Federal student loan interest rate to double July 1


The average Ohio college student graduates with $28,683 in student loan debt. And unless Congress acts before the end of the month, their debts will grow a lot higher.

In a partisan debate involving President Barack Obama and lawmakers on Capitol Hill, Congress is struggling to forge a compromise in time to prevent an interest rate increase for new subsidized Stafford student loans taken out after July 1, which are scheduled to double from 3.4 percent to 6.8 percent.

If those rates double, then 361,857 students at Ohio colleges would be affected, according to a study done by The Institute for College Access and Success, a non-profit education organization in California.

More than 40,000 local students have federal student loans for the 2011-12 school year. including nearly 10,000 at Wright State University, 9,000 at Miami University and more than 7,000 at Sinclair Community College.

Diane Stemper, executive director of Ohio State University’s financial aid office, said that 59 percent of university students graduated with an average debt of $21,566 for the 2012 academic year. She warned that if interest rates double, a student facing a debt of $25,470 under the current loan rates would discover they actually owe $29,782.

“We have an obligation to not make interest rates so high that students can’t pay them back,” said Rep. Joyce Beatty, D-Columbus, and a former senior vice president at Ohio State. “We should figure out a compromise that would help young folks continue to matriculate, for them to be able to say, ‘I can work hard and have a job that will allow me to pay back the loans I took out.’ “

Just last April, total student loan debt nationwide surpassed $1 trillion.

Democrats in the Senate and House back a bill that would freeze the interest rates at 3.4 percent for another two years, which they say would allow Congress more time to generate a long-term solution to the nation’s accumulating student debt.

By contrast, House Republicans approved a bill last month that would make interest rates for subsidized Stafford loans equal to the yield of the 10-year Treasury note plus 2.5 percentage points. The rates would be fluid, meaning they would change as the market evolves, and would be capped at 8.5 percent.

Although some analysts believe the differences are not that great, so far, neither side appears ready to budge. In a speech last month, Obama vowed to veto the House Republican bill, charging that it “fails to lock in low rates for students next year” and “eliminates safeguards for lower-income families.”

In a statement accompanying Obama’s speech, the White House warned the House GOP plan “creates greater uncertainty for borrowers about the total cost of their loans.’’

Last Thursday at his weekly news conference House Speaker John Boehner, R-West Chester Twp., fired back, claiming Obama’s refusal to compromise demonstrates that the president is “more interested in scoring political points” than resolving the issue, adding that he fears Obama “and his party have decided to deliberately allow rates to rise on students and families.”

Sen. Rob Portman, R-Ohio, told reporters in a conference call that “many of us believe that over the long haul it’s better to tie it to the market because right now the rates go up and down based on congressional action … and there’s a lot of uncertainty with that.”

Those involved in the student loan program disagree on which approach is better. While Stemper said Ohio State has not endorsed any plan, she said that the university “supports tying the interest rates to the market rate.’’ But she said OSU “believes that all of the proposals need to be evaluated to determine the best approach to keeping the program both viable and affordable for students.”

Tabitha Woodruff of the Ohio Public Interest Research Group countered that the Republican proposals would offer a short-term fix for students entering college within the next few years, but after that rates would be jacked way up.

In addition, the Democratic and Republican bills take very different approaches on how to pay for the bill.

The Democrats finance their version by closing what they say are tax loopholes, including saving $4.6 billion over 10 years through a major change in Individual Retirement Accounts and 401Ks.

The Democrats want IRA distributions to a beneficiary to be completed within five years of the account holder’s death. Under current law, the distributions can take place over a longer period of time.

By contrast, the House Republican bill would reduce the federal deficit by $3.7 billion during the next decade because students would face the possibility of paying higher interest rates.

“The current high school freshman would be paying for the seniors in high school and paying to reduce the deficit,” Woodruff said. “Student loans should be looked at as a job creator and an economic investment.’’


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