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Deal reached to extend student loan interest rate

Senate Reaches Deal on Loans
June 27, 2012

WASHINGTON -- With less than a week remaining until the interest rate on federally subsidized student loans is set to double, Senate leaders said Tuesday afternoon that they had agreed on a compromise to keep the rate at 3.4 percent for another year.

The $6 billion extension would be paid for in part by changing eligibility rules for subsidized loans, which are awarded based on financial need and on which the government pays the interest while borrowers are enrolled in college. Once students had been pursuing a bachelor's degree for more than six years, or an associate degree for more than three, they would no longer be eligible to take out additional subsidized loans -- a change that would save about $1.2 billion. The remainder of the cost would reportedly be covered by changes to pension laws, and the student loan measure might be combined with a federal transportation bill that also has a July 1 deadline for renewal.

The proposed change to eligibility rules might disappoint some student aid advocates. Senate Democrats had hoped to pay for the interest rate extension without any financial damage to other financial aid programs. The limitation -- that subsidized loan eligibility be limited to 150 percent of a program’s time to degree -- was originally proposed by President Obama in his budget request for fiscal year 2013, and adopted by Senate Democrats in an appropriations bill voted on in committee last week.

But in the administration and Senate budgets, the $1.2 billion savings from limiting subsidized loan eligibility would have been used to help fill a looming shortfall in Pell Grants in 2014. Redirecting those savings to keeping the interest rate low for another year means the shortfall is even larger than it otherwise would have been.

That means the next Congress will confront not only another scheduled increase in the interest rate -- which would now double in 2014 -- but a $6 billion Pell Grant shortfall.

The scheduled interest rate increase for subsidized student loans, which would affect about 7 million borrowers taking out new loans after July 1, was long foreseen. In the College Cost Reduction and Access Act of 2007, Congress set the rate to gradually decrease, bottoming out this year at 3.4 percent, before doubling to 6.8 percent, the 2007 rate, on Sunday.

The change would have added about $1,000 to the cost of the average student loan. Obama seized on the issue as his re-election campaign began, giving speeches on college campuses urging students to demand that Congress act to prevent the increase. While Congressional Republicans initially resisted, Mitt Romney, the presumed Republican nominee, soon echoed Obama’s call. For more than a month, the dispute centered not around whether the interest rate would be extended, but on how Congress would pay for it.

It’s unclear how many students will be affected by the change in eligibility rules. Students already have a lifetime borrowing limit of $23,000 in subsidized federal loans, which full-time students studying for a bachelor’s degree would already reach in less than six years if they were borrowing the maximum amount each year.

Students in two-year programs would be more likely to hit the eligibility limit before the lifetime cap, but at least at community colleges, those students are also less likely to borrow than are their counterparts at four-year colleges. About 20 percent of community college students borrow to attend college.

Questions also remain about how the limit would be applied to part-time students, who routinely take longer than full-time students to get degrees.

A vote on the student loan measure -- which might be attached either to a new bill funding the Federal Highway Administration or to an extension of the transportation bill currently in effect, although it might stand on its own -- is expected by the end of the week, when Congress leaves for the July 4 recess.

 

 

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