Obama's Student Loan Push: A Guide To The Interest Rate Debate

WASHINGTON -- President Barack Obama and his likely GOP opponent, Mitt Romney, agree on an issue of importance to college students: Keeping the interest rate low on a popular federally subsidized student loan issued to low-and middle-income students.

The interest rate is scheduled to double on July 1 from 3.4 percent to 6.8 percent on subsidized Stafford loans unless Congress acts. About 7 million undergraduates would be affected, raising costs by an average of $1,000 each, according to the White House.

Obama embarked on Tuesday on a tour through college campuses in North Carolina, Colorado and Iowa to discuss the rate increase. Before he left, however, Romney stole a little wind from his sails by saying he, too, agreed with the need to stop the rate from doubling.

Some questions and answers about student loan debt and the scheduled interest rate hike:

Q: How big of a problem is student loan debt?

A: U.S. student loan debt has surpassed credit card and auto-loan debt, with some estimates putting it at $1 trillion. This debt jeopardizes the fragile recovery and increases the burden on taxpayers. About two-thirds of student loan debt is held by people under 30, according to the New York Fed. Borrowers owe a median $12,800, an amount even advocates for student borrowers acknowledge is usually manageable and more than worthwhile factoring in the economic benefits of a college degree. However, not all borrowers complete a degree – and the average balance is considerably higher than the median: about $23,000. That reflects a relatively small number of borrowers with very large balances.

Q: Are there signs of improvement?

A: Unlike other forms of consumer debt, student loan debt is growing. The most recent figures show new college graduates with loans owed more than $25,000 when they left school, up 5 percent from the year before. Mark Kantrowitz of the website Finaid.org estimates that 85 percent of student loan debt is owed to the federal government, and those loans typically carry lower rates and borrower protections such as income-based repayment maximums.

However, the number of borrowers defaulting on federal loans has jumped sharply recently. Of 3.6 million borrowers who entered repayment in fiscal 2009, nearly 9 percent defaulted with two years, up from 7 percent for the previous year's cohort. Meanwhile, the College Board said last fall that the average in-state tuition and fees at four-year public colleges rose an additional $631, or about 8 percent, compared with a year ago. The cost of a full credit load has passed $8,000 – an all-time high.

Q: Why is the interest rate on subsidized Stafford loans expected to double?

A: Acting on a Democratic campaign promise in 2006, Democrats in 2007 crafted the law to progressively lower the interest rate from 6.8 percent to the 3.4 percent rate – where it is this school year – and then return to the original 6.8 percent in 2012. Republican President George W. Bush signed the deal into law after it was approved by bipartisan but Democratic-heavy majorities in both chambers. Congress wrote the law this way for one simple reason, says Jason Delisle, director of the federal education budget project at the New America Foundation: cost. It would cost an additional $6 billion annually to keep the interest rate at 3.4 percent.

Q: Are there people who aren't affected by the rate increase?

A: Students issued loans before July 1 won't be hit with the higher rate. It also doesn't affect the interest rates on unsubsidized Stafford loans (now at 6.8 percent) and PLUS loans for parents (now at 7.9 percent). Unlike subsidized Stafford loans, unsubsidized Stafford loans are not based on financial need.

Q: What is the reaction from Congress?

A: Rep. John Kline, R-Minn., chairman of the House Education and the Workforce Committee, has said he and his Republican colleagues are exploring options "in hopes of finding a responsible solution that serves borrowers and taxpayers equally well." He said lofty campaign promises put them in an "untenable situation" and they now must choose between allowing interest rates to rise or "piling billions of dollars on the backs of taxpayers." In the Senate, Sen. Tom Harkin, D-Iowa, chairman of the Senate Committee on Health, Education, Labor and Pensions, said this week he intends to introduce legislation that would extend the interest rate for another year. Then, next year, Harkin said when the Higher Education Act is up for reauthorization, a longer term fix could be reached. He said they are looking at funding options.

