On Wednesday, President Obama proposed a major shift in the interest rate calculation for federal student loans: tying the rate to the government’s cost of borrowing, which is a variable benchmark. Currently loan rates are fixed by statute. Prospects for enactment of the Obama plan are uncertain. But Congress faces pressure to at least debate loan policy because the rate on a key type of loan will double — again, by statute — on July 1 unless lawmakers intervene.
Last year at about this time, a similar debate unfolded. The rate on the federal subsidized Stafford loan — described as subsidized because interest does not accrue on the loan while a student is in school — was scheduled to rise from 3.4 percent to 6.8 percent on July 1, 2012. Because it was a presidential campaign year, the loan issue got heavy publicity. Obama campaigned to freeze the rate. His Republican opponent, Mitt Romney, agreed. Congress extended the rate for one year.
Now the year is almost up, and there is a bipartisan push to rethink loan policy.
It’s worth giving an overview of the loan program before looking at policy questions.
Federal officials project that there will be about 10.7 million unique borrowers of federal loans in the 2013-14 academic year. They can borrow from one or more sources of funds.
●Stafford loans, named for a former Republican U.S. senator from Vermont, Robert Stafford, are a cornerstone of the federal loan program. Undergraduate students with demonstrated financial need — generally from low- to moderate-income families — are eligible for a subsidized Stafford loan. The government projects that about 7.2 million students in the coming academic year will take out such loans. No student may borrow more than $23,000, cumulatively, under this type of loan. The rate is for these loans is 3.4 percent until July 1. Then, absent any change in law, it will be 6.8 percent.
The total volume of subsidized Stafford loans for fiscal 2014 is estimated to be $29.3 billion.
●Unsubsidized Stafford loans, at a rate of 6.8 percent, are available to graduate and undergraduate students without a requirement to demonstrate financial need. Total annual volume of these loans is estimated at $62.7 billion a year. There are certain limits on this type of loan too.
●PLUS loans, available to graduate students and parents of dependent undergraduates, are issued at a rate of 7.9 percent. Total annual volume is projected at $20 billion. Curiously, the acronym means Parent Loan for Undergraduate Students. But obviously, that is a misnomer for PLUS borrowers who are graduate students.
●Perkins loans, named after Carl D. Perkins, a former Democratic U.S. representative from Kentucky, target undergraduate and graduate students with exceptional financial need. These federal loans , with a rate of 5 percent, are issued through participating schools. Funds for this program are limited. Not everyone who qualifies for a Perkins loan gets one. Total annual volume is projected at $857 million.