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The End of Subsidized Loans?

July 13, 2011

WASHINGTON -- As talks continue and the deadline approaches on increasing the federal debt limit, the federal government's subsidy for undergraduate student loans is now on the table.

The negotiations between the White House and Congressional Republicans, aimed at reaching an agreement before the U.S. hits its borrowing limit on Aug. 2 and risks default, have looked at entitlements and other federal programs as possible sources of savings. During talks Monday, Rep. Eric Cantor, the Republican majority leader, reportedly proposed making students responsible for paying the interest their loans accrue while they’re enrolled in college, a change that would save the government $40 billion over 10 years.

The proposal would end the subsidized Stafford loan program, in which the federal government pays the interest that accrues while students are enrolled in school. It’s an idea that has gained some traction: it was previously embraced by the bipartisan federal debt commission, the College Board’s Rethinking Student Aid panel, and even (in a limited way) by President Obama, who, in his 2012 budget proposal, called for ending subsidized interest payments on graduate student loans and need-based Perkins loans. But Obama and the College Board panel recommended using the savings from the subsidies to expand financial aid for needy students, rather than to pay down the deficit as Cantor's plan and the debt commission's would.

Whether the proposal, which was first reported Tuesday by the news website The Daily Beast, will make it into the final compromise is still unclear; President Obama reportedly opposed it, and there’s no evidence that a consensus will emerge any time soon. But the possibility of ending the subsidized Stafford loan program drew immediate fire from student advocates, who argued that it would transfer debt from the federal government to needy students.

“Many students will face thousands more dollars in accrued student loan interest by the time they graduate,” said Rich Williams, the higher education advocate for the U.S. Public Interest Research Group. “They’re already financially vulnerable, which is why they’re getting that money.”

Subsidized loans, which are awarded based on financial need, make up just under half of all Stafford loans, which are the federal government’s largest pool of student loans. Students who borrow the maximum amount of subsidized loans, $23,000, and take six years to graduate would owe $5,000 more by graduation and $9,000 after a 20-year repayment period, said Pauline Abernathy, vice president of the Institute for College Access and Success.

“We certainly hope this will not be considered,” Abernathy said. “It merely is shifting the debt from the federal government to the next generation of Americans.”

The elimination of the subsidy, combined with the fact that the interest rate on federal student loans is slated to double next year -- to 6.8 percent -- would mean that low-income college students would graduate with far more debt, she said.

As Congress and the White House have put forward plans that slash spending in recent months, student aid programs have come in for their share of cuts, and there is widespread agreement, even among the programs’ supporters, that some kind of changes will be necessary. The Pell Grant Program, which has become increasingly expensive, is perceived to be vulnerable not only in the talks about long-term deficits, but in more immediate deliberations over the next federal budget, for 2012.

The United States Student Association, the largest student advocacy group, called on Democratic leaders to reject proposed cuts to Pell Grants or federal student loans. “We demand assurances from members of Congress and the President that these draconian cuts will not be agreed to,” the group said in a statement. “Any agreement that cuts the $5,550 Pell Grant maximum award level or makes harmful changes to its eligibility requirement will hurt low-income students and college completion, at a time when our economy needs more college graduates.”

But other advocates for student aid called for perspective on the proposed cuts. Losing the interest subsidy is far from ideal, and could harm student borrowers, they said. But other options, such as a Pell Grant cut, would be far worse.

“Certainly it would be a blow to students,” said Justin Draeger, president of the National Association of Student Financial Aid Administrators. “But it doesn’t decrease the total amount of aid available to them up front to pay for college.” A cut that could change whether students are able to pay for school at all, such as lowering the maximum Pell Grant, would have a more dramatic effect, he said.

While the total amount added to the loan might look daunting, he added, it could be more manageable when viewed in terms of monthly payments -- perhaps $30 to $50 more each month. “It’s a benefit loss, and potentially a costly one for students,” Draeger said. “But it’s taking away future earnings over the life of the loan as opposed to decreasing dollars available up front.”

 

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