_____

AP Education Writer Justin Pope contributed to this report.

Earlier on HuffPost:

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• Ryan Budget Whacks Pell Grants, Makes Federal Student Loans More Expensive

  Pell grants are the financial aid packages given to low-income college students which they do not have to pay back. Students who receive them are not required to attend a public college or even stay in their homestate, so that freedom has made it a fairly popular program. However, Rep. Paul Ryan's <a href="http://www.huffingtonpost.com/2012/03/27/pell-grants-paul-ryan-budget_n_1383178.html" target="_hplink">proposed federal budget would cut $200 million</a> from the program, and potentially eliminate help for more than 1 million students. Currently the maximum Pell grant award is $5,645, which only covers about a third of the cost of attending college. Ryan's budget would cut Pell grant eligibility for students who attend classes on less than halftime. His budget would also make it so college students with federal student loans would have to start paying interest on their loans while still in school.

• Student Loans And Bankruptcy

  Thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005, virtually no student loans can be discharged in bankruptcy. So in practical terms, if you have $200,000 in debt for credit cards, car payments, or mortgage payments from a private bank, they can all be wiped away in bankruptcy. However, student loans from the same private lender cannot. The argument is that you can take away someone's car when they file bankruptcy, but you cannot take away their education. The Senate <a href="http://www.usnews.com/education/blogs/student-loan-ranger/2012/03/28/looming-student-debt-crisis-hits-the-senate" target="_hplink">heard testimony</a> on March 20 about whether or not this should be changed. Sen. Dick Durbin (D-Ill.) is <a href="http://www.bloomberg.com/news/2012-03-20/durbin-urges-private-student-loans-be-discharged-in-bankruptcy.html" target="_hplink">leading the charge for bankruptcy reform</a> that would allow students to get rid of their student loan debt when and if they file bankruptcy.

• Student Loan Forgiveness Act

  <a href="http://www.huffingtonpost.com/2012/04/10/student-loan-forgiveness-act-2012-hansen-clarke_n_1415910.html" target="_hplink">HuffPost Detroit reported</a> on the Student Loan Forgiveness Act, put forward by Rep. Hansen Clarke (D-Mich.): <blockquote>H.R. 4170 would forgive student loan debt for those who have paid 10 percent of their discretionary income toward their loans for 10 years and would cap interest on federal student loans at the current rate of 3.4 percent. Individuals who go into teaching, public service or practice medicine in underserved areas would have their debt forgiven after only five years. "Everyone tells us to go to school and work hard and we'll be rewarded for our dedication," Clarke said. "But the promise of a dream can turn into a nightmare for so many people."</blockquote>

• Petition For Student Loan Forgiveness Act

  An <a href="http://signon.org/sign/support-the-student-loan" target="_hplink">online petition</a> hosted by MoveOn.org has nearly reached its goal of attaining 875,000 signatures in support of the Student Loan Forgiveness Act. The Forgiveness Act would allow students who make payments equal to 10% of their discretionary income for 10 years to have their remaining federal student loan debt forgiven. According to talking points included in the petition, "If you have already been making payments on your student loans, your repayment period would likely be shorter than 10 years. The amount you have already paid on your student loans over the past decade would be credited toward meeting the requirement for forgiveness."

• Student Loan Interest Rates: They May Double

  A 2007 law that kept federally subsidized Stafford loan interest rates low will expire this summer, <a href="http://www.huffingtonpost.com/2012/03/21/student-loan-interest-rate_n_1371236.html" target="_hplink">meaning the rates would double</a> from 3.4 to 6.8 percent. Students have already gone to Capitol Hill to protest and most Democrats are in favor of keeping the interest rates low. Sen. Jack Reed (D-R.I.) and Rep. Joe Courtney (D-Conn.) proposed a bill that would get rid of the expiration date on the discounted student loan rate. However, Republicans argue it would cost the federal government $5.7 billion, which they say is way too much. If Congress does not act, the interest rates for federal student loans would increase on June 30, 2012.

