April 26, 2012

Interest Rates on Student Loans Set to Double

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Thousands of Cornellians may face higher debt loads if a bill that supports subsidized Stafford loans expires on July 1, which will cause interest rates on the loans to double from 3.4 to 6.8 percent.

In the 2010 – 11 academic year, 3,340 undergraduates at Cornell received subsidized Stafford loans — need-based loans on which the government pays interest while students are enrolled in college. If Congress does not intervene, all loans taken out after July 1 will carry an interest rate of 6.8 percent, which will cost students repaying their loans after graduating from Cornell about $1,000 per loan, according to Prof. Steven Kyle, applied economics and management.

To prevent the interest rate from increasing for one year — which will cost approximately $6 billion — Congress must create and pass a new law by July 1. The House will vote Friday on a Republican bill that would keep interest rates at 3.4 percent for one year by cutting money from President Barack Obama’s healthcare law. Democrats in the Senate hope to advance their own plan, which would keep the interest rates at current levels by increasing payroll taxes for some corporations.

Financial aid advocates — including Cornell students and staff — have been fighting the interest rate increase for months. President Barack Obama gave speeches at colleges in Colorado, Iowa and North Carolina pushing Congress to keep the interest rate of the subsidized Stafford loans low, while 11 Cornellians went to Washington, D.C., to lobby members of Congress to support student aid, The Sun reported in March.

Adam Raveret ’12, one student who travelled to D.C. on the trip, said that he “can only think of negatives to doubling the interest rate.”

“It will make college unaffordable for low-income [students], which I think is a shame,” he said.

Raveret said that the federal government should invest in educacation and not allow the interest rate on Stafford loans to rise.

“Educating their citizens creates a better society and will better the country in general,” Raveret said. “I think that students deserve to have a lower interest rate … I think that education is an equalizer. It makes the American Dream possible.”

Karen LoParco, federal legislative associate in Cornell’s Office of Federal Government Relations, said that she also hopes Congress will act to prevent interest rates on Stafford loans from increasing.

“We support a freeze on the current rate for Federal Stafford subsidized student loans, as long as offsets are not taken from other federal student aid programs to offset the cost of the freeze,” LoParco said in an email.

Subsidized loans are a significant source of financial aid for students, especially if interest rates are low, according to Thomas Keane, director of financial aid for scholarships and policy analysis.

While thousands of Cornellians use Stafford loans to help finance their education, Keane said that he does not think a rise in interest rates for the loans will deter students from attending Cornell. For instance, before 2007, the interest rate of Stafford loans was 6.8 percent — but Keane said that he did not notice students being deterred from applying to the University.

“I think it speaks to the strength that Cornell represents,” Keane said.

Maintaining the interest rates of subsidized Stafford loans may also be important because other loans carry even higher interest rates. For instance, 2,200 undergraduates in the 2010-11 academic year used unsubsidized Stafford loans, which, unlike subsidized loans, are not need-based and charge a 6.8 percent interest rate. Some students at Cornell borrow at an even higher interest rate. The University’s institutional loans charge an eight percent interest rate, according to Keane.

The additional $1,000 students will have to pay if their Stafford loan interest rates rise will also place a heavy burden on new graduates, Prof. Kyle said.

“When you leave college, you’re just starting out, and that $1,000 is a big deal,” Kyle said. “[The rise in Stafford interest rates] will discourage people and make it hard for them. Bankruptcy laws today are very hard; you can’t get out from under a student loan.”

Kyle said that cutting government spending through increasing interest rates — which decreases the amount of money that the government must spend on student loans — is not the right course of action for the economy. Instead, Kyle said, the government should follow an expansionary fiscal policy, or an increase in government spending.

Original Author: Margaret Yoder