Student-loan deal a mixed bag for borrowers
The Senate could vote soon on a student-loan deal, but the fix might not give parents and students any reason to rejoice.
Because Congress was unable to reach a compromise, rates for new, federal subsidized Stafford loans doubled July 1, to 6.8 percent. A Senate deal reached Wednesday evening would reportedly set a cap for Stafford and PLUS loans, and peg their rates to the 10-year Treasury note.
Under the proposal, undergraduates could borrow at an expected rate of 3.86 percent for the 2013-14 academic year. Graduate students could borrow at 5.4 percent, and parents at 6.4 percent.
Rates would be retroactive to July 1, benefiting consumers who have taken out new federal loans for the coming school year, according to Joseph Hurley, a certified public accountant and chief executive of Savingforcollege.com.
Student loan rates would reset every year on July 1. Undergraduate rates would be capped at 8.25 percent, graduate rates at 9.25 percent and parents' rates at 10.5 percent.
The lower rate provides a little relief for students such as Blake Crist, 21, who has relied on a mix of sources, including subsidized and unsubsidized loans, work study, and scholarships, to finance his degree in integrated marketing communications from Ithaca College.
"Just the thought of finding a job when you graduate is scary enough," said Crist, who hopes to work in marketing."It becomes terrifying when you have to worry about paying off loans." He expects the proposed deal to keep his payments a bit lower than they might be otherwise.
Future college students may not get that advantage, however.
"It's still going to be, effectively, an interest rate increase masquerading as a decrease," said Mark Kantrowitz, publisher of Edvisors Network. Students enrolled in college now will benefit from the low interest rates, but as the economy recovers and rates rise, today's high school students could end up paying more than 6.8 percent. "It's far from a permanent solution," he said.
That said, government-subsidized loans are still the cheapest option for student borrowing. Private loans often have higher rates that fluctuate, and students may be charged interest while in school or during periods of deferment. That wouldn't change under the proposed deal.
"It may not be as cheap down the road, but then, comparable rates will be up, too," Hurley said.
But the rate deal doesn't alleviate what experts say is the real problem with student loans: The amount of debt, rather than its cost.
Federal student loan debt has topped $1 trillion, the Consumer Finance Protection Bureau announced Wednesday. All outstanding student loan debt, including private and federal loans, totals $1.2 trillion.
The average college senior in 2011 had student loan debt of $26,600, according to The Project on Student Debt.
"There's no cheap way to do undergrad right now," said Jonathan Meier, 18, of Manchester, Conn. An incoming freshman at Steven Institute of Technology studying quantitative science, Meier plans to take on $5,500 in unsubsidized loans each year.
Kantrowitz said the cost of college, up about 4 percent in just the last year, has outpaced available grant money. The cost to attend a private college in 2012-13 totaled $39,518, according to the College Board, while in-state public colleges ran $17,136.
Higher costs force families to take on more debt or choose a lower-cost college, which may affect students' ability to graduate on time, he said, adding that some families are priced out of college entirely.
With growing loan debt and higher rates on the horizon, it's more important for families to take steps to prepare financially for college by saving and hunting for scholarships, Kantrowitz said.
"Every dollar you save is a dollar you don't have to borrow," he said. For students already in school, installment plans for tuition can help spread out the costs, potentially enabling families to pay more out of current income instead of borrowing.