2002 deal would raise cost of student loans


Published: Sunday, January 22, 2006 at 6:01 a.m.
Last Modified: Sunday, January 22, 2006 at 12:00 a.m.

Facts

Lowdown on loans

  • WHAT'S NEW: A budget bill before Congress prompts accusations that Republicans are cutting billions from financial aid and loans to college students, but who loses and where to lay blame are not so clear.
  • THE STORY SO FAR: Students and their allies negotiated fixed loan rates four years ago that take effect in July. Critics of the budget bill are angry that Congress isn't changing the deal now that interest rates are low.
  • WHAT'S NEXT: Education and student groups hope to defeat the bill.

  • WASHINGTON - College students are always hunting for a deal.
    So it was a high-five moment when student groups negotiated with lenders and members of Congress to fix interest on student loans at 6.8 percent beginning this July. That was four years ago, when variable interest rates were around 8 percent.
    They figured millions of student borrowers would save big bucks. But after that legislation was signed in 2002, interest rates plunged. Now students are looking at a 2-point hike this summer on new loans compared to the current 4.7 percent rate for borrowers still in school.
    "People are going to be shocked when they see how much they have to pay," said Gabe Pendas, a senior at Florida State University and president of the student Senate.
    Critics like Pendas are bashing congressional Republicans for refusing to change the 2002 law before loans become more expensive. But this is also a story about buyer's remorse, and how it has muddied a hot political debate.
    Pendas and other campus leaders are working with the U.S. Student Association, which helped negotiate the fixed rate, to plan protests in hopes of derailing a big deficit-cutting bill headed for a House vote in February. Vice President Cheney had to cast a tie-breaking vote last month for the bill to pass the Senate after Democrats hammered Republicans on a slate of issues, including student loans and Medicaid.
    Parents and students have heard a lot lately about how Congress is on the verge of cutting $12.7 billion from student loans and aid to reduce the deficit. The bill is meant to reduce the deficit by $40 billion over five years.
    Karen Fooks, director of student financial affairs at the University of Florida, said the budget bill is a mixed bag for students. The debate, she said, involves some fuzzy math.
    "Certainly they're playing politics with it," she said.
    Some observers say students could still come out winners if market-driven interest rates, which have risen in recent months, hit the 6.8 percent level or higher.
    Who pays? Senate Democrats spotlighted the student loan issue last month in debate on the budget bill.
    "Congress missed the opportunity to say students, not banks, should be given a break," Sen. Edward Kennedy of Massachusetts, ranking Democrat on the education committee, said on the chamber floor.
    It's true that $12.7 billion in the budget bill would be funneled from financial aid ledgers over the next five years to the Treasury. Most of that money, however, would come from a change in how the federally backed loans to students are administered, people on both sides agree, not really from cutting student loans and grants.
    Students will pay 6.8 percent on new loans beginning July 1 under the deal negotiated four years ago, not because of this bill.
    Rather than allowing banks to collect all of the interest, the budget bill would require lenders to rebate the difference between 6.8 percent and a variable rate that the federal government promises them for administering the loans. Republicans argue the banks would get a windfall without that change.
    The U.S. Student Association wants college students to call House members and complain the bill "will force students and parents to pay thousands of dollars in additional interest on their student loans."
    About 7.3 million students now hold federally backed loans for college. A much smaller number of parents, currently 780,000, borrow under federal programs for their children.
    Parents will pay more on new loans as well, although the budget bill isn't as damaging as critics suggest. Under the same 2002 law that fixed student rates, parent rates also were scheduled to be fixed at 7.9 percent this July. The budget bill increases that rate to 8.5 percent.
    Critics say the budget bill takes advantage of college dreams. "The goal of this entire effort has been to use students and parents as a revenue raiser," said Luke Swarthout, spokesman for the U.S. Public Interest Research Group.
    Republicans say the bill would help students more than it would hurt them.
    "This whole notion that's being bandied about that we are actually cutting aid to students we reject categorically," said Craig Orfield, spokesman for the chairman of the Senate Health Education, Labor and Pensions Committee, Sen. Mike Enzi of Wyoming.
    A really good deal The bill includes clearly positive moves for students. For example, Stafford Loan limits for freshmen and sophomores would go from $3,500 to $4,500 and graduate loan limits also would rise. The bill creates two new grant programs for low-income students.
    Other changes, to origination fees and financing for schools making direct loans, would have mixed effects.
    Education groups say the money being taken from lenders should be put into loan and grant programs. They want the 6.8 and 8.5 percent levels to become caps rather than fixed rates.
    "What people are complaining about is they didn't fix current law," said Chris Simmons, associate director for government relations at the American Council on Education, which is fighting the bill on behalf of 12 college and financial aid organizations.
    Harrison Wadsworth, a lobbyist for the Consumer Bankers Association, said lenders agree with education groups on many key points. Wadsworth said the budget bill has positives and negatives for students and lenders, who have stayed relatively quiet to avoid provoking lawmakers in a budget-cutting mood.
    "It's a question of being concerned about it getting worse," he said.
    Jasmine Harris, legislative director for the U.S. Student Association, said the government doesn't do American education any good by sticking to the interest rates her group and others originally brokered.
    She said "6.8 looked like a really good deal for students . . . Then we saw the scenario where interest rates could go lower than anyone ever anticipated."

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