As the country prepares for the Memorial Day holiday, many student loan holders have their eyes on a July 1st deadline that, without Congressional action, will allow interest rates to jump from 3.4 to 6.8 percent for millions of subsidized Stafford loans. Though neither Republicans or Democrats believe that rates should be allowed to double in July, they remain divided over a solution to the problem. And so was born the student loan debate in Washington.
While interest rates on Stafford loans are currently set by the government, a recently-introduced, Republican-sponsored piece of legislation would use a market-based system to calculate federal student loan interest rates. Under this plan, both subsidized and unsubsidized Stafford loan rates would be calculated annually and tied to the 10-year Treasury notes, plus 2.5 percentage points.
While such a change may sound small, many believe such a modification could introduce a level of volatility in the system that would have far reaching implications for students who rely on federal loans to finance part or all of their domestic and international higher education goals. According to Congressional Budget Office projections, for example, under the proposal the interest rate on Stafford loans would be 5 percent in 2014. Though this is significantly lower than the disconcerting 6.8 percent that will result from legislative inaction, under the GOP plan the rate would climb to 7.7 percent in 2023.
As a result, the Obama Administration has vowed to veto the proposal even before it has appeared before the Democratic-led Senate. The Democrats, for their part, are pursuing an alternative plan to freeze rates at the current 3.4 percent until 2015 but face opposition from Republicans who argue that a two-year extension of the current rate would cost taxpayers about $9 billion.
The resulting gridlock may have a much more immediate effect on students (including those study abroad students utilizing Stafford Loans): if, through inaction, rates are allowed to double on July 1, the non-partisan Congressional Research Service estimates that a student who borrows the maximum amount of Stafford loans over five years would pay would pay almost $5,000 more ($12,598 instead of $7,965) over the life of the loan.
