Student Loan Pinch
Congress is poised to raise the cost of college borrowing
Get ready for higher rates on student loans. As part of the budget bill now working its way through Congress, lawmakers plan to shave the deficit by raising rates on federal student and parent loans. That gives anyone with federal education debt until June 30 to consolidate loans and lock in today's low rates.
The move accelerates an inflationary spiral that is already pushing the cost of a college degree up faster than wages and prices. The typical four-year public university is charging $12,127 this year, up $751 from last year and more than $3,600 from 2000. In the meantime, scholarships have lagged. The maximum federal Pell grant, the nation's single largest source of financial aid, for example, has remained capped at $4,050 since 2003.
The bill would raise the interest rate on Stafford loans, used by more than 7 million students a year, to a fixed 6.8 percent from a variable rate that is capped this year at 5.3 percent and over the past 10 years has averaged 6.1 percent. The bill offsets some of the hikes with reduced fees. But it means that a member of the class of 2010 who borrows a typical total of $17,000 would end up repaying about $23,500 over the 10-year life of the loan, $1,000 more than would a student who locked in today's rates and fees, according to the American Council on Education, an association of universities.
The 800,000 parents who were expected to borrow from the federal government to fund their kids' education next fall will pay even more. The variable rate on the federal Parent Loan for Undergraduate Students was set at 6.1 percent for this year and has averaged 6.9 percent over the past decade. But the bill sets the interest rate for all loans after July 1 at 8.5 percent permanently. A parent who borrows $10,000 next fall would pay $1,200 more than one who locks in today's rates, the ACE says.
The payoff. Still, says Bill Elliott, vice president for enrollment at Carnegie Mellon University, students and parents will simply have to bear the cost. "The cost of a degree is up, but look at the returns," he says, such as higher salaries and better jobs. "How can you afford not to get one?"
The student-loan bill has a few small silver linings for borrowers. All loans made before July 1 will keep their original terms. So graduates with outstanding federal educational loans have a few months to lock in rates as low as 3.3 percent if they take advantage of discounts such as those for automatic payments offered by lenders like the Missouri Higher Education Loan Authority. Current students, however, should read the fine print before consolidating, since such loans don't offer some benefits, including payment-free grace periods during school.
Also, college students who weren't planning on borrowing until next semester should consider taking the loan now (and perhaps quickly consolidating to a low fixed rate) to take advantage of today's terms, says Mark Brenner, vice chairman of College Loan Corp. "That way, you can save your cash for as long as possible," he says.
Younger students, such as today's high school seniors, will be stuck with the higher rates because the law doesn't allow them to borrow now for next fall. Still, even at 6.8 percent, Stafford loans are cheaper than most private loans. PLUS loans also still offer some unique benefits, such as insurance against death or disability. But at 8.5 percent they will no longer be the bargain they once were. Home equity lines of credit, for example, are currently averaging about 7 percent.
Next year's borrowers can take solace that at least some of the extra money they will be paying will be handed back to students. Nearly $1 billion a year has been earmarked for grants to students who take a tough college-prep curriculum in high school or study science or in-demand foreign languages. And other provisions in the bill will allow more families to qualify for bigger Pell grants.
This story appears in the January 30, 2006 print edition of U.S. News & World Report.
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