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Student Loan Interest Rates Could Double This Summer

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Advocates weigh risking cutbacks in the Pell program for low-income students

By Chris Levister

Americans owe almost $1 trillion in student loans. As if paying off students loans wasn't tough enough, interest rates could double this summer. On July first, the interest rate on federally subsidized loans will go from 3.4% to 6.8%. That means the more than 7 million students taking out loans for the next school year will have to dig deeper in their pockets to pay them off.
If Congress does nothing, the cost to students borrowing the maximum $23,000 in subsidized loans is an extra $5,000 over a 10-year repayment period.
President Barack Obama is launching a major campaign to convince Congress to extend the lower interest rate, including a Twitter campaign, an appearance on the Jimmy Fallon show and multiple speeches on the increase. The President used his weekly radio address and a round of visits to large universities in North Carolina, Colorado and Iowa to call on Congress to put forward and pass legislation to prevent the loan hike.

The partisan flavor of the debate is all but sure to be on display at Obama's college events, which are likely to feel more like re-election rallies.

At a time when Americans owe more on student loans than on credit cards — student debt is topping $1 trillion for the first time — and the Occupy movement has highlighted the rising furor over spiraling student debt, the issue has moved higher on the political agenda. But the question of what to do about the looming interest rate increase has landed deep in the chasm separating Democrats from Republicans, who accuse the president of using the issue in a fiscally irresponsible way, in an attempt to buy the youth vote.

The White House insists Obama's events are driven by the need for college affordability and his view that education is an economic cornerstone.

Education Secretary Arne Duncan said in a statement, millions of students would be financially squeezed if rates go up, to the cost of an additional $1,000 on average. "More and more middle-class families are starting to think college might not be for them," Duncan said. "It's for rich folks. That's a real problem."

Another problem: The cost of keeping the interest rates frozen on these subsidized Stafford loans could run $6 billion a year.

Subsidized Stafford loans are low-interest loans for eligible students that help cover the cost of higher education at a four-year college or university, community college, or trade and technical schools.

It is unclear how that cost would be paid. Duncan said the administration will work with Congress on the answer. For now, the White House is pushing a one-year extension, not a permanent fix.

“Bad policy based on lofty campaign promises has put us in an untenable situation,” said John P. Kline Jr., the Minnesota Republican who is chairman of the House Committee on Education and the Workforce. The low interest rate stemmed from the 2007 College Cost Reduction and Access Act, which reduced interest rates on subsidized Stafford loans over the following four academic years — from 6.8 percent to the current 3.4 percent — with the proviso that the rates would revert to 6.8 percent this July.

Mr. Kline, who earlier this year called the interest-rate hike a “ticking time bomb set by Democrats,” said he was exploring other options in hopes of finding a solution that served borrowers and taxpayers equally well. For Obama, the matter gives him a platform to position himself as a defender of the middle class or those working to make their way into it. He is shifting from the issue of tax fairness, which he has hammered for weeks, to education in front of young voters who helped fuel his winning coalition in 2008.

The president carried voters between the ages of 18-29 by a margin of about 2-to-1 in 2008, but many recent college graduates have faced high levels of unemployment, raising concerns about whether they will vote in large numbers for Obama again. Outside Congress, even some of the strongest student-aid advocates debate the question. While nearly everyone is in favor of the broad goal of college affordability, some experts point out that even 6.8 percent is lower than the rate on most private student loans. And they question whether it is worth risking cutbacks in the Pell program for low-income students, one possible consequence of using more federal money to keep interest rates low on the Stafford loans, which are in wide use by middle-income students.

When the 2007 law was passed, 77 Republicans — most of whom are still in Congress — voted for it. But in the current climate of fractious partisanship, new legislation introduced by Representative Joe Courtney to extend the lower rate has 127 co-sponsors, all of them Democrats. Mr. Courtney said he was hopeful that some Republican support would be forthcoming as the political stakes became more apparent. "President Obama believes we must reward hard work and responsibility by keeping interest rates on student loans low so more Americans get a fair shot at an affordable college education," the White House said in a statement.

Polling shows Obama holds a sizable lead over his presumed opponent, Mitt Romney among registered voters under 30. In Obama's first run for the White House, young voters helped him carry GOP-leaning states like North Carolina and Indiana thanks to major voter registration drives on college campuses.

Obama campaign officials have estimated a universe of about 8 million voters between the ages of 18 and 21 who weren't old enough to vote in 2008 but could be tapped to support the president this time. Yet Obama may be a tougher sell to young people this time.

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