Congress may have averted a doubling of interest rates on millions of new federal student loans, but the fix is only for a year, leaving students on edge over whether they’ll face a similar increase next summer.
“It’s scary,” said Faith Nebergall, a student at Indiana University whose loans currently total upward of $20,000. “And it’s unfair to kind of be kept in the dark as to how much money we owe.”
Under the agreement, interest rates on new subsidized Stafford loans will remain at 3.4 percent. That’s estimated to save 7.4 million students about $1,000 each on the average loan, which is usually paid off over 10 or more years.
In the short run, that means students can breathe a sigh of relief this summer. A year from now, however, those rates are set to rise to 6.8 percent. That automatic increase was approved by Congress when lawmakers signed off on a series of scheduled rate reductions five years ago.
“There are more struggling families and they need some assurances to feel OK about getting young people into and through college,” said Kati Haycock, president of The Education Trust. “Congress aggravates everybody, creates lots of anxiety out there, and essentially gives us a one-year solution.”
About $1.2 billion will be saved by limiting federal subsidies of Stafford loans to six years for students pursuing a bachelor’s degree and three years for those completing an associate’s degree.
Richard Vedder, director of the Center for College Affordability and Productivity and an economics professor at Ohio University, said that could have the positive effect of encouraging more students to complete their degree in a timely manner, while also allowing some flexibility for students who work and have families and need more time to finish.
But he sees a negative impact down the road. Vedder argues that lower interest rates contribute to the desire to borrow money, which he says has the adverse effect of enabling schools to raise their tuition. Some students with poor academic records and for whom college might not be the best fight might be inclined to enroll anyway. That could aggravate problems in the labor market, where there are many unemployed and underemployed recent college graduates.
“It makes political sense, but not economic sense,” Vedder said.
The price of college tuition has skyrocketed in recent decades. Between 1982 and 2007, tuition and fees increased 439 percent while the median family income rose 147 percent, according to a report from the National Center for Public Policy and Higher Education. The price of in-state tuition at a public university has increased by more than 5 percent annually in the past 10 years. It jumped 15 percent between 2008 and 2010 alone.