Congress Approves Hike in Federal Loan Interest Rates
Congress approves hike in federal loan interest rates
February 4, 2006 11:19 AM
Congress narrowly approved a bill on Feb. 1 that will cut $11.9 billion from the federal student loan program but some argue that this doesn’t necessarily spell disaster for students.
The budget cut was approved 216 to 214 with 13 Republicans, one independent and 200 Democrats voting against it. Starting July 1 the interest rate for both subsidized (government pays interest until student graduates), and unsubsidized (student pays interest) loans will rise from the current 4.7 percent to 6.8 percent.
Federal loans for parents, or PLUS loans, will rise from the current 6.1 percent to 8.5 percent. The student-loan cuts are part of a $40 billion deficit-reduction package that will slice federal funding from education and health plans.
The large jump in interest rates may seem like a lot, but these new rates are fixed for the life of the loan, while under the old program interest rates were adjusted every year.
“The interest rate increase is not as bad as it seems,” said Conwey Casillas, the director of public affairs for Sallie Mae, the nation’s largest paying-for-college company. “Even though a jump of almost 2 percent looks like a lot of money, interest rates could have possibly gone up that much and even more under the old way of changing them every year. This way you know the rate will not change unless Congress passes another bill, which probably won’t happen for another five or six years.”
However, according to political science professor Robert Smith, higher interest rates are likely to continue to have a negative effect on low and middle-income students.
“A slight increase in interest rates can still turn into quite a bit of money,” Smith said. “This might make it more difficult for some kids to go to school.”
Zoë Leonard, a 21-year-old film major, also sees how this interest hike will affect the lower-income students.
“It seems this is all part of the process of Bush keeping people ignorant,” Leonard said. “Higher interest rates decrease the likelihood of people getting educated and it just keeps the class system in place.”
There are a few things students can do before the increase is in effect to avoid paying more interest. According to Casillas, the best thing for graduating students to do is consolidate their loans before June 30 in order to fix a lower interest rate for the life of the loan.
Students can also get a private loan from a bank, but banks will generally not lend very much money unless the student owns a house or property, or something that the bank can secure the loan to. For instance, Wells Fargo will not give more than $8,500 for an unsecured loan.
According to SF State’s Director of Financial Aid, Barbara Hubler, college financial advisers do not generally recommend private student loans because banks give students interest rates that will be higher than even the latest government rate.
“The best option for students is still the federal loan program,” Hubler said. “We don’t encourage students to get private loans but sometimes it is the only way to get through school.”
Sallie Mae offers students a few monetary incentives if they choose to consolidate their loans.
According to Dawn Siddens, a Sallie Mae loan counselor, there is no fee to consolidate loans with Sallie Mae. They also offer a 0.25 percent lower interest rate if the student pays through a direct debit from their bank account. After making 36 payments on time, the student’s interest rate will go down 1 percent.
In addition to financial incentives, consolidation of loans also will help a student’s credit score. When the federal loans are transferred to a private lender the government loan will be seen as paid off on a credit report, even though the student simply opened up a new loan, said Siddens.
Students with loans should speak with a financial adviser to get advice on how to manage the debt as soon as possible. Applications for loan consolidation with any company need to be received by June 30 at the very latest to be eligible for the old interest rates.
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