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Articles / Paying for College / Student Loan Interest Rates

July 2, 2013

Student Loan Interest Rates

The first of July this year rather overshadowed the Fourth with some college student loan headlines: “Student Loan Rates Double After Congressional Inaction." “Interest rates on new college student loans double, but Congress could restore low rates later." “Student loans: Exploiting America's young." “Student Loan Interest Rates Double." Happy summer, collegians!

In case you've been on another planet or too busy working to earn money to make payments on your student loans, you may not be aware of what transpired. Here's how one news report chose to characterize what happened July 1:

Monday, the interest rate on government-backed student loans skyrocketed from 3.4 to 6.8 percent. The rate hike had been avoided for a few years thanks to last-minute deals in Congress, but no such deal emerged this year.


The rate hike hit approximately 7 million students looking to advance their education in community colleges, colleges, and universities. The rate hike also comes at a time when the overall student loan market is beginning to loom over a sputtering economy.

Across the nation, a cumulative $1.2 trillion is held in student loan debt by current and former students. Most of the debt is not paid on time and the federal government has said it's not helping unless Congress acts first.

What drives me crazy about this event is the issue of interest rates in general. If you are fortunate enough to have a savings account, you're probably earning right around one percent interest (or less) on your money, even a considerably large amount of money. Now, as if the old 3.4% Federal student loan rates weren't insulting enough, they have risen to twice that: 6.8%. That's roughly seven times what your bank is likely offering you on your savings. I know this from personal experience. Thanks, Uncle Ben (Bernanke).

President Obama says that this doubling of interest rates is like a $1,000 tax increase. What are others saying?

One of the best places to observe the pulse of parents and students reacting to this loan rate rise is the College Confidential discussion forum. One thread is particularly enlightening. Here are some sample comments:

– >> People would not have predictable payments.<<

Life is not predictable.

My property tax payments are predictable.

My gasoline expenses aren't predictable.

My electricity and heating bills are predictable.

Part of adult life is dealing with the unpredictable.

– The subsidized Staffords are used by almost everyone who is eligible, including people going to in-state public universities.

If you want to reduce government waste, then allow the President to crack down on for-profit diploma mills who are wasting far too much federal aid with extremely high default rates. So far, Congress has obstructed those reform efforts.

– classic case of “have" VS. “have not".

[Our son] has been borrowing both Perkins and subsidized Staffords. W/o them, the private would become not affordable.

If the rate does go up, we will probably refinance home mortgage to get the extra cash instead of taking out the high interest loan.

– Speaking of the rise in student interest rates, we need to abolish the Federal Reserve System and put the US back on the Gold Standard.

(my son is interning for a state legislator, and he said it is amazing how many people call in with conspiracy theories)

– For the past couple years, the President has asked Congress to reauthorize and expand the Perkins loan system so that it would be used to reward the most cost-efficient colleges with more loan money, and penalize the colleges with the worst results. The measurements would include such factors as high 4 and 6 year graduation rates, etc. and the most reasonable net tuition costs. Congress hasn't acted. If Congress does not act regarding Perkins, all of the loan money is supposed to be returned to the feds as it repaid, and no new loans would be issued starting in a year.

– The media said the rates can be reduced retroactively – but probably not after they are disbursed. The problem is that Congress went home.

– The interest rate does, and should, affect the rational student's decision whether a particular college is affordable, and whether the decision to go to college at all makes economic sense. Unfortunately, you're probably right that many students don't rationally consider the consequences of amassing large amounts of debt, or the true cost of that debt which is a function not only of the amount borrowed, but also of the interest rate.

***

Obviously, this rate-rise issue is a political football with polar-opposite points of view. What are the Democrats saying about this?

U.S. Senate Democrats today called for a two-year postponement of a scheduled increase in the interest rate charged on education loans to millions of college students.

Senate Majority Leader Harry Reid and other top Democrats unveiled legislation that would head off an increase set to hit in July and would instead extend the current 3.4 percent rate into 2015. They rejected President Barack Obama's call for more sweeping changes in the loan program, including replacing its fixed rates with ones that would vary with market conditions.

Senator Tom Harkin, an Iowa Democrat who heads the Senate Health, Education, Labor and Pensions Committee, said that while he supports allowing rates to float, with certain conditions, lawmakers don't have time to sort out such big changes before July.

“We just want to do something very simple," said Harkin, whose panel has jurisdiction over the loan programs. “Just leave it the way it is."

Speaking of polar opposites, how about Rush Limbaugh?

One thing I do remember about this: The legislation that automatically raised the student loan interest rate to 6.8% today is Democrat legislation. Democrats wrote the bill, and it was one of those things probably that they thought would never happen. “We'll fix it as we get down the pike." But they had to do this. They had to write an increase in the student loan interest rate in order to come up with revenue to pay for something else that the CBO was scoring. …

… Look, the truth is the truth and facts are facts, and you students need to understand that it's the Democrat Party doing this. This is a Democrat Party idea, it's a Democrat administration, which is eagerly embracing the increase in the loan rates so they get more money to fund Obamacare. It's the Democrats who wrote the legislation that has the scheduled doubling of the interest rate in it in the first place.

***

So, choose your side, as a parent or a student, as a Democrat or Republican, or as a Liberal or Conservative. Regardless of which side you're on, the fact remains that unless something happens to change what happened July 1, it's going to cost more to borrow money to go to college.

What's your opinion about this? Let us know. Post a comment below.

**********

Be sure to check out all my college-related articles at College Confidential.

Written by

Dave Berry

Dave Berry

Dave is co-founder of College Confidential and College Karma Consulting, co-author of America's Elite Colleges: The Smart Buyer's Guide to the Ivy League and Other Top Schools, and has over 30 years of experience helping high schoolers gain admission to Ivy League and other ultra-selective schools. He is an expert in the areas application strategies, stats evaluation, college matching, student profile marketing, essays, personality and temperament assessments and web-based admissions counseling. Dave is a graduate of The Pennsylvania State University and has won national awards for his writing on higher education issues, marketing campaigns and communications programs. He brings this expertise to the discipline of college admissions and his role as a student advocate. His College Quest newspaper page won the Newspaper Association of America's Program Excellence Award, the Pennsylvania Newspaper Publisher's Association Newspapers in Education Award, the Thomson Newspapers President's Award for Marketing Excellence and the Inland Press Association-University of Kentucky School of Journalism and Mass Communications Inland Innovation Award for the Best New Page. His pioneering journalism program for teenagers, PRO-TEENS, also received national media attention. In addition, Dave won the Newspaper Association of America's Program Excellence Award for Celebrate Diversity!, a program teaching junior high school students about issues of tolerance. His College Knowledge question-and-answer columns have been published in newspapers throughout the United States. Dave loves Corvettes, classical music, computers, and miniature dachshunds. He and his wife Sharon have a daughter, son and four grandchildren.

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