Interest rate policy change could increase student debt

By Matt Daray

A new student loan law passed by Congress may hurt the very cause it was created to support – student pocketbooks.

Congress capped the student loan interest rate at 3.9 percent for undergraduates this school year. Without the cap, rates could have jumped to 6.8 percent. But, at the same time, Congress decided to align rates to the market. That could allow the rates to climb to 8.25 percent in the future.

While the law was designed to help students, university officials say it may hurt students in the long run.

Advertisement

The new law guarantees the government will receive profits over the next several years. Profits are expected to generate $175 billion for the government over the next decade and increase profit levels starting in 2016, according to an August Congressional Budget Office report.

University President Glenn Poshard said the rate cap renders mixed emotions because the bill will make college more expensive in the short term, and it seems to benefit the government more than students in the long-term.

“It may end up that the government becomes the largest recipient of profits off these loans as opposed to students, and I don’t like that,” he said.

Poshard said he is grateful the rates are lower than their original projections, but they are still higher this year than last. He said it would impact students even more than it already has.

Enrollment rates might be affected by an increase in interest rates, as some families might not be able to afford an education if student loans lead to more debt, he said, especially during a recession. He said the combination of national and state financial woes on top of the burden of some families dealing with medium–to-low income can make it almost impossible for some individuals to attend college.

“I would have preferred that (the government) left the rates at 3.4 percent and capped that, but they didn’t,” he said. “It’s certainly going to cost students more than it has in the past several years and, therefore, is going to cost their families more.”

Terri Harfst, director of the Financial Aid Office, said the cap would likely not affect enrollment because students who want an education and cannot pay for it themselves will ask for loans despite interest rates.

Advertisement

“Regardless of what this cap is now, students still need to take out student loans if they have need,” she said. “If they don’t have a family supporting them, assisting them through expenses, student loans are vital to the financial aid package.”

Harfst said while