Increasing Student Loan Rates Mired in Partisan Controversy

Aimee Stern

There are currently 7.4 million undergraduate students relying on loans subsidized by the federal government to help pay for college. Presidential hopefuls Mitt Romney and Barack Obama are currently debating the issue of raising interest rates from 3.4 percent to 6.8 percent, but ultimately members of Congress will decide.

Although both candidates and members of Congress hope to keep the interest rates from doubling, Obama is considering vetoing a bill, drafted by Republicans in Congress, which would draw funding from public health funds. Democrats in Congress have proposed that the money needed to keep interest rates low should come from increasing taxes on the wealthy.
Currently, about half of the students enrolled at Oberlin receive to help pay for their education. Because Oberlin meets 100 percent of students’ demonstrated need, and all financial aid packages contain loans — regardless of whether the students decide to accept them — the outcome of this policy will have a great impact on the entire College.

Rob Reddy, director of financial aid at Oberlin, said, “Students will be paying more to repay their loans. For students with smaller balances, there will only be a minor impact, but with students with higher balances, it will be a burden because they’ll have higher payments and have to pay back more in the long run.”

Reddy explained that turbulent interest rates have made it difficult for students to evaluate their financial burden.

“The challenge here is that there has to be some level of interest paid so that the government can afford these loans that have to be serviced and managed. I don’t know that I’m qualified to say what a fair rate is, but I think that the interest rates have been all over the place, which has been confusing to students,” Reddy said.

Ultimately, Reddy said, this issue might leave students to carry the financial burden for the adverse economic circumstances the country and the government are still facing.

“The government should set a reasonable rate and try to keep it the same throughout. The interest rate on student loans is only one piece of a very large issue —there is not enough federal money. As an advocate for students, I just don’t want the budget problems taken out on [the students].”

College sophomore Zach Crowell, an economics major and member of the Oberlin College Democrats, said that the issue boils down to the source of funding.

“Both Republicans and Democrats oppose higher interest rates, but once again it’s a dispute about funding the program. It’s really frustrating to see how this complete refusal to compromise is once again threatening not only my own livelihood but also the health of the larger economy.”

College junior Nick Miller, president of the OC Republicans and Libertarians, spoke out against the subsidizing of college education in general.

“Most of the reason for the increased costs of college is due directly to the fact that the federal government subsidizes the cost by offering cheap loans and grants. The federal government should not subsidize college education. Therefore, rate increase or not, the government will not be helping make college more affordable if it continues to subsidize education. Furthermore, the federal government would not have the power to subsidize college, or any other industry for that matter, under a traditional, original understanding of the Commerce Clause.”

Beth Tallman, a financial consultant who teaches the class Fundamentals in Finance, explained that this change in interest rate would only affect new borrowings in the upcoming academic year, 2012–2013, so students graduating this year would be unaffected. She also emphasized the unfortunate outcome of a seemingly simple debate.

“What should be a straightforward issue is mired in the partisan politics that have paralyzed Washington as of late. The estimated cost of maintaining this lower interest rate is in the single digit billions of dollars. Each side proposes paying for this cost by means the other side will find insupportable.”

Putting the politics aside, Tallman provided a monetary example of how students would be affected by the increase in rate. She provided the following scenario: a student borrows the maximum amount of $19,000 under the subsidized program and graduates in four years.

“I assumed the standard repayment option, [monthly for 10 years or 120 payments]. What this [increase in interest rate] means to students going forward is at most an $1,100 increase in cost over the [10 year] life of the loan and a difference in monthly payments of less than $10. You must judge for yourself if this has a significant impact.”
However, given the possibility of an increase in rate, Tallman still believes that federal loans are the best way to borrow money to pay for education.

She said, “Regardless of the outcome of this debate, federal loans, whether subsidized or unsubsidized, are still the safest way to go if you must borrow to pay for school. One reason is that the interest rate is fixed, [while most private loans have variable rates]. More important than the fixed rate is the flexibility the government offers in repayment options, including graduate payments and income-based, extended repayments.”

Reddy said he is hopeful for a fair resolution to this issue, which would include reasonable interest rates for students who take out loans from the government.

“I would not be surprised if Democrats and Republicans found some sort of middle ground because no one is happy with the prospect of increasing interest rates and placing a further burden on students. A 6.8 percent interest rate is still not so bad for students and although no one wants this increase, without the Stafford program, student loans would come from the private bank sector, and rates would be between 10 and 20 percent. I think it’s really important for students and student groups to do their part and lobby. We appreciate the program and are grateful to have it, but we want to make sure the manageable interest rates continue.”