Legislation would raise interest rates on student loans

Students and parents could start paying higher fixed interest rates on student loans next year if the U.S. House of Representatives passes certain legislation when it reconvenes this week.

The Deficit Reduction Act is an omnibus bill that includes provisions for cutting a total of $40 billion in federal funds for programs such as student loans, Medicare, Medicaid, agriculture and digital technology to decrease the national deficit over the next five years. It aims to save $12.7 billion by making changes to the student loan program. Changes would specifically include increasing interest rates and fees paid by students and parents, and reducing subsidies to student loan lenders.

The bill’s provisions would require lenders that earn more than the fair market return on loans to rebate the excess interest payments made by students and parents to the federal government. Also, variable interest rates for Stafford loans would be replaced by a fixed interest rate of 6.8 percent; PLUS, a loan for parents, would have a fixed interest rate of 8.5 percent.

“Based on current rates, this is high,” said Dan Small, GW director of Financial Aid. For 2005, the typical interest rates were 5.3 percent for Stafford loans and 6.1 percent for PLUS loans, according to FinAid.com.

Small, however, said that if the bill is passed it would not reduce how much financial aid funds a student would receive – it might just make it more expensive to pay the loans off in the long run.

“The cuts in the loan program do not have any effect on money used by the student to meet the cost of attendance,” Small said. “It is when the student is in repayment that their monthly payment … could be higher due to the interest rates.”

The most recent version of the bill was passed by the Senate Dec. 21 by a vote of 51 to 50, with Vice President Dick Cheney being forced to break the tie. It was sent back to the House floor for reconsideration, which is scheduled to begin Feb. 1.

The loan-lending agencies, however, will be most affected by the bill’s changes. At Sallie Mae, the largest student loan lending agency in the country, a spokesperson said students should not be “scared off” by the bill because it only cuts funds that would be given to lenders, not students.

Supporters of the bill believe that as a whole the Deficit Reduction Act is able to curb entitlement spending in Congress and bring the government one step closer to putting its fiscal house back in order.

“The Deficit Reduction Act, in addition to being fiscally responsible, also makes some good government reforms that will improve services for the Americans that need them,” said Senate Budget Committee Chairman Judd Gregg (R-N.H.), who introduced the bill, in a statement.

Opponents of the bill accuse Congress of raiding student aid by overcharging students and parents through the fixed-interest rates to generate billions of dollars to decrease the deficit and give tax cuts to the wealthy. In the Senate, votes were split mostly along party lines.

“The effect of this bill is that students and parents will end up getting less out of our student aid programs as a college degree continues to cost more. Students and their families need more aid in order to make college less expensive, and not the other way around,” said Luke Swarthout, a higher education associate with Student Public Interest Research Groups, in a news release.

GW officials recognize that the University will also have to cope with these changes.

“The University and (the Financial Aid) office are concerned about the proposed rules,” Small said. “Since there is little or no increase in federal assistance … the burden on assisting financial needy students will fall on the shoulders of the University, something that all colleges are facing.”

Tom Joyce, vice president of corporate communications at Sallie Mae, called the cuts “untimely” and “disproportionate” for his company because the amount of students attending college is increasing. However, he added that the fixed 6.8 percent interest rate may be a good thing for students, at least in the short-term.

Joyce said that if interest rates for the Stafford loans were reset soon, they would probably go up to almost 7 percent, so a fixed rate might benefit student borrowers.

“But five years from now, will that be a good thing? I don’t know,” he said.

GW sophomore Keisha Vaughan said that student loans are a big concern for her, and she feels that it is important to be aware of changes to the programs. She also said that she thinks the fixed rate could be a good thing.

“With the fixed rate, I wouldn’t have to worry about interest rates skyrocketing, and that’s good to know,” she said.

Other students didn’t know much about the changes but said that any alteration to the way student loans work is something to be worried about.

“I am paying for most of my college through government loans, so this is definitely a concern,” freshman Kathleen Hall said.

Other provisions of the Deficit Reduction Act that relate to student loans include the expansion of PLUS loans to graduate students, who will be able to borrow up to the full cost of tuition through the program.

The bill would increase the maximum amount of subsidized loans that first-year and second-year students may borrow beginning in fiscal year 2007. The limit for first-year students would increase from $2,625 to $3,500, and for second-year students it would increase from $3,500 to $4,500. The bill also would increase the limit for unsubsidized loans for each year of graduate school to $12,000, from its present limit of $10,000, and would also establish a $3.7 billion grant for low-income students studying math and science.

Eric Solomon, a spokesman for Nelnet, one of the country’s leading educational finance companies, said the Free Application for Federal Student Aid, or FAFSA, is going to be simplified and that all students should fill it out.

“Eight million students did not receive financial aid last year because they failed to fill out the application,” said Solomon, a former media relations employee at GW. “By filling out the FAFSA, students are eligible for federal, state and institutional aid, which is something they should take advantage of.”

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