Federal student loan interest rates are set to increase on July 1.
The concrete changes are yet to be determined, but the future of student loan interest rates may go one of two ways. They will either double from 3.4 percent to 6.8 percent or they will be regulated annually based on market interest rates.
Interest rates are set to double this summer if Congress does not pass proposed legislation. Rep. Karen Bass, (D-Calif., proposed the Student Loan Fairness Act that will permanently extend the 3.4 percent interest rate. Senators Tom Coburn, R-Okla., Lamar Alexander, R-Tenn., and Richard Burr, R-N.C., proposed the Comprehensive Student Loan Protection Act that will apply rates equal to the 10-year Treasury yield rates for subsidized loans. Unsubsidized loans will have an increase of 3 percent.
Jan Bass, director of the Financial Aid Office, said in an email interview that the changes will cost students more money in the long run.
“There is good and bad with a variable interest rate,” Bass said. “Currently, rates are low, so students would benefit from a variable rate. As rates increase, a variable rate can end up costing students more. There is also the uncertainty from year to year as to what the rate will be. It would be important that there is a cap set on the variable rate proposal.”
President Obama’s budget proposal for the U.S. Department of Education states a “long-term fix” for student loans. This “fix” will set federal student loan interest rates per year based on the government’s borrowing cost. The projected rates are lower than the 6.8 percent, but will increase as the market price rises. With the current 10-year Treasury yield rate, the highest that the interest rate should reach would be 5.75 percent for graduate students.
Kevin Krieger, professor of finance, took out student loans at a rate of 6.2 percent while he was in college. He said sees Obama’s proposal as a compromise.
“I don’t think it’s a bad thing to have a little market response,” Krieger said. “I’m a little bit surprised at the system—that we’re going to have a fixed rate, but it changes every year. That’s odd to me. The whole point of trying to be sensitive to the market is to be sensitive all the time.
“It’s an odd compromise we have, but I suspect what it comes from is the desire to have a fixed rate,” he said. “People like fixed rates, especially after getting burned with some variable rate products like mortgage and things like that.”
Shawn Shelton, a senior software engineering major, has only been affected by student loans this semester, because he took out a federal unsubsidized loan. He said he thinks that the changes will affect students when they’re finished with school.
“When I had to do the master pledge you had to sign before they give you the loan, the interest rates on it were crazy,” he said. “I don’t think, from my perspective, that a lot of students see that long-term effect with the changes, but I feel like it will affect them.”
The university deals with four different federal student loans: the Perkins loan, the federal direct loan, the federal direct parent PLUS loan and the federal direct PLUS loan for graduate students. The Perkins loan, a campus-based aid, has a fixed rate of 5 percent. The rest are federal direct loans congruent that are with federal interest rates. Federal direct loans are either subsidized, unsubsidized, parent PLUS or graduate PLUS.
“My advice to students always is to borrow only when necessary to meet the costs of your education,” Jan Bass said.
“Decline or reduce the amount of student loan that is offered to you,” she said. “We will let you know the maximum amount available to you, but we do not encourage you to borrow at the maximum limits.”
The proposals are still under consideration in Congress. Changes to federal student loan interest rates will take effect on July 1, 2013.
For questions and more information on federal student loans, contact the financial aid office at 474-2400.