The U.S. Senate failed to agree on a student loan bill Wednesday, leaving the federally subsidized Stafford loan interest rate to double from 3.4 percent to 6.8 percent and keeping students in limbo awaiting Congress’ next move.
Most Senate Democrats backed a bill Wednesday to extend the lower rate for another year, but they failed to reach a 60-vote threshold to move forward against a filibuster.
The result of the impasse, for now, is the higher interest rate for new federally subsidized Stafford loans. That means more than 7 million students in the upcoming school year are projected to pay an average of about $1,000 more per loan, according to federal estimates.
Students apply for loans annually, and the higher rate applies to all new loans. Existing loans are not affected.
The loans go to those who have financial need, with about three-quarters of the recipients coming from families making less than $60,000 a year. Just under half of all undergraduate students who borrow receive these loans.
A few Senate Democrats joined with Republicans on Wednesday to back a long-term alternative, tying all federal loan rates to 10-year Treasury bond rates. That type of approach also has been supported by President Barack Obama and House Republicans, though the specifics vary. The Obama administration on Wednesday publicly supported Senate Democrats’ one-year plan.
Lawmakers from both parties have said any legislation could make the new rate retroactive to July 1. The rate is now higher than most of those offered by private lenders.
While students don’t have to sign loan agreements until new semesters begin in August, this is the time of year when families plan how to pay for college. Those decisions can’t wait until the first day of fall classes, said Tim Renick, vice provost at Georgia State University.
It used to be federal loans were preferred over private lenders, but the higher interest rate changes all that, he said. It’s a question of whether families wait to see if Congress reaches an agreement or they go with a private lender. When Renick meets with families, he must tell them that the current federal rate is 6.8 percent, although he mentions it could change.
“This whole thing is creating uncertainty and confusion,” Renick said. “The whole circumstance is not student-friendly.”
Renick said the loan debate is ironic. Tuition and college costs at public universities have increased in recent years because of state and federal funding cuts. That has required more students to take out more loans.
“Not only is college more expensive, it’s more confusing to pay for it,” Renick said.
Students say they will continue to go to college, even with the higher loan interest rates. But they are trying to find ways to take out smaller loans or avoid them all together.
Torian Cannon started at Georgia Perimeter College in 2011 and then took a year off so he could work. He returned to the college this year and continues to work full time. He hopes to transfer to Clayton State University, although he’ll need loans to earn a degree there.
“I hate the idea of taking out loans, but I feel like I can’t avoid it,” the 20-year-old said. “I know I need a degree and I need help paying for it. I feel like we’re being held hostage by all this loan mess.”
More than 220,000 Georgians attend college using Stafford loans.
Georgia State said the change would affect about 14,400 of its students. Kennesaw State University estimated the new interest rate would affect about 12,000 of its students. At the University of Georgia, about 8,000 received more than $32 million in these subsidized loans last year.
A 2002 law started a transition from variable to congressionally fixed interest rates, which ended up at a 6.8 percent rate for 2006. Then in 2007, Congress passed a law to gradually whittle down the rates to 3.4 percent. That law expired July 1, 2012, when the 3.4 percent rate was extended by a year.
Before Wednesday’s vote, U.S. Sen. Tom Harkin, D-Iowa, accused proponents of market-based interest rates of “trading national debt for student debt,” by proposing something less expensive for the federal government. He criticized the alternative Senate plan for not putting a hard cap on Stafford loan rates, saying that as Treasury interest rates rise, students will end up paying more than the current 6.8 percent.
U.S. Sen. Richard Burr, R-N.C., countered that his plan, co-sponsored by a trio of caucusing Democrats, would help keep rates down for more borrowers — as it deals with all federal loans, not just subsidized Stafford loans.
Burr’s bill would establish the cost of an undergraduate subsidized Stafford loan at 1.85 points more than what the Treasury Department pays to borrow money for 10 years. Now that loan rate would be around 4.5 percent. Graduate subsidized loans and PLUS loans would carry higher rates.
Georgia Republican U.S. Sen. Johnny Isakson said he was involved in negotiations before Wednesday’s vote on a possible compromise, but it did not come together.
“Quite frankly, the best I can tell you is (Senate Majority Leader) Harry Reid was dug in wanting it his way or the highway,” Isakson said. He said Burr’s bill “will ultimately be the legislation that passes, or something very, very close to it.”
Two-thirds of college seniors who graduated from a four-year college in 2011 had loan debt. The average debt was:
$26,600 — U.S. average
$22,443 — Georgia average
$20,439 — Georgia State University average
$20,423 — Kennesaw State University average
$18,569 — University of Georgia average
Source: Project on Student Debt, 2011 graduate data
NEW LOAN RATES
The higher loan rates will impact any undergraduates taking out direct subsidized loans. The loans will not accrue interest while the borrower is in school. Here’s how the new interest rate will affect monthly payments on the standard 10-year repayment schedule:
Loan debt … Payment under 3.4 percent rate … Payment under 6.8 percent rate … Increase in annual interest cost
$5,000 … $49.21 … $57.54 … $99.96
$10,000 … $98.42 … $115.08 … $199.92
$15,000 … $147.63 … $172.62 … $299.88
$20,000 … $196.84 … $230.16 … $399.84
Source: U.S. Consumer Financial Protection Bureau