News Column

Rates on Student Loans Set to Double

May 22, 2013
Diploma on money

New Mexicans who have federal student loan debt may see their interest rates double unless Congress acts by July 1.

But many expect that, similar to last year, Congress will take action just before the deadline, staving off the sharp increases for students who have taken out subsidized Stafford loans, which are federally subsidized and guaranteed and go to students who meet needs requirements.

The current rate on a subsidized Stafford loans is 3.4 percent annually and interest doesn't accrue while a student is in college. The interest rate is scheduled to go to 6.8 percent.

Terry Babbitt, UNM's associate vice president for enrollment management, said he believes Congress will prevent that because 6.8 percent is "well-above the current market rates."

Several bills in Congress attempt to tackle the issue.

Legislation in 2007 kept interest rates at 3.4 percent for subsidized Stafford loans, but that rate expired in 2012. Congress last year approved a one-year extension of the lower interest rate.

A bill gaining momentum in Congress would create a variable interest rate on the loans.

That bill has been criticized by many Democrats and several nonprofits -- including the Institute for College Access and Success, a non-partisan group that works to make higher education more accessible and affordable -- for putting students at risk of much higher rates.

President Barack Obama is proposing to base student interest rates on 10-year Treasury note yields, but the rate would stay the same for the life of the loan.

Babbitt said he favors that approach because it could help students better predict their debt accumulation and pay-back requirements.

"While still speculative due to emerging details, we slightly favor the varying rates each year with fixed rates over the life of the loan ..." Babbitt said in an email.

Student debt has become a $1 trillion problem and has exceeded credit card debt in the United States.

In New Mexico, 14.6 percent of consumers have student debt, compared with 16.2 percent nationally. New Mexicans with student loans have an average of $23,090 of debt, according to a report by the Federal Reserve Bank of New York. The national average is $24,810.

At the University of New Mexico, 46 percent of students have student loans.

A bill passed in the House Education and the Workforce Committee, would make interest rates variable, meaning they could change every year. House Bill 1911, introduced by committee chairman Rep. John Kline, R-Minn., and Virginia Foxx, R-N.C., would cap those variable rates at 8.5 percent.

The legislation moves most federal student loans to a market-based interest rate, basing them on the 10-year Treasury note plus 2.5 percent for Stafford loans.

"Although the bill caps how high student loan rates can go, the underlying formula would force unnecessarily high costs onto student borrowers to pay for deficit reduction. In the first 10 years alone, students would be expected to pay $3.7 billion more to borrow for college than under current law. They will pay even more if market rates are higher than projected," according to a joint statement by The Education Trust and The Institute for College Access and Success.

Among other proposals:

A bill sponsored by Massachusetts Democratic Sen. Elizabeth Warren would temporarily set interest rates at the same rate banks pay when they borrow from the government, which currently is 0.75 percent.

A measure by Sens. Jack Reed, D-R. I., Tom Harkin D-Iowa, and majority leader Harry Reid, D-Nevada, would freeze Stafford loan rates for two years while Congress figures out a long-term solution.

New Mexico Sen. Martin Heinrich is considering Reed's bill, a spokeswoman said.

"Congress must act to keep interest rates on student loans from doubling this summer," he said in a statement.

Babbitt said 6.8 percent is still a much lower rate than private loans, at about 9 or 10 percent. The monthly payment for students if the rate doubles would increase by about $20, he said.

Still, he expects action that would keep rates from doubling.

"If it does not, then we will do more outreach and communication with students about the change and implications. ... It won't be devastating but we certainly want to avoid it and will make sure students know about the implications if it does happen," he said.


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Source: (c)2013 the Albuquerque Journal (Albuquerque, N.M.) Distributed by MCT Information Services


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