Harrington: How much will loan reform really cost students?

Columnist and Economics double-major Luke Harrington crunches some numbers and shows students how much Congress’ new borrowing rules will affect their wallets.

harrington webFew things make college students sweat more than student loans. Luckily, we might be able to save on deodorant, if only for the near future. Earlier this month, the US Senate reached a deal in a contentious battle over how to renew federal funding for undergraduate and graduate students seeking financial aid. The House passed their version of the bill in May.

The current laws and policies regarding federal student aid for college expired at the end of June. As such, the rules must be and renewed by the sitting Congress. Per usual, this piece of legislation has turned into a philosophical showdown for Democrats and Republicans. On one side, Democrats wanted to renew the existing system and exercise government power to keep rates artificially low to allow low-income families continuing access to college

“Democrats are committed to making higher education more accessible and affordable, and are focused on addressing this issue,” Said House Minority Whip Steny Hoyer of Maryland, the #2 Democrat in the House. “I hope Republicans will work with us on an acceptable bill to keep rates low for students… across the country.”

On the other, Republicans want to open up the student loan rate system to the competitive free-market, which they believe will yield the best possible rates for consumers. The Senate’s final product is an amalgamation of both parties’ methods. House Speaker John Boehner lambasted the Democrats forsupposedly letting students down by allowing the previous law to expire, and rates to increase before acting.

“The White House and Senate democrats have let these students down,” Boehner said. “Frankly, I think that they deserve better. It’s time for the president to lead. It’s time for him to bring the Senate Democrat leaders together and develop a solution. The House has done its job. It’s time for the White House and the Senate to do its job.”

Politics aside, the upshot is this: Student loan interest rates will no longer be completely fixed, and will probably instead reflect the behavior of the 10-year Treasury note rate. Now, let’s expand on this a bit. This will mean that if the bill receives President Obama’s signature and new freshman John Q. Public wants to take out a federal student loan this August, it will be at a rate tied in some way to the 10-Year Treasury Note Interest Rate. He’ll probably pay around 3.68 percent in interest, give or take, on his loan over the course of the next 10 years.

Now up until this point, if somebody wanted to take out a loan at a later date, they would get the same, fixed rate as everyone else, regardless of when the loan is taken out. I would pay the same exact rate as an older sibling did a year ago.

This will no longer be the case. The difference now is that the federal student loan rate could now change, reflecting market behavior. If your loan rate is 2.59 percent this August, and it increases to maybe 2.65 percent by December, everyone else who wishes to take out a loan in December will pay a higher rate than you for the next 10 years, the same way normal loans work.

This poses a new problem. The federal government artificially froze the rate in the past but will no longer continue to do so if this bill is passed. Interest rates will rise when the economy gets back on its feet.

According to an Aug. 1 Bloomberg.com article entitled, “Congress Votes to Extend Fixed Interest for Student Loans,” the interest rates will be locked in yearly after the final auction before June for the 10-year Treasury note yield in order to create more stability for borrowers. The rate will not exactly match the Treasury’s yield, but will instead be 2.05 percentage points higher for undergraduates taking out loans in their own names. This year’s rate will be 3.86 percent. Graduate student loans will be tacked at 3.6 points higher, coming in at 5.41 percent, and Federal student PLUS loans (loans taken out by parents of students) will be 4.6 points higher at 6.41 percent.

Here is a breakdown of a few situations involving different interest rates and payment scenarios to give readers a hypothetical picture of how much they might pay in interest. Each of these examples will deal with a loan of $20,000, which would cover the average one-year tuition for an in-state Temple student plus a little extra. We’ll do this year’s undergraduate student rate first, 3.86percent, which will come out to be worth $29,208.76 paid over 10 years, so an extra $9,200 in interest. Remember, this rate is only for undergraduates who take out the loan in their own name.

Graduate students will pay 5.41 percent, which comes into about $33,872.57 or an extra $13,872 in interest. Next let’s calculate the PLUS loan rate, which is what parents of dependent undergraduates will pay. A $20,000 loan paid over 10 years at a rate of 6.41percent will come out to be $37,266.69, or an extra $17,266.

The President has not yet signed the bill so nothing is set in stone, but when the final version is passed, it will impact the lives and financial planning of the vast majority of American college students. This is something every Temple student should be aware and watchful of for his or her future undergraduate years as well as any potential years in graduate school.

Luke Harrington can be reached at luke.harrington@temple.edu.

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