As the fall semester has officially started for colleges across the state, many students are sighing with relief that their student loans won’t double for the school year.
President Obama signed the Smarter Solutions for Student Act into law on August 3; legislation that restores student loan rates from the July 1 double and ties certain loans to the market.
The signed bill highlights relief among college students returning to class this fall. Rates doubled from 3.4 percent to 6.8 percent on July 1 after lawmakers couldn’t agree on a way to keep rates low. Without action, rates would have remained high.
Approval was reached by a vote of 81 to 18 in the senate. Sixteen Democrats were against the Smarter Solutions for Student Act.
The legislation only deals with Stafford loans which affect nearly 34 percent of college students. Previous students and students who already have Stafford loans will not be affected by the law. Loans will be kept at rates previous to the hike.
With the bill signed by Obama, rates will now be tied to the market. As of now, the market rate is low meaning the government can borrow money for relatively cheap, but once the economy improves, which it is expected to do in the next decade, rates will increase.
More specifically, interest rates will be set using the value of the 10-year Treasury Note with an added percentage. For Stafford loans, subsidized and unsubsidized, the add-on will be 2.5 percent and will be capped at 8.5 percent. For PLUS loans, taken out by parents and graduate students, the add-on is 4.5 percent, capped at 10.5 percent, according to a bill summary from the Education and the Workforce Committee.
Based on current forecasts, the 10-year Treasury Note is expected to be 1.9 percent for the remainder of 2013 and reach 5.2 percent by 2018.
The bill will save the federal government $995 million over five years and $3.7 billion in the next decade, according to the Congressional Budget Office. Additionally, the deficit is expected to decrease by $715 million in the next decade. Many Democrats argue the government shouldn’t make money from student loan interest rates.
In the short term, around 11 million students with Stafford loans will average around $1,500 in savings for the semester. Without a fixed rate, each new loan could be more expensive than the last, but Washington claims there’s more good than harm being done by taking politicians out of the equation.
“The legislation provides stability for low- and middle-income students working to finance their post secondary education and prevents future uncertainty about whether Congress is going to act in time to change the interest rate. The legislation will strengthen our nation’s student loan programs and serve the best interests of both borrowers and taxpayers,” writes the Education and the Workforce Committee.
The cost of borrowing money for the government is passed on to students, raising the bigger question among many politicians, students and parents across the country- what does it take to keep higher education affordable? Rates will eventually rise causing the amount of student debt to increase.
Today student debt has broken the $1 trillion mark. According to the Consumer Financial Protection Bureau and Forbes reports, six percent of the total national debt is due to student loans.
The Denver Post reported on August 21 “thousands of former students have stopped paying on their federal student loans.” Around 8,800 students defaulting on their loans in Colorado put the state above the national average of 9.1 percent.
CSU-Pueblo is experiencing higher default rates as well, said Sean McGivney, Director of Admissions and Financial Aid at the university, but this is the national trend.
The recovering economy paired with higher unemployment and accessibility to more loan money than students have ever had is the perfect formula for higher loan default rates, but there are programs that make paying back loans easy.
“By theory, the national default rate could be zero if people were enrolled in the right repayment program,” McGivney said. “There are so many programs, it can be overwhelming.”
The struggle in repaying loans can have an effect on enrollment at colleges, according to some.
Research from the Institute for College Access and Success (TICAS) has found financial aid increases enrollment.
“When it works as it should, financial aid enables all students willing to study hard to go to college and get a quality credential without burdensome debt,” said TICAS President Lauren Asher. “Federal aid can and must do more to keep college within reach for all students and families.”
TICAS recommended a dozen changes that would improve the federal financial aid process. At the top of the list, the institute suggests simplifying the application for federal aid. Doubling the maximum Pell Grant would also help as it would close the gap in enrollment and completion.
Making the changes to the system would cost little to nothing for most of the recommendations, the institute reports. Others would require additional investments.
“The question is not whether we have the resources to get far more students to and through college, or whether we know what will make a difference. It is whether we have the will to make the changes and investments needed to keep college in reach,” said Pauline Abernathy, vice president of TICAS.
Locally, enrollment isn’t being affected by loan rates. McGivney said the university doesn’t experience changes in retention or enrollment because of the rates.
It’s like buying a car, he said. Loan interest rates aren’t taken into consideration if a person really needs one, much like an education.