010 and then to the current 3.4 percent a year later.
Some two-thirds of students are graduating with loans exceeding $25,000; one in 10 borrowers owes more than $54,000 in loans. And student loan debt now tops $1 trillion. For those students, the rates make significant differences in how much they have to pay back each month.
For some, the rates seem arbitrary and have little to do with interest rates available for other purchases such as homes or cars.
“Burdening students with 6.8 percent loans when interest rates in the economy are at historic lows makes no sense,” said Lauren Asher, president of the Institute for College Access and Success, a nonprofit organization.
Both House Education Committee Chairman John Kline of Minnesota and his Democratic counterpart, Rep. George Miller of California, prefer to keep rates at their current levels but have not outlined how they might accomplish that goal.
Rep. Karen Bass, a California Democrat, last week introduced a proposal that would permanently cap the interest rate at 3.4 percent. Senate Democrats say their budget proposal would permanently keep the student rates low. But their budget document doesn’t explicitly cover the $6 billion annual cost.
Instead, its committee report included a window for the Senate Health Education and Pension Committee to pass a student loan rate fix down the road.
But so far, the money isn’t there. And if the committee wants to keep the rates where they are, they will have to find a way to pay for them, either through cuts to programs in the budget or by adding new taxes.
“Spending is measured in numbers, not words,” said Jason Delisle, a former Republican staffer on the Senate Budget Committee and now director of the New America Foundation’s Federal Budget Project. “The Murray budget does not include funding for any changes to student loans.”
The Congressional Budget Office estimates that of the almost $113 billion in new student loans the government made this year, more than $38 billion will be lost to defaults, even after Washington collects what it can through wage garnishments.
The net cost to taxpayers after most students pay back their loans with interest is $5.7 billion. If the rate increases, Washington will be collecting more interest from new students’ loans.
But those who lobbied lawmakers a year ago said they were pessimistic before Obama and his Republican challenger Mitt Romney both came out in support of keeping the rates low.
“We were at this point and we knew this issue was looming. But it wasn’t anything we had any real traction with,” said Tobin Van Ostern, deputy director of Campus Progress at the liberal Center for American Progress. “At this point, I didn’t think we’d prevent them from doubling.”
This time, he’s looking at the July 1 deadline with the same concern.
“Having a deadline does help. It’s much easier to deal with one specific date,” Van Ostern said. “But if Congress can’t come together … interest rates are going to double. There tends to be a tendency for inaction.”