• No Definition Of Credit Hours

  Republicans passed a bill out of committee that would repeal minimum standards for a credit hour and removes the need for a state to authorize higher education institutions in their state. Rep. Virginia Foxx (R-N.C.) <a href="http://edworkforce.house.gov/News/DocumentSingle.aspx?DocumentID=281565" target="_hplink">contends this would allow</a> greater flexibility for schools, Democrats counter that it opens the door for fraud. The federal definition of a <a href="http://democrats.edworkforce.house.gov/blog/overturning-accountability-and-integrity-measures-higher-education-programs-facts-hr-2117" target="_hplink">credit hour is the basic unit</a> underlying the distribution of federal student aid. Rep. Tim Bishop (D-N.Y.) <a href="http://www.insidehighered.com/views/2012/03/15/essay-argues-against-bill-overturn-us-rules-higher-ed-oversight#ixzz1qXWVjWPA" target="_hplink">wrote on Inside Higher Ed</a> that the bill represents a threat to the government's ability to police institutional fraud in the higher education industry. In regards to eliminating the requirement for state authorization for colleges, Bishop said "the bill would make it impossible for states to guarantee the quality of programs operating inside their borders."

• Pell Grants Are Now Semester Limited

  A rule from the Obama administration <a href="http://www.wtva.com/news/local/story/Longtime-students-may-be-shocked-at-new-law/nDgQP5Yu9ES5KSkIJJYXiw.cspx" target="_hplink">will limit the use</a> of Pell grants to 12 full-time semesters, or approximately six years of studying. The new rule goes into effect July 1, and the Department of Education will contact students in April who have used up their allotted time in school.

• Investigate The Federal Loan Programs

  Congressional Republicans <a href="http://www.businessweek.com/news/2012-03-28/republicans-call-for-congressional-probe-of-student-loan-program" target="_hplink">recently sent a letter</a> to the Government Accountability Office urging them to investigate the federal student loan program and whether they are "appropriately managing student debt." The federal government has turned to private debt collectors to collect money owed for student loans, while $67 billion of student loans are now in default, according to Businessweek. Those contractors out there trying to get students and graduates to pay up are paid on commission. The GOP <a href="http://edworkforce.house.gov/UploadedFiles/03-27-12_-_GAO_Letter_on_FFEL.pdf" target="_hplink">letter said</a> they were concerned borrowers who have defaulted are not getting adequate assistance to get back on track repaying their loans. The letter was signed by Rep. John Kline of Minnesota, chair of the House education committee; Sen. Michael Enzi of Wyoming, the ranking member of the Senate education committee; Reps. Virginia Foxx of North Carolina and Judy Biggert of Illinois; and Sens. Lamar Alexander of Tennessee and Tom Coburn of Oklahoma

• The CFPB Will See You Now

  The newly created Consumer Financial Protection Bureau said it will <a href="http://www.huffingtonpost.com/2012/03/05/student-loan-complaints-cfpb_n_1322037.html" target="_hplink">field complaints</a> about billing, confusing advertising and collection by private student lenders, and relay complaints about federal loans. "Getting a higher education can mean taking on significant debt - a big decision with a lot of consequences," said CFPB Director Richard Cordray. It's safe to say the CFPB is pretty concerned about student debt among American college students. Rohit Chopra, the student loan ombudsman for the CFPB, had a grim forecast recently in a <a href="http://www.huffingtonpost.com/2012/03/22/student-loan-interest-rate_n_1372506.html" target="_hplink">blog post about student debt</a>: "Students continue to borrow private student loans, which lack the income-based repayment and deferment options of federal student loans. If current trends continue, there will be consequences not just for young people, but for all of us."

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Comments

[Germaine Gosha]

01:26 PM on 05/05/2012

Do you think that it is fair to say that all circumstances with the educational future are the same or is it easier for one to make statements they really have no ideal about?

