Beaches may lure and gardens may flourish this summer, but it’s not going to be a very good season for students with college loan debt, or for those who want to borrow money to enter graduate programs.
That’s because interest on the subsidized Stafford loan—an extremely common type of loan—will double on July 1 if Congress doesn’t extend a measure passed in 2007. That year—just before the recession—it voted to cut the subsidized Stafford rate with progressive reductions each year, from 6.8 percent in 2007-08 to 3.4 percent in 2011-12. For 2012-2013, however, the rate pops back to 6.8 percent.
For students who borrowed for graduate programs last year and may be carrying $50,000 or more worth of debt, a doubling of interest rates on part or all of that debt will make a big difference, especially at a time when many can’t find work even in professional fields such as law.
Some Congresspeople say the government stands to lose $2 billion a year if the interest rate doesn’t revert. But two Congressmen from New England, Rep. Joe Courtney (D-Conn.) and Sen. Jack Reed (D-R.I.), have introduced legislation that would keep the interest at 3.4 percent.
The other dark cloud over the summer for people trying to enter graduate programs is that subsidized Stafford loans will no longer be available to them. The subsidized loans didn’t begin to accrue interest until after the student’s program was finished.
Undergrads can still get the subsidized loans, but now graduate students will only be eligible for the unsubsidized Staffords, which begin accruing while the student is still in school.
The reversion of interest rates to the higher figure and the elimination of subsidized loans for graduate students has to be seen against the backdrop of soaring tuition costs; the rise in tution stemmed in part from the availability of loan money. That cycle has caught students in a bubble that has been profitable for lenders and colleges, but so costly for students that more and more are defaulting. Default, however, doesn’t obviate responsibility for the loan; it only lays the borrower open to fees and penalties that can double, triple, or even quadruple the original debt.
Student debt cannot be discharged in bankruptcy, and in some cases the penalty for default is revocation of a professional license, which removes the very instrument the young person had planned to use to pay the debt.
