Like jobs, gas prices, and other pocketbook issues, the clash on Capitol Hill over student-loan interest rates has erupted into a major political discussion nationwide, as families grow increasingly anxious about student debt and the rising cost of college.
As Congress haggles over legislation to prevent need-based student-loan rates from doubling to 6.8 percent on July 1, some students say that the issue is much broader than just interest rates. Debt in itself is the problem, particularly when the prospects of employment after college are uncertain.
Lawmakers in both parties say they agree that rates should not go up, but are in a standoff over how to pay for a one-year extension that would cost $6 billion. Both sides are trying to portray themselves as addressing voters’ economic concerns, while accusing the other side of playing politics.
Without congressional action, seven million undergraduate students will face $1,000, on average, in additional debt after graduation. The neediest students could see the cost of their debt go up by $5,000, adding about $500 a year to the cost of repayment if they stick to the standard 10-year repayment plan.
“I would characterize it as Obama throwing students under the bus,” said Colin Kavanaugh, who graduated from the University of Pennsylvania in 2011. For students taking out new undergraduate loans, a hike on July 1 would be “an extra topping on top of what is already a cake we can’t eat.”
Last year, Alexis Diaz got into what she called her “dream school.” Although her parents couldn't afford to send her to the expensive private college in New Jersey, her mother cosigned thousands of dollars in federal and private loans so Diaz could transfer to Rider University. Diaz, a senior in the fall, is studying to be an education and dance major, has a 4.0 grade-point average, and hopes to one day become a professor of child development.
But the possibility that interest rates could double on July 1 is weighing on the Diaz household.
“It’s put an even bigger strain on my family,” Diaz said, adding that her parents are already hurting financially because their house is badly in need of repair and her father can’t find a job because of his age. “We’re trying the best we can, but we need a miracle.”
The Senate voted down dueling Democratic and Republican bills in May that would have delayed the increase in subsidized undergraduate Stafford loans for one year. Senate leaders are now discussing changes in the federal pension accounting system to pay for a one-year freeze. The trust level between Republicans and Democrats is low enough to make it difficult for them to find agreement on even the most basic things, but the plan put forth by Senate Majority Leader Harry Reid last week suggests they may find a way to keep the rate from rising. It’s only a short-term fix, however. Next year, lawmakers will be faced with the same problem.
Subsidized Stafford loans are lent based on income; undergraduates who qualify can currently take out as much as $23,000 at the low 3.4 percent rate. Unsubsidized loans have a fixed rate of 6.8 percent and can be taken out by any student regardless of income.
Diaz worries that, if she can’t pay back her loans after graduation, the debt will fall on her mother, who is already struggling as the family’s sole breadwinner. “I’ll owe more than a mortgage on a house by the time I’m done,” she said.
But at this point, Diaz doesn’t really have a choice. It doesn't make sense financially to finish her degree at a cheaper school because the transfer to Rider already left her a semester behind. “The years are just going to add up,” she said.
The Diaz family isn’t the only American household that would take a financial hit if rates double this summer. According to the College Board, in the 2010-2011 school year, 34 percent of undergraduates took out federal Stafford loans, up from 22 percent in 2000-2001. The rate of students taking out subsidized Stafford loans has also increased over the past decade, from 18 percent in 2000-2001 to 30 percent in 2010-2011, meaning that more students with lower incomes are trying to pay for college.
Although the number of graduate and undergraduate students taking out federal Stafford loans is up over the past decade, the average dollar amount taken out by individual students in both subsidized and unsubsidized Stafford loans lagged slightly in recent years. College Board consultant Kathy Payea said this might suggest that frustrated, indebted students are not taking out the maximum loans allotted to them.