Under continued gridlock in Congress, student loan interest rates are expected to double July 1 — potentially adding thousands of dollars in interest costs at a time when rising tuition is threatening to shut some students out of college.
“I feel like they’re trying to weed out the people who can’t pay,” complained Florida International University student Urzam Gilani, a 21-year-old psychology major.
The U.S. Senate on Thursday abandoned all hope of reaching a loan rate compromise before the July 1 deadline, which means that interest rates on new subsidized Stafford loans will automatically jump from 3.4 percent to 6.8 percent on Monday. Because the change only affects new loans, the student debt held by those who have already graduated from college will not be affected. For current students, the interest on loans they took out before July 1 will also stay unchanged.
The United States Public Interest Research Group, an advocacy organization, identified the 25 U.S. colleges with the largest number of students affected — and three of them are in Florida. The University of Central Florida is No. 8 with 19,653 students affected, the University of South Florida is No. 13 with 15,514 students, and FIU is No. 19 with 13,750 students impacted.
Going forward, Congress’ Joint Economic Committee estimates that the higher interest rates will cost the average student about $2,600. More than seven million students are expected to be immediately impacted.
Subsidized Stafford loans are awarded to students who demonstrate financial need — generally low-to-moderate income borrowers. A major perk of the program is that the federal government pays the interest while students are still in school.
The income-based nature of subsidized Stafford loans means that not all students who borrow will be affected by the rate hike, but it also means that the federal government is raising borrowing costs for those students who are least able to afford it.
Higher Stafford rates are but the latest example of how the federal government is scaling back student aid. Other cutbacks in recent years included eliminating the in-school interest subsidy for graduate-level student loans, and eliminating Pell grant awards during summer terms.
Congress saved billions of dollars from those changes — money that was, in part, used to pay down the federal deficit. But the cuts have prompted criticism that reducing the nation’s debt is being done on the backs of students.
“Cutting student aid to the generations that have to pay off the $17 trillion federal debt is the wrong choice,” US PIRG wrote in a policy paper on student loan rates. “If this generation and future generations of American students have to shoulder the burden of the accumulated federal budget deficits of the past 40 years, at the very least the federal government should enable them access to the post-secondary skills and knowledge necessary to cope with that debt.”
US PIRG noted that, as of today, the government already makes 36 cents on every dollar loaned, and “increasing interest rates simply increases the government’s profits from students.”
On Thursday, even though the rate hike had not yet taken effect, senators were pointing fingers. Senate Republican Leader Mitch McConnell faulted the “obstruction” of Senate Democrats, while Sen. Jack Reed, a Rhode Island Democrat, said a proposed solution pushed by Republicans would have awful interest-rate consequences in the long term — making it even worse for students than the new 6.8 interest rate.
“Students across this country would rather have no deal than a bad deal,” Reed said.
The proposal Reed rejected had support from Republicans, but also at least one prominent Senate Democrat. Its key provision is that it would link future student loan rates to the interest rates in financial markets.
President Barack Obama’s 2013 budget proposal also suggested a switch to a market rate-based approach. At the moment, because interest rates are generally so low, that solution would raise student loan rates to about 4.5 percent. But as the economy strengthens and future interest rates rise, students would likely end up paying considerably more.
The president’s posture is a marked departure from only a year ago when, looking to woo young voters on the campaign trail, Obama called it a “no-brainer” to keep student interest rates at 3.4 percent. Both political parties, in fact, supported holding rates steady last year.
Privately, some congressional Democrats have grumbled that Obama’s new position forced the interest-rate negotiations to the right. Some Senate Democrats continue to hold out hope that in the coming weeks, a deal can be worked out to keep interest rates at 3.4 percent for one more year, with a long-term solution negotiated as part of an upcoming wide-ranging higher education bill.
Though Florida’s in-state college tuition is still cheaper than most states, tuition at schools like FIU and the University of Florida has more than doubled in the past decade. And Florida’s state lawmakers have joined the federal government in cutting back on student aid, with the size and scope of the popular Bright Futures scholarships being steadily reduced year after year.
At the same time, student debt in Florida has consistently grown. More than half of Florida students who graduated in 2011 had student loans, according to The Project on Student Debt, with the average student owing $23,054.