[OLJW00]

04:15 PM on 04/25/2012

We all know what an education costs.. Just three years suffering under an education at Obama U. has left America a mere FIVE TRILLION DOLLARS IN DEBT....

www.usdebtclock.org

[Germaine Gosha]

01:17 PM on 05/05/2012

Most people with such a negative take on Education have either never been to college or have already received their benefits so where do you fit IN?

[OLJW00]

01:28 PM on 05/05/2012

I don't have a negative take on education - I am pointing out that HOW we are doing it is wrong.

BTW... I do indeed have a University degree. Graduated with a 3.78 GPA in fact. And I paid for it via military service (GI Bill), scholarships and working. Paid for every penny myself without one cent of debt or assistance from family.

Any more questions?

[Germaine Gosha]

07:34 PM on 05/05/2012

Great offer some solutions

[robwilsontv]

03:46 PM on 04/25/2012

I support the premise flowering the rates, but I also believe that government subsidies have artificially increased the cost of tuition. I'm encouraged that more colleges are offering courses for free. Here's a video I posted on my YouTube channel with the details; http://youtu.be/tKZ2SYjALts

[OLJW00]

04:16 PM on 04/25/2012

The cost of high education in public universities alone is up only 130% in the last 20 years.

[jenniferkizzy]

03:39 PM on 04/25/2012

for all you people out there going for a student loan is like going for a guide too the galaxy you don't know how you got there and you want too go home see ya bye

[OLJW00]

04:17 PM on 04/25/2012

DON'T PANIC

[jenniferkizzy]

07:06 PM on 04/25/2012

going too meet the pres must be like going too meet the queen aghhhhhhhhhhh

[ny hot mic]

03:13 PM on 04/25/2012

http://www.mindingthecampus.com/originals/2012/02/why_they_seem_to_rise_together.html

From the link:

1. The intended income transfers from taxpayers (and, increasingly bondholders) to students have been largely diverted to college coffers; swelling payrolls and leading to armies of new university bureaucrats, million-dollar college presidents, an academic arms race and other pathologies;

2. This, in turn, has thwarted university productivity growth and helps explain why higher education is vastly more expensive than in most other major developed countries;

3. The goal of helping low-income students has not been met, and a lower percent of recent college graduates come from less affluent students than was true in 1970 when Pell Grants did not exist;

4. To the extent that these aid programs have increased enrollments (read Gillen), they have added to the growing disconnect between labor-market realities and student job expectations, creating armies of college graduates who are bartenders, taxi drivers, etc.

5. Enrollment increases, in turn, have contributed to a dumbing down of higher education and to declining standards.

All true, and all unintended consequences.

We have to get it out of our heads that every kid needs to go to college. No, they' don't. A college-educated bartender is just a waste of money.”

[JanayCY]

02:04 PM on 04/25/2012

My federal loans are 6.8% (taken out from 2007 to 2012, udergrad and grad)--I'm confused as well. The most confusing part is that my mortgage is 3.98%...why aren't federal student loan rates near historical lows just like other types of loans?

[aem46]

09:00 AM on 04/25/2012

My federal student loans are already at 6.8% Am I missing something?

[Kelly S]

10:36 AM on 04/25/2012

You either took them out before 2007, or they are not subsidized Stafford loans.

[gold7246]

08:46 AM on 04/25/2012

Where are Obama's student loan apps? Where are Obama's college transcripts? Where are Obama's scholarship apps? How come these records are being suppressed?

[Nicholas Kocal]

10:46 PM on 04/24/2012

An educated America is one of the republican's worst nightmares.

[UNLVGOP]

01:17 AM on 04/25/2012

So then why are the Democrats so much against school choice?

[Nicholas Kocal]

01:18 PM on 04/25/2012

Because school choice helps the 1% and destroys the rest. You do not fix public education by removing a handful of children and leaving the rest.