By Noelle Bernard Boyer
The decision came on the heels of the expiration of last year’s law that kept federal subsidized Stafford loans, or direct subsidized loans, at 3.4 percent until July 1, 2013. Congress failed to reach an agreement and interest rates doubled.
By July 31, Congress compromised on the Bipartisan Student Loan Certainty Act of 2013. For the 2013 school year, undergraduate students can take out Stafford loans at 3.86 percent, while graduates and parent PLUS loan borrowers have a 5.41 percent and 6.41 percent rate respectively.
“Every year that loan will have a new rate based on what the market is doing, but that rate will then be fixed for the life of the loan,” said Megan McClean, Director of Policy and Federal Relations at the National Association of Student Financial Aid Administrators.
The new law retroactively lowers interest rates for students. However, experts say the rates could rise as the U.S. economy improves.
“It’s a long-term solution that puts rates back in line with the market,” McClean said.
Marc Egan, the associate director of government relations for the National Education Association, disagreed, stating more must be done to prevent rates from exceeding 6.8 percent.
“In the near term, the rates are going to be lower,” Egan said. “There is time for Congress to take a look at this in a way that they get it done correctly and that benefits students and families who just want to be able to go to college without having to be saddled with unmanageable debt when they get out of college.”
The law contains caps that guarantee undergraduate subsidized and unsubsidized Stafford loans will not exceed 8.25 percent, graduate loans are limited at 9.5 percent, and parent PLUS loans are capped at 10.5 percent.
PUTTING A FACE TO THE POLICY
According to the U.S. Department of Education, the number of students applying for financial aid increased by 62 percent in the past five years. Moreover, the amount of financial aid distributed rose by 140 percent over the last 10 years, from $72.3 billion to $173.8 billion.
Justin Reash, a graduate student at DePaul University studying for a Master of Arts in journalism, entered in August 2012 knowing he could not attend without federal loans.
“I was concerned with how I was going to finance it, but I realized that I’d rather have the degree, and the experience and the skills that come with the degree, and pay back the loan later on,” Reash said.
To attend DePaul, Reash borrows $4,500 each quarter in subsidized federal loans, which costs him a total of roughly $36,000 excluding the interest he will incur.
“Repayment of loans seems like a very scary thing, but if you have a sound financial sense and you know how to make a rudimentary budget, you can pay them off,” Reash said. He suggests universities enroll undergraduates in a mandatory finance course to explain budgeting, debt, and financial terms so students are not bombarded when it is time to face loans after graduation
“It would be a step in the right direction. The future of America are these 18-year-olds,” Reash said. “We need to invest in them as much as they are investing in themselves.”
Lillian Bales starts law school in the fall and will graduate in 2016. She decided to attend American University’s Washington College of Law supplemented through federal loans despite the debt she accrued at an undergraduate university.
“I chose my undergraduate school for its reputation of supporting graduates. While it was much more expensive ($43,000 yearly tuition /$72,000 yearly total cost), it provided better opportunities for outgoing students with regard to job offers and internships,” she said.
Robert Weinerman, Senior Director of College Finance for College Coach, said the federal government should invest in post-graduate programs.
“When students graduate, there’s not a lot of information about how to deal with their debt,” he said. “Some kind of post-graduation financial aid programs on loan repayment would go a long way to fixing some of the problems that they run into.”
PLANNING WITH THE END IN MIND
For those considering borrowing to pay for college, experts urge students and families to sit down and create a budget to see what they can afford without borrowing.
“Most people go into college thinking we’ll make it happen,” Weinerman said. “I encourage them to do their homework.”
If students are confused about deciding between borrowing private or federal funds, McClean recommends starting by looking beyond interest rates, since both options now have rates aligned with the market. “It’s really easy upfront for students and parents to look at the interest rate as the main feature of the loan,” she said.
According to McClean, federal loans often offer better repayment benefits, such as a six-month grace period for graduates, income-based repayment options, and discharge provisions. “All those things are not inherent in private loans,” she said.
The status of college affordability is ultimately in the hands of citizens and if they want to see the cost of college decrease, lawmakers must be called upon, experts said.
“So many jobs today and in the future require a college education,” Egan said. “If students contact their Congress members and tell their stories, it can have a huge impact when lawmakers sit down and actually debate the issue. They can put a face and a name to the policy.”