Some student loans to become more expensive despite deal

June 27, 2012

College students are facing a roughly $20 billion increase in the cost of their federal loans, despite a much-heralded deal in Washington to contain the expense of higher education.

Starting Sunday, students hoping to earn the graduate degrees that have become mandatory for many white-collar jobs will become responsible for paying the interest on their federal loans while they are in school and immediately after they graduate. That means they’ll have to pay an extra $18 billion out of pocket over the next decade.

Meanwhile, the government will no longer cover the interest on undergraduate loans during the six months after students finish school. That’s expected to cost them more than $2 billion.

These changes have received little attention as lawmakers instead focus on preventing a spike in interest rates on federal student loans. They are the fallout of earlier political battles and compromises over broader issues such as the federal budget and the national debt ceiling. And they are forcing students such as Clarise McCants to make tough choices about how to pursue academic goals without jeopardizing financial security.

“I don’t want to hastily make a decision that could waste thousands of dollars I don’t have,” said McCants, who said she will have to put off graduate school after finishing her undergraduate degree at Howard University in the spring. “That could kind of prove disastrous for my finances.”

Much of the recent debate about the nation’s soaring student debt burden has centered on how to prevent the interest rate on new federally subsidized undergraduate loans from doubling to 6.8 percent on Sunday. President Obama made the issue part of his stump speech at colleges nationwide, while Republican rival Mitt Romney also came out in support of the measure. This week, Senate leaders announced that they had finally reached a compromise on how to pay the estimated $6 billion cost of freezing the rate for one year. Congress is expected to approve the deal by Friday.

But the deal’s benefits are being blunted by the two changes that will saddle students with higher costs.

Lawmakers ended a long-standing program that pays the interest on federally subsidized loans for six months after a student graduates from college. The change applies to new loans issued through July 2014.

Students who take out these loans over the next year will receive the lower interest rate — but that amount will be charged to their bill as soon as they throw their graduation caps in the air. Students who apply for federal loans next year will be hit with a double whammy: a higher interest rate that begins after graduation.

“It really makes the loans kind of unpredictable and hard to understand for students and families when these changes are happening through the budget process,” said Megan McClean, managing director of policy and federal relations for the National Association of Student Financial Aid Administrators, a trade group.

The outlook for students pursuing advanced degrees is even more grim.

As of Sunday, Uncle Sam will no longer pay the interest on new graduate loans while students are in school and for six months after they finish. The change comes as government data show that the average annual cost of a master’s degree and professional programs in law and medicine has jumped by double digits. Enrollment in graduate programs has risen by 33 percent since 2000, to 2.8 million students.

The graduate loan subsidy is a casualty of last summer’s debate over the national debt ceiling. Lawmakers eliminated the program to cover a shortfall in funding loans for low-income students.

“It’s a difficult question, because as some experts point out . . . [subsidies are] a back-end benefit to students,” said Julie Morgan, associate director for post-secondary education at the Center for American Progress. “They do save them money . . . but they don’t encourage students to attend school.”

Mechelle Sieglitz said she recently learned that she would have to rely on unsubsidized federal loans for her last year of divinity school, putting tuition out of reach. So she took a teaching job and is hoping to save enough money to finish her education later.

“Though I’ve been able to find ways around the system, I know a lot of kids are not going to be as fortunate and will have to drop out to avoid mounting tuition and shrinking options,” she wrote.

Personal finance expert John Ulzheimer, head of consumer education for SmartCredit.com, said the changes to student loans are forcing many borrowers to have what he called an “economic come-to-Jesus moment” about what their degrees are worth.

Bryce Freeman, a student at the University of Florida at Gainesville, said the change to graduate loans will influence which schools he considers for a master’s degree in public policy. Although Georgetown University and the University of California at Berkeley are appealing, the cost may put them out of reach.

“That’s the million-dollar question,” he said. “You have to find a balance between a program that’s going to get you a good-paying job and one that makes sense financially.”

Ylan Q. Mui is a financial reporter at The Washington Post covering the Federal Reserve and the economy.
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