The Senate adjourned for the July 4 recess on Thursday, but failed to keep interest rates on Stafford loans at the current 3.4 percent rate. The failure to vote on a plan before the recess means that interest rates on new, federally subsidized loans will double to 6.8 percent Monday.
Congress’ Joint Economic Committee estimates that the average student will be paying $2,600 more starting July 1. On a $23,000 student loan repaid over 10 years, a student would be paying about $3,000 total interest.
Subsidized student loans are awarded based on financial need, and interest doesn’t accumulate while students are enrolled in college. (Unsubsidized loans, which are available to all undergraduates, already have an interest rate of 6.8 percent.) The increase was long-planned: it was originally supposed to happen last year, the result of legislation passed in 2007 that gradually lowered interest rates for five years, but an election-year coalition of student advocates and the Obama campaign successfully pushed for a one-year extension.
But after paying little attention to the issue for the past 11 months, lawmakers failed to agree on a new proposal and spent the past few weeks arguing about a solution.
A rare agreement between the Obama administration and Congressional Republicans on switching to a market-based rate led many observers to believe that compromise was possible. But the issue got bogged down in Congressional deadlock as Democrats pushed for capping interest rates or extending the current rates, while the House passed a plan that the Obama administration threatened to veto.
This doesn’t mean, however, that college graduates with subsidized loans will actually pay more starting next month. As the article explains, the higher interest rate will apply only to new loans, issued this year. No one currently making payments will see a rate hike. Whether students will actually pay the new rate — which applies only to new, federally subsidized loans — is unclear.
On Thursday, Senator Tom Harkin, the Iowa Democrat who chairs the education committee, said lawmakers would consider a one-year fix that would apply retroactively on July 10. Since the federal government is the lender for all new student loans, Congress could adjust interest rates after the fact. But where the money will come from to pay for the extension, which last year cost $6 billion, is an open question.
The US government is already forecast to make a record $51 billion profit from the federal student loan program this year at current interest rates, which Sen. Angus King (I-Maine) described as “billions of dollars off the backs of our students.”
If lawmakers fail to make a retroactive deal that would undo the impending spike in interest rates, US college students may find themselves unable to afford taking out a federal loan.