Q: What do college-bound students need to know about student loans before school resumes this fall?
A: Many young adults use the summer months to earn money to help pay for their college expenses in the year ahead. Even with summer just having started, the first day of fall classes aren't too far behind. However, most college-bound students will need to finance college tuition through school loans. Last year, U.S. student loan debt exceeded $1 trillion. The vast majority of student borrowing is from the federal Stafford Loan program. Starting in July 2006, the interest rate on all Stafford Loans was set at 6.8 percent as a result of advocacy by student groups who determined that a fixed rate at 6.8 percent was a better deal for students given the history of the previous variable interest rates. Approximately 40 percent of federal Stafford loans are awarded based on need with the taxpayers paying the interest on the loan while students are in school. About 7.7 million undergraduate students are expected to apply for this subset of subsidized Stafford loans for the 2013-2014 academic year. Special interest rates on these loans were set temporarily at 3.4 percent for the past two years. On July 1, the original 6.8 interest rate is scheduled to be reinstated for all new Stafford loans. Existing subsidized Stafford loans will not be affected by changes scheduled for July 1. If the interest rate resets to 6.8 percent, the average student loan borrower would owe about $727 more in interest over 10 years, or $6.06 a month.
Q: Are changes to the student loan system being considered in Washington?
A: Various proposals reflect efforts to keep college affordable for students and their families. Earning an advanced degree is one way to scale the economic ladder of mobility in the United States. Although policymakers share a common goal to keep higher education attainable for the next generation, it is more difficult to reach a consensus on how to pay for that goal. The President has proposed a long term solution linking interest rates for new Stafford loans to market interest rates so that students can take advantage of lower interest rates during more difficult economic times. The House of Representatives passed legislation to revert to a variable rate system in which interest rates on student loans change from year to year based on the market rate. Senate Democrats have proposed to continue the special 3.4 percent rate for another two years by raising taxes permanently. Senate Republicans put forward a proposal closely aligned with the President's plan to link student loans to market-based interest rates. And like fixed home mortgage loans, the rate would be locked in for the life of the loan. However, while the President's plan maintains different rates for different loans, our plan would allow all students borrowing federal student loans to take advantage of the same low rate. Let me repeat. It would help all students take advantage of historically low interest rates, including loans available to parents and graduate students. With the current Treasury note at 1.75 percent, students taking out a new loan this fall would pay 4.75 percent for the life of that loan. Since 60 percent of federal student loans have remained at 6.8 percent since 2006, and most students who qualify for the subsidized 3.4 percent loans also have to take out loans at the higher rate, our proposal would result in greater savings for more students compared to the Senate Democrats' proposed extension of the special rate just for subsidized loans. While it is uncertain which proposal will gain final approval, I will continue championing policies that address the exploding growth of college tuition and fees. That includes my work to bring more transparency to college revenue and expenses.
Q: Why is it so complicated to figure out a student's tuition tab?
A: A big part of the problem calls for a fairly simple solution: Boil down the financial aid mumbo-jumbo into plain English. Replacing the bewildering information that families receive from each college in which their students receive financial aid award letters with one boilerplate, easy-to-understand letter would be a welcome blessing to families across the country. Under the current system, many families find it nearly impossible to make an informed decision. Various definitions are used for grant aid (which does not need to be repaid) with student loans (which do need to be repaid). That's why I'm working to separate the wheat from the chaff. The bipartisan legislation I've cosponsored with Senator Al Franken of Minnesota would drive out the cobwebs tangling up financial aid literacy. Called "Understanding the True Cost of College Act," our bill would create standard terms and definitions for college aid so students and families can make direct comparisons. This would empower students to better understand their debt burden and avoid taking on more than they can afford. Even better, this would help students shop around for the best value in the higher education marketplace. As a result, more colleges would be inspired to rein in double-digit tuition hikes as they compete to keep up enrollment.
Friday, June 21, 2013
