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California Association of Private Postsecondary Schools

At 11th Hour, Congress Approves Freeze of Interest Rate on Some Student Loans

07/02/2012

The Chronicle of Higher Education - June 29, 2012 - Michael Stratford

After months of disagreement over how to pay for a temporary freeze on the interest rate for certain federal student loans, Congress on Friday passed a bill that averts a rate increase but reduces some benefits for borrowers.

The measure keeps the interest rate for federally-subsidized loans to undergraduates at 3.4 percent until July 2013. Lawmakers attached the measure to their compromise package for highway projects, which received bipartisan support in both houses of Congress. It passed the House by a 373-52 vote, and the Senate approved it 74 to 19.

The one-year extension of the student-loan rate will be paid for in part by tightening the rules on subsidized loans. The interest subsidy on loans for undergraduates still in school will be limited to a period of 150 percent of a program's standard completion time. For example, a student pursuing a degree at a four-year college will no longer be eligible for an interest subsidy after six years. Additional funds for the interest-rate freeze will come from changes to federal pension laws.

In his State of the Union address in January, President Obama urged Congress to prevent the interest rate from doubling, and he has included the issue in campaign efforts to court student voters.

Republicans and Democrats were in agreement about extending the low-interest rate, but they wrangled for months over how to offset its $6-billion cost.

Before a serious compromise began to take hold this week, the issue of the interest rate on student loans was largely an exercise in political grandstanding. For several months, each side proposed funding sources that were unpalatable to the other, while casting blame on each other for inaction.

The extension of the low interest rate will have a modest impact on student debt. It applies only to new, federally-subsidized student loans to undergraduates, which are disbursed to borrowers who qualify for them based on their income levels.

Still, more than seven million students receive those types of loans, and the interest-rate freeze will save the average borrower $7 to $9 a month, or about $1,000 over the course of repayment.

Although Friday's 11th-hour Congressional action prevents the interest rate from doubling as of Sunday, several other federal student-aid options are set to end this weekend. Graduate students will no longer qualify for the in-school subsidy on federal loans. The interest rate for those loans will remain at 6.8 percent. And a smaller category of college students, those without a high-school diploma or GED, will no longer be eligible for any type of student aid. They had previously been able to obtain aid by taking a basic skills test or fulfilling other requirements demonstrating their "ability to benefit" from higher education.

In addition, certain borrowers who have bank-held loans issued through the Federal Family Education Loan Program have until Saturday to apply for a special consolidation loan that offers up to a half-percentage-point interest-rate discount and other federal repayment benefits.