With the threat of student interest rates nearly doubling looming overhead, the president’s latest proposal to keep increasing payments at bay this summer is up for national debate.
President Barack Obama proposed a loan-reform strategy last Wednesday in his 2014 fiscal year budget to change interest rates of certain types of student loans. Despite his attempts to keep loan increases at bay, some national student advocacy groups are voicing opposition to the plan.
The average MSU student graduates with $23,725 of debt, according to a 2011 Project on Student Debt study.
The College Cost Reduction and Access Act of 2007 that cut student loan interest rates for subsidized Stafford loans — the most common type of loan the government pays interest on — from 6.8 to 3.4 percent was set to expire last summer.
Although Congress reached an eleventh-hour decision to extend the low interest rates for another year, it will face the same dilemma this summer.
“The reason we’re looking at this is the inaction of the Congress,” said Rep. Sam Singh, D-East Lansing, adding they should look for long-term solutions.
Because the 2007 act cut student loan interest rates to 3.4 percent, the government must pay a $6 billion difference each year to compensate for the cut, which adds to the country’s about $17 trillion national debt.
The president’s plan to curb loan increases would allow students with subsidized Stafford loans to pay a rate equal to the 10-year Treasury note, which currently is at 1.75 percent, plus an additional 0.93 percentage points. The rates would be set annually based on this rate and fixed for the duration of each loan.
The 10-year Treasury Note rate guides what most interest rates are set at, although most federal student loans currently are not based on this rate, with the exception of some private loans. The treasury rate changes based on the economy, and interest rates tied to the treasury rate also will change, said Val Meyers, associate director of the Office of Financial Aid.
“It is hard to know what actually will happen,” Meyers said. “(There’s) not enough detail in the budget to know what this will mean for students.”
Students with unsubsidized Stafford loans would pay an additional 2 percent, and parents and graduate students with PLUS loans would pay an extra 3 percent of interest.
If the student loan interest rates are changed, people will not see a large impact until students begin to repay their loans, Meyers said. It will add to the amount students have to pay back, but Meyers doesn’t think that it will keep students from borrowing money for school.
Student advocacy groups, such as the National Campus Leadership Council, released a statement addressing their belief that the spike in interest rates could increase future college costs.
“(The plan) offers no protection for students when rates inevitably begin to climb,” the statement said. “Without a cap, this proposal falls far short of the comprehensive reform to student loans that we need.”
In December, Obama and the U.S Department of Education released a reformed federal loan program, Pay As You Earn, to cap monthly loan payments.
Qualifying students only pay 10 percent of their income toward student loans, reducing the risk of default.
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