Interest rates on federally subsidized Stafford student loans
doubled as of July 1, and since then, Congress has tried to pass
a student loan bill that would give students and parents some
relief from those higher rates.
But as of Friday morning, the Senate hadn't been able to find
a compromise that would be acceptable for everyone. Without
action, students will pay 6.8% for their Stafford loans this
year, up from 3.4% during the previous school year.
Let's take a look at the current status of the student loan
bill and what the congressional impasse means for your
What the student loan bill would do
President Obama and a number of lawmakers have put forward
several proposals that would reduce student loan interest rates
below the 6.8% level. Most of them involve tying the rate for
loans granted in a specific year to current interest rates such
as those on U.S. Treasury bonds.
reported earlier this week that one tentative Senate proposal
would involve using the 10-year Treasury bond rate and adding 1.8
percentage points to it, which would have equated to a 3.61%
interest rate this year. For parent PLUS loans, the add-on would
be 4.5 percentage points, producing a 6.31% rate compared with
the 7.9% they pay currently. That's the rate that students would
pay on that year's loans for as long as they had them
Not everyone agrees that a rate that changes every year is
best for students.
What's holding things up
Some lawmakers have pushed for a temporary continuation of last
year's 3.4% rate, but those bills have been blocked by those
seeking a more permanent solution. Others believe that even a
3.4% rate is too high, with Sen. Elizabeth Warren having made a
proposal to match up student loan rates with the current Federal
Reserve discount rate of 0.75%.
For the most part, though, finding a middle-ground rate isn't
the problem. Rather, two more fundamental disagreements are
holding up progress on a compromise.
First, the Senate and the House differ on whether student
loans should have rates that are fixed for the life of the loan
or whether those rates should vary from year to year. Second,
lawmakers agree that any changes shouldn't result in added cost,
but the tentative Senate proposal described above would cost the
government an additional $22 billion according to the
Congressional Budget Office.
Until those issues are resolved, the impasse is likely to
It's important to understand that for the most part, the
impact on banks from the bill would be minimal. Under the Federal
Direct Loan Program, the Department of Education is the lender on
Stafford loans extended through the program rather than a private
lender. Admittedly, rising rates on Stafford loans might make
private student loans from lenders
look somewhat less unattractive. But increased regulation led
Bank of America
, and several other institutions to reduce or eliminate their
student lending programs, making it clear that student loans
aren't enough of a money-making cash-cow to give banks an
incentive to keep lending.
What you should do next
Regardless of what happens with the student loan bill impasse,
the key for students and parents looking to take out student
loans is to recognize that they have minimal leverage in
affecting the congressional debate.
Even then, the debate doesn't affect you if you don't qualify
for subsidized loans or if you've already graduated. All of the
proposals affect only future loans, and the way your
existing rates are calculated won't change.
For all others, the first thing to do is to figure out what
type of loans you have or are eligible for and recognize
that rates on Stafford loans have historically been
substantially lower than what's available elsewhere -- and even
if those rates rise significantly, you're not likely to find
Next, focus on reducing the amount you need to borrow in
student loans in the first place.
Early college savings, financially savvy decisions about which
college a student chooses, and looking into lower-cost
alternatives on housing options and other necessary college
expenses can reduce your need for student loans (and the whims of
lawmakers). In particular, with tax-free accounts like 529 plans
and Coverdell Education Savings accounts, parents can work to
help their children avoid the difficulty of entering adulthood
with a big debt burden on their shoulders before they even get
their first job.
Whatever the government does with rates, the student loan bill
impasse is a good reminder that taking control of your own
financial destiny is the best way to handle uncertainty.
Unfortunately, those who rely on loans will end up having to
accept whatever decision the government makes, with few if any
alternatives to what could prove to be a tougher repayment burden
for years to come.
Besides the student loan bill, the other big government
issue affecting millions of Americans right now is the onset of
Obamacare, which will undoubtedly have far-reaching effects.
The Motley Fool's new free report, "
Everything You Need to Know About Obamacare
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to read more.
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