As it stands, college students nationwide and almost half of all University of Maine students will feel the financial pain of last year’s debt-ceiling debate come July.
Last year, when lawmakers sought ways to shrink the federal budget, they left interest rates poised to increase July 1. Nearly 8 million students nationwide who rely on subsidized loans to cover college costs would see the interest rate double from the current 3.4 percent to 6.8 percent as of July 1, if Congress fails to act.
The rate increase comes as part of a broader piece of legislation known as the Budget Control Act of 2011, approved after Congress’ debt-ceiling impasse.
To make matters worse for students, those borrowing subsidized Stafford loans processed on or after July 1 will no longer receive the six-month grace period in which the government pays the interest.
These loans will still have a grace period, but interest will immediately begin accruing on the loans’ principal balance, thus increasing the amount the student will be required to pay in the long run.
Financial aid officials at the University of Maine, where 5,600 students, or nearly half the student population, received subsidized Stafford loans this year, said they share grave concerns for the compounding effect that such a rate hike could have on heavily indebted college students.
“We are out there saying, ‘Don’t impact any of this. Don’t impact Pell grants. In fact, give us more. Don’t impact loan interest rates. Look at how many students are borrowing. Look at the issues we are facing right now,’ ” said Peggy Crawford, director of Financial Aid at UMaine.
Additionally, graduate students enrolling in a program of study on or after July 1 will no longer be eligible for subsidized Stafford loans. They will remain eligible for unsubsidized loans, which already carry an interest rate of 6.8 percent.
The reality of the situation could mean more debt for middle-class and low-income students who use the subsidized loans to pay for the spiking costs of tuition and fees that other federal aid, such as Pell grants, can no longer cover.
Students who qualify for the loans must demonstrate financial need and meet income restrictions to receive them. The government pays the interest on the loans while recipients are in school.
“Rising college costs, tight family finances and uncertain job prospects pack a triple whammy for student borrowers,” said Rich Williams, a higher education analyst with the Washington, D.C.-based Public Interest Research Group. “In this economy, the last thing we should do is double the interest rates on student loans.”
The current subsidized rate of 3.4 percent has only been in effect for one year. But rates have been decreasing since 2007, when Congress passed the College Cost Reduction and Access Act. Prior to 2007, the rate had been at 8.25 percent, which officials say, due in part to the fluctuating rates of recent years, should keep the sticker shock at bay if the rate does double.
Still, if congress does not freeze the current rate, the average subsidized Stafford loan borrower would have an additional $2,800 in college debt over a 10-year repayment term.
Moreover, borrowers who assume the maximum $23,000 in subsidized loans will see the total of their interest inflate an additional $5,000 over a 10-year repayment period and $11,000 over 20 years.
President Barack Obama has prodded Congress to block the rate hike for current and future Stafford loan recipients, but the legislation to keep the 3.4 percent interest rate has come to a standstill, and advocates of a rate freeze say there seems to be little support on Capitol Hill for addressing the issue at this time.
In the last decade, college loan debt has increased from $41 billion to $103 billion, according to a report released by the College Board. It now outpaces credit card debt in the United States. According to the Wall Street Journal, it topped the $1 trillion mark sometime last year.
Both Crawford and Connie Smith, who serves as the assistant director of Financial Aid at UMaine, said education spending and federal loan programs should be a top priority for Congress.
They are urging students to contact their elected representatives to protest an increase in the interest rate.
“Truthfully, UMaine students could have a significant impact in this national discussion,” Crawford said. “Our representatives and senators are very education-related, they care. So contacting your congressman will go a long ways, because they will support reducing this.”
In any event, the likelihood of Congress sparring over the matter seems inevitable. To date, the White House’s Office of Management and Budget estimates it would cost $3.7 billion to keep the current rate for five years. Republicans on the House Education Committee disagree and slate the cost at more than $6 billion. Other entities outside Congress, such as FinAid.org, estimate it will cost $5.7 billion to keep the current rate.
On March 13, representatives with the Public Interest Research Group delivered 130,000 letters to congressional leaders, asking them to keep the current rate. Many supporters of a rate freeze believe any additional costs to students could serve as a barrier for some in continuing their education.
“I don’t think that students should have to forgo a graduate degree if they wish to pursue one because they’ve already had to use student loans and are concerned about racking up more debt,” said Kristin Kittridge, a UMaine graduate student studying nutrition.
“I’m already concerned for our generation with student loan debt as it adds up, because I know it is a huge financial burden for people that affects their life and major life choices.”