Bloomberg News

Inaction Means Student-Loan Interest Rates Will Double Next Week

June 27, 2013

The rate that undergraduates from poor families pay for student loans will double on July 1. U.S. senators have departed for a one-week break without an agreement on what do to about the automatic increase.

The interest rate for subsidized Stafford loans, available to undergraduates from low-income families, will increase to 6.8 percent from 3.4 percent. More than 7 million students borrow through that program.

With one group of senators pushing for a floating interest rate and another group seeking a one-year freeze, action was postponed until after the new rate takes effect.

Senate leaders have agreed to schedule a July 10 procedural vote on S. 1238, a bill that would keep current rates in place until 2014, said Rhode Island Democrat Jack Reed.

Questions to be resolved when senators return include:

-- Should interest rates be frozen?

-- Should interest rates be allowed to rise and fall by linking them to Treasury notes?

-- If the rates are linked to Treasury notes, should there be a cap, or maximum rate that students can expect to pay?

-- Should the interest rate be set exactly where the government breaks even, or should it be higher to bring in extra money for deficit reduction?

“The best option for students is extension of the 3.4 percent rate for one more year,” Reed told reporters.

The Education Department can administratively handle a retroactive interest-rate adjustment, he said. That “can be accomplished fairly easily,” so “we’re in a position where we have a window,” Reed said.

“There’s no particular drop-dead date,” he said.

Debt Loads

The share of 25-year-old Americans with student debt increased to 43 percent last year from 25 percent in 2003, according to the Federal Reserve Bank of New York. During that nine-year period, the average education-loan balance of people in that age group increased 91 percent, to $20,326 from $10,649, according to the New York Fed.

In the aggregate, student-loan debt totals almost $1.2 trillion, according to the Consumer Financial Protection Bureau.

Economists warn that what is owed in student loans may rival home-mortgage indebtedness as a drag on U.S. growth.

“The difficulties borrowers face when trying to manage cash flow may have a broader impact on the economy and society,” Rohit Chopra, the consumer bureau’s student-loan ombudsman, told the Senate Banking Committee on June 25. “When young workers are putting large portions of their income toward student-loan-payment payments, they’re less able to stash away cash for that first down payment.”

Loan Types

The most popular government loan is the Stafford.

Subsidized Stafford loans are limited to students with lower incomes, and the interest rate is 3.4 percent, set by Congress. The government pays the interest during school. The interest rate will increase to 6.8 percent on new originations if Congress doesn’t act by July 1.

Any undergraduate, regardless of income, can get an unsubsidized Stafford loan at a rate of 6.8 percent.

The federal loan limits for undergraduates are $5,500 the first year, $6,500 the second year and $7,500 in the last years. Graduate students no longer dependent on their parents also can take out Stafford loans.

Another type of direct federal loan, called PLUS, carries a rate of 7.9 percent for graduate students and parents of undergraduates.

On May 23, the Republican-run House passed legislation, H.R. 1911, that sought to tie student loan interest rates to the 10-year Treasury note plus 2.5 percent.

President Barack Obama has a different proposal, that would let the rate float with less fluctuation.

To contact the reporter on this story: James Rowley in Washington at jarowley@bloomberg.net

To contact the editor responsible for this story: Katherine Rizzo at krizzo5@bloomberg.net


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