Obama's Budget Would Double the Interest Rate on Student Loans--After the Election

May 14, 2012 - 4:12 PM

Obama

President Barack Obama delivers the commence address at Barnard College, Monday, May 14, 2012, in New York. (AP Photo/Pablo Martinez Monsivais)

(CNSNews.com) – President Obama's fiscal 2013 budget proposal would double the interest rate on federally backed student loans from 3.4 percent to 6.8 percent--eight months after the November presidential election.

The White House fiscal year 2013 plan calls for maintaining the current 3.4 percent interest rate for federally guaranteed student loans, but only through July 1, 2013, at which point it would automatically increase to 6.8 percent. Neither the president’s plan nor the Democrats’ legislation would extend the low rate beyond another year.

The president’s budget calls for “Suspending an Increase in Student Loan Interest Rates.” (See page 97).  

“Under current law, interest rates on subsidized Stafford loans are slated to rise this summer [July 1] from 3.4 percent to 6.8 percent,” reads the Obama budget. “At a time when the economy is still recovering and market interest rates remain low, it makes no sense to double rates on student loans. The Budget suspends the scheduled increase for the coming year, so that rates will remain at 3.4 percent.”

The Senate bill favored by Democrats states, “in the matter preceding clause (i), by striking ‘and before July 1, 2012,’ and inserting `and before July 1, 2013.’”

The Republican alternative legislation would also extend the low rate for only another year.

Subsidized Stafford Loans are only available to students who demonstrate financial need. Starting in July, these loans will only be available to undergraduate students. The federal government does not require the borrower to pay the interest that accrues while the borrower is in school.

During the 2006-2007 and 2007-2008 academic years, Stafford Loans to undergraduate students were offered with a fixed rate of 6.8 percent. The College Cost Reduction and Access Act of 2007 set lower interest rates for students in the 2008-2009 through 2011-2012 academic years. The interest rate for loans during those years gradually declined to 3.4 percent.  An interest rate reduction would benefit about 7.4 million students, according to the Congressional Research Service (CRS).

Prior to those changes, interest rates had been as high as 8.02 percent in the 2007-2008 academic year and as low as 2.36 percent in the 2011-2012 academic year, according to the CRS report.

“The minimum monthly payment according to a standard repayment plan is $50, which may result in a loan being repaid in less than 10 years,” the May 4 CRS report said. “However, most borrowers obtain more than one loan resulting in the combined repayment amount being more than $50 and sufficient to result in a full 10-year amortization. For purposes of comparison, these figures are all based on a full 10-year amortization.”

Obama has focused heavily on keeping student loan interest rates down to 3.4 percent in some of his recent speeches on college campuses. The youth vote helped boost his victory in 2008, where he beat John McCain by 34 percent among voters under 30, according to the Associated Press. However, last month a Harvard poll found that this year Obama is leading his Republican opponent Mitt Romney by 12 points (41%-29%) among voters aged 18 to 24.