Until June 29th, a big problem was brewing for college students but less than two days before the deadline, Congress agreed on a bill that would avert larger student loan payments for some students.
The cost of college rises at roughly twice the rate of inflation each year. This equates to nearly 6% annually and that has made college tuition out of reach of the majority of families that didn’t save for education costs. Because of that, most students now rely on grants and loans to pay the costs. Grants quickly run out for most leaving student loans as their only option.
The federal government helps by offering two types of loans, called Stafford loans.
The unsubsidized loans offer an interest rate of 6.8% and don’t require students to start making payments on the loans until they graduate although interest continues to add up while they’re in school.
The subsidized Stafford loan has two advantages: First, the interest rate is cut in half giving students a rate of 3.4% and second, the Federal government pays the interest on the loans while the student is still enrolled.
When the Democratic Congress took over in 2007, they lowered the rate on subsidized student loans dropping the rate to a low of 3.4% but that legislation was due to expire on July 1st, 2012. This would have restored the original 6.8% interest rate causing students to pay hundreds of dollars more each year.
With unemployment reaching 14% for those 20-24 years old, the two presidential candidates, along with Congress, knew that allowing interest rates to double would be unpopular.
Both sides of the aisle agreed that the rate should remain at 3.4% but the Republicans wouldn’t approve a bill without finding a way to pay the $6 billion price tag that comes with it.
A Transportation Bill
On June 29th, Congress voted to extend the subsidized Stafford loan interest rate of 3.4% for an additional year.
The legislation appeared in a transportation bill that appropriated funds to continue the maintenance of roads and bridges through July 6th while a more permanent bill is completed. Additionally, the bill extends the Federal Flood Insurance program that protects families against floods. The $6 billion to fund the cost that comes with the extension of the lower interest rate will come from changes in how companies fund pension programs.
The new student loan provisions are only temporary measures. The extension is set to expire on July 1st of 2013 making it a necessity that Congress take up the issue again next year. Yes, we’ll have to go through this again in a year.
With the student loan delinquency rate now at 14.6% and a large number of college graduates unemployed, both political parties knew that allowing the rate to increase would place further pressure on college graduates still looking for a job.
Still, the rate will eventually have to go up. Or we’ll have to admit that we want the government to subsidize loan rates for students (not necessarily bad but a discussion for another day). Either way student loan debt is quickly turning into a bubble which, if burst, will seriously set back our economy.
For now students win. Hopefully those getting loans under this still low rate choose their degrees wisely and are able to pay back their student loans.