Student loans have become an indispensable tool for families trying
to pay the soaring cost of higher education, which at some private
colleges and universities tops $50,000 a year.
At a time when Americans owe more on student loans than on credit cards — student debt is topping $1 trillion for the first time
— and the Occupy movement has highlighted the rising furor over
spiraling student debt, the issue has moved higher on the political
agenda.
The types of loans available fall into three general categories:
federally guaranteed loans made by banks and other lenders; federal
direct loans made directly by the government; and private loans, which
are essentially the same as any other consumer loan, from banks and
other companies.
The interest rate paid by students on both guaranteed loans and
direct loans is fixed and is set by Congress. In the case of guaranteed
loans, the government pays a subsidy to lenders that make the loans and
also guarantees the amounts loaned, almost completely protecting lenders
from losses. Private loans usually have worse terms than either type of
federal loan and the interest rates on private loans can change over
time. To learn more about loan terms, see the Student Loan Guide.
The current rate for subsidized Stafford loans was set by Democrats
in 2007 through legislation that temporarily reduced interest rates for
the low- and middle-income undergraduates who receive them. The rate
went to 3.4 percent from 6.8 percent and was scheduled to revert to the
higher figure on July 1, 2012, without Congressional intervention.
But on June 29, Congress gave final approval to legislation that combines a two-year transportation measure with bills to extend subsidized student loans and revamp federal flood insurance, wrapping up a bruising session.
The $6.7 billion student loan provision
extended the 3.4 percent interest rate on Stafford loans for one year.
The bulk of that — $5.5 billion — would come from two pension measures.
One would change how private pension interest payments are calculated,
smoothing the fluctuations for businesses even as the total cost rises
slightly. The other would come from higher premiums for companies
participating in the Pension Benefit Guaranty Corporation.
Another $1.2 billion would come from limiting how long a student
could receive Stafford loans to 150 percent of the average time it takes
to complete a degree.
Graduate students with Stafford loans pay the higher rate, as do students with unsubsidized Stafford loans.
As with other measures designed to aid middle-class voters, the fight
between Democrats and Republicans was less over the substance of the
bill than how to pay for it, with Republicans looking to cut government
spending and Democrats looking to extract more money from high earners.
While nearly everyone is in favor of the broad goal of college
affordability, some experts point out that even 6.8 percent is lower
than the rate on most private student loans.
Background
Much more attention is now paid to the student loan business, which
provides tens of billions of dollars a year in financing to students and
families. In 2007, a series of scandals rocked the industry, as
investigations by state attorneys general and by lawmakers in Washington
turned up questionable relationships between some college financial aid
offices, which could direct students to particular lenders, and loan
companies seeking to gain business.
In 2008, student lending was shaken by the credit crisis, which
threatened to cut off the supply of student loans from private lenders
by depriving them of a means of raising fresh capital. Many lenders
depended on being able to sell loans they made in order to get money to
make new loans, and investors’ interest in buying student loans — along
with home loans and all manner of debt — fell dramatically. To bolster
the industry, the federal government stepped in as a buyer of federally
guaranteed loans.
In 2009, the House of Representatives passed legislation
that would expand federal aid to college students while ending federal
subsidies to private lenders. By shifting to direct federal lending, the
Obama administration said it would save more than $80 billion over 10
years, which would go into higher Pell grants for low-income students, new investments in community colleges, early-childhood programs and other education efforts.
American students took out twice the value of student loans in 2011,
about $112 billion, as they did a decade before, after adjusting for
inflation.
