The interest rate on federal subsidized student loans jumped from 3.4 percent to 6.8 percent on July 1, after Congress failed to renew the lower rate.
David Duarte | Courtesy
Christopher Bryant, a junior at the University of Idaho, fills out paperwork outside of the Financial Aid office Monday morning. Federal subsidized student loans jumped from 3.4 percent to 6.8 percent on July 1 after Congress failed to renew the lower rate.
The interest rate increase will affect approximately 7.2 million students across the country who will sign up for federal subsidized loans, according to The Institute for College Access and Success, a national student advocacy group.
Approximately 4,700 University of Idaho students took out a subsidized student loan last school year, totaling $19 million in borrowed costs, said Daniel Davenport, director of student financial services.
“I think it’s really sad that the federal government couldn’t reach an agreement on such a simple and bipartisan issue as college affordability,” Max Cowan, ASUI president said. “I think that specifically at UI we will see the effects of it, in that years down the road students won’t be able to afford higher education.”
A bill sponsored by Sen. Jack Reed (D-RI) concerning student loan interest rates failed earlier this month, by a vote of 51-49, largely upon partisan lines. The legislation would have returned student loan interest rates to 3.4 percent.
Three Republican senators — Lamar Alexander (R-TN), Tom Coburn (R-OK) and Richard Burr (R-NC)– sponsored legislation that tied loan interest rates to a 10-year U.S. Treasury rate. The proposed bill also failed in the senate earlier this summer.
Despite the failed legislation, Davenport said there is a good possibility that Congress will pass legislation to lower interest rates before the start of the school year, because both parties are getting pressure to pass legislation.
“I am hopeful especially from what I’ve been hearing, most lawmakers are in support of some plan that would make sure that the subsidized loans have a lower rate,” Cowan said.
Davenport said that the interest rate increase should not deter prospective students from attending college, because students will not have to pay back loans until after they graduate, in which time Congress can lower the rate.
Davenport said every time legislators change the loan system, through sequestration, new programs and yearly budget bills costs taxpayers more money.
“It just confuses everything, you know, it may not sound like much of a change but you think about changing all the administrative assistance that tracks it and keeps the interest, the billing, the payment system, all of that,” Davenport said. “That is a huge cost when they play with it, but of course they don’t see that.”
Cowan said he recently met with Arne Duncan, the U.S. secretary of education, who was hopeful that a deal could be reached before schools starts, and that the compromise that would be reached would be retroactive. Retroactive legislation would lower interest rates for students who took out loans after the July 1 deadline to make sure they are not kept at a 6.8 percent interest rate.
The 3.4 percent interest rate was implemented in 2007 under the College Opportunity and Affordability Act. The legislation guaranteed a six-month grace period where interest would not be accrued, and payment would not be required.
Davenport said the interest rate increase does not apply to federal unsubsidized student loans, which accrue interest and do not require payment until after graduation.
Subsidized student loans are only offered to undergraduate students who show a need for financial assistance. However, an unsubsidized student loan is offered to both graduate and undergraduate students regardless of financial need. In both types of student loans the school decides how much to offer.
Congress is expected to vote this week on a compromise that will cut rates on all new loans, but ties future fixed rates to the market conditions when they will be expected to rise. The plan also caps the loan rates at 8.25 percent for undergraduate loans and 9.5 percent for graduate loans and includes fixed-rate interest rates for the life of the loan.
Ryan Tarinelli can be reached at [email protected]