Student loan deal a mixed blessing as rates to rise in future

An agreement Congress passed last month has kept interest rates on subsidized student loans from doubling now, but the deal is projected to raise interest rates in the future and generate higher profits for the federal government.

The interest rate for 11 million undergraduate students who rely on federal subsidized Stafford Loans doubled to 6.8 percent on July 1 when the College Cost Reduction and Access Act and a one-year extension of that act expired. In a rare bipartisan move, Congress lowered the interest rate to 3.86 percent for both subsidized and unsubsidized undergraduate Stafford Loans through the Student Loan Certainty Act.

The average indebtedness of a University of Connecticut student who borrowed from federal loan programs is $23,822, below the national average, according to the school.

Mitch DeMazza of Clinton graduated from UConn in May with a degree in political science and Spanish. DeMazza said he owes about $50,000 and he considers himself lucky since some of his friends who went to colleges in other states are further in debt.

Federal student loan interest rates are now pegged to the rate on the 10-year Treasury note, plus a set amount that varies depending on the type of the loan. The rates are fixed for the life of the loan but the rates for new loans will change annually based on the market.

Some critics of the compromise deal contend it would have been better if Congress had left the rate at a fixed 6.8 percent.

With the new formula, Stafford Loan rates are projected to exceed 6.8 percent by 2015 for graduate students and by 2017 for undergraduates, according to the Institute for College Access & Success, a nonprofit that works to make higher education more affordable and accessible.

The rate for federal loans for graduate students and parents of undergraduates, the PLUS loans, are projected to be higher than their current rate of 7.9 percent by 2016.

'Short-term thinking'

Mitchell College President Mary Ellen Jukoski characterized the passage of the act as "short-term thinking." Some students may not apply for these federal loans in the future because of the high cost and either not attend college or only study part-time, she added.

"The larger concern that I have is an educated citizenry for this country," she said Monday. "Because if we don't provide opportunities for students to get an education and also provide funding for them to get an education, we as a nation are going to lag behind other nations out there and it is going to affect all facets of the quality of life here in America."

Over the next 10 years the deal is expected to cost borrowers an additional $715 million, according to the Congressional Budget Office. This is in addition to about $184 billion in profits that the interest payments will already generate for the federal government, according to TICAS. A statement by the nonprofit said the act was more "a missed opportunity" to make college more affordable than "a cause for celebration."

"Every time we run the numbers we see that students are worse off in a short period of time than they would have been if Congress had done nothing at all," said Jessica Thompson, a senior policy analyst at TICAS. "That was an outcome we couldn't support."

U.S. Rep. Joe Courtney, D-2nd District, stood behind President Barack Obama when he signed the act Aug. 9. Courtney said the bill's critics are ignoring legislative history since this program has been revisited almost on a yearly basis.

"We were not passing the Ten Commandments," he said. "… For someone to say it is better that these kids and parents should suffer now because Congress couldn't guarantee what happens to students five years from now makes no sense. That is why the bill, at the end of the day, passed overwhelmingly."

Courtney said he expects the rates to be reconsidered after the Higher Education Act expires this year. Subsidized loans are available to undergraduate students with financial need. Unsubsidized loans are available to undergraduate and graduate students and the students do not need to demonstrate financial need.

The Student Loan Certainty Act does limit how high rates can rise, at a cap of 8.25 percent for undergraduate students, 9.5 percent for graduate students and 10.5 percent for PLUS loans.

It also directs the Government Accountability Office to determine the cost to the federal government of lending to students.

Courtney said the rates need to be adjusted to make sure students are not underwriting the country's deficit.

Two-thirds of college seniors who graduated in 2011 had student loan debt, averaging $26,600 each, according to data from TICAS. Connecticut is a "high-debt state," with borrowers averaging $28,783 in debt, the nonprofit said.

UConn set aside $85 million this year in institutional need and merit aid for students, doubling what was provided in 2008.

The amount of outstanding student loan debt now stands at about $1.1 trillion, which is second only to mortgages in household debt, according to the Consumer Financial Protection Bureau. Between 2007 and 2012, the number of students who were borrowing money increased by 31 percent, the bureau said in a May report.

ConnPIRG, which represents students at colleges across the state, has worked to spotlight the impact student loan debt has on society.

Abe Scarr, director of the consumer group, said graduates are delaying home purchases and business ventures while others are choosing high-paying jobs to repay their loans instead of going into careers in public service. Others are forgoing a higher education, Scarr added.

ConnPIRG did not support the final agreement on the student loan rates since rates will rise so the government can pay down the deficit, he said.

'Not a good deal'

"We think that is the wrong way to be making student loan policy," Scarr said. "It's not a good deal for the students in Connecticut or the country."

According to the national organization, U.S. PIRG, current undergraduate and graduate students will save $3,600 and PLUS loan borrowers will save $2,100 now through the lower rates. But in 2018, undergraduates will be paying $900 more, graduates will be paying $7,700 more and PLUS loan borrowers will be paying $2,750 more, according to the data.

Marcus Harris, an undergraduate at Central Connecticut State University, said he expects to be $25,000 to $30,000 in debt, or more, when he graduates. Harris, 26, of Hartford, said he wants to buy a big house in a nice neighborhood, get married and have children. His debt, he said, could have a "huge impact" on those plans.

"Maybe I'll have to settle for something less, maybe a lesser house or a condominium, until I can pay off those loans and get out of that debt," he said. "It could be a factor in determining when we have kids."

Harris said he feels as if the politicians in Washington, D.C. are "not looking out for us."

j.mcdermott@theday.com

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