Bill would adjust student loan rates

Your Money

February 04, 2007|By Carolyn Bigda | Carolyn Bigda,Tribune Media Services

Student-loan borrowers cheered last month when the House voted to halve interest rates on federal loans. But don't start celebrating just yet.

The bill, called the College Student Relief Act of 2007, would reduce the current rate on subsidized Stafford loans from a fixed 6.8 percent to a fixed 3.4 percent over five years.

Subsidized Stafford loans are awarded based on financial need, and the federal government covers the interest while you're in school.

The loan's counterpart, the unsubsidized Stafford, is available to any student, and interest accrues while you study. It would continue to carry a 6.8 percent fixed rate.

"There's no question that the bill would help a lot of students, especially when students are becoming increasingly indebted," said Stephen Burd, a senior research fellow who covers financial-aid issues for the New America Foundation, a nonpartisan public policy group.

The median debt level of graduates who borrowed to pay for a private, four-year college was $19,500, data from the College Board show. At public universities, the figure is $15,500.

The House bill wouldn't lower the amount students have to borrow. But it would make the debt more affordable.

What would you save?

The gradual rate drop would mean some students would borrow at a new fixed rate each year: 6.12 percent on loans disbursed starting July 1, 5.44 percent in 2008, 4.76 percent in 2009, 4.08 percent in 2010 and 3.4 percent after July 1, 2011.

Translated into dollars: If you enroll this fall and borrow the maximum subsidized Stafford for four years, you would save an estimated $2,100 in interest over the typical 10-year repayment period. For freshmen who start school in 2011, the savings would be nearly double.

What's up for debate?

The Senate is expected to take up the issue this month, with prospects uncertain and progress potentially slow. Sen. Edward M. Kennedy, a Massachusetts Democrat and chairman of the Senate Health, Education, Labor and Pensions Committee, plans to introduce a more comprehensive bill with benefits that would include:

An increase in the maximum Pell grant (awarded to undergraduates with the most financial need and is not repaid) from $4,050 to $5,100.

Capping monthly student loan payments to 15 percent of a borrower's discretionary income and raising the allowable tax deduction for college tuition to $12,000.

"I'm not that optimistic about their ability to get it all done this year," Burd said.

One reason is that the Democrats have a narrower majority in the Senate than in the House.

Even more important, though, might be figuring out how to pay for any changes.

The House bill is expected to cost about $6 billion, most of which would be offset by reducing subsidies paid to private lenders that administer federal student loans, such as Sallie Mae, Citibank and the National Education Loan Network.

"We support cutting interest rates to the lowest possible rate," said Conwey Casillas, a Sallie Mae representative.

Some would receive nothing.

Not every student-loan borrower would benefit from either the House bill or the Senate's proposals.

"It does nothing for people who've already been through college," said Alan Collinge, founder of Student Loan Justice.

Also, graduate student loans do not qualify for the rate cut.

Carolyn Bigda writes for Tribune Media Services.

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