Student loan interest rates could increase next year if President Barack Obama’s 2014 budget proposal is reconciled with Congress’s budgets.
The White House budget, released Wednesday, proposes reforming subsidized Stafford loan interest rates by tying the rates to the market rate. Under this proposal, rates for the life of the loan would be determined by the U.S. Treasury 10-year borrowing rate, plus a variable percentage tied to income levels, for the year the loan is issued.
Subsidized Stafford loans, part of many students’ financial aid packages, have a fixed interest rate of 3.4 percent. Barring action by Congress, the rate will double to 6.8 percent on July 1.
Fifty-nine percent of the MU class of 2011 graduated with debt, according to the Institute for College Access & Success’s project on student debt. Eighty-five percent of the debt was to the federal government. The average student owed more than $23,000.
According to the Congressional Budget Office, student loans cost the federal government $110 billion annually. More than a quarter of the loans are subsidized.
In an effort to ease student debt, Obama also proposed capping loan repayment at no more than 10 percent of the holder’s income. Income-based repayment plans are currently only available to loan holders who meet a minimum debt-to-income ratio.
Lauren Asher, president of the Institute for College Access & Success, called the proposal a “mixed bag” for students.
“It is imperative that student loans remain affordable so that students of all backgrounds can get to and through school despite rising college costs,” she said in a statement.
Earlier this year, the Democrat-led Senate and the Republican-led House of Representatives each passed budgets of their own. The Senate budget proposed passing legislation to keep loan interest rates affordable, but did not provide specifics or allocate funds in the budget to do so. The House budget would allow the loan rate to rise to 6.8 percent.
Asher said none of the budget proposals offered a perfect solution.
“Comprehensive reform is needed to keep federal loans affordable over time, streamline the program and better target benefits, but the president’s proposal misses these marks and the House-passed FY14 Budget Resolution goes much further in the wrong direction,” Asher said.
Under the Obama and Senate budgets, Pell grants, which do not need to be repaid and are available to low-income students, would be spared from cuts. The House budget would freeze the maximum Pell grant award at $5,645 for the next decade and reduce Pell eligibility.
Twenty-one percent of MU students received Pell grants during the 2010-2011 school year. Approximately 9 million students nationwide receive Pell grants, making the grants the nation’s largest financial aid program.
