By Jonnelle Marte
The student loan bill passed by the Senate on Wednesday would bring immediate relief to current college students, but critics worry the move could hike borrowing costs in the long run.
Parents shell out less for kids in college
Parents are giving their children less cash to pay for college amid continued economic weakness, adding to pressure on students to borrow money, rely more on grants—and in many cases, live at home. WSJ's Doug Belkin reports.
The bill, which the Senate passed 81-18, would tie student loan rates to the government's borrowing costs. Rates would be pegged to the 10-year Treasury note, plus 2.05 percentage points for undergraduate students, 3.6 percentage points for graduate students and 4.6 percentage points for parent loans. And that rate would be fixed throughout the life of the loan.
But future students could face higher rates if Treasury yields climb as analysts expect them to as the economy improves, critics say. Loan rates could climb to a maximum 8.25% for undergraduate students, 9.5% for graduate students, and 10.5% for loans taken out by parents—all above the current rate of 6.8%. "This is an interest rate increase masquerading as a decrease," says Mark Kantrowitz, publisher of the Edvisors Network, a network of about a dozen websites about planning and paying for college.
Sen. Tom Harkin (D., Iowa), a supporter of the bill, said it sets interest rates to the lowest level possible without adding to the federal deficit, according to a Wall Street Journal report.
The bill comes less than a month after lawmakers let interest rates on federal student loans rise from 3.4% to 6.8%, and if passed, it would take effect as if it were enacted on July 1. Legislators have been working to find a resolution, but the debate stalled because of disagreement over how high rates should be allowed to go in the long term. One amendment proposed by Democratic senators Jack Reed of Rhode Island and Elizabeth Warren of Massachusetts, which failed to pass, would cap loan rates ate 6.8% for undergraduate students.
Some college advocates say the bill doesn't address what they say is the more prominent issue: the rising cost of college. "This compromise doesn't do anything to lower the cost of tuition," says Evan Feinberg, president of Generation Opportunity, a nonprofit advocacy organization for young people based in Arlington, Va. "It actually continues to drive up the price of education."
Shutterstock.com
Student loan debt is now the biggest form of consumer debt, second only to mortgages, according to the Federal Reserve Bank of New York. Consumers ages 30 to 39 carry the largest debt loads, with an average debt load of $29,364 in the fourth quarter of 2012, compared with an average of $24,803 for all age groups.
Separately, financial regulators issued a statement Thursday urging banks to "work constructively" with consumers who might be struggling with their private student loans. Those banks with programs that might help borrowers restructure their loans or grant them extensions, deferrals or renewals, should clearly explain the programs to affected borrowers, the statement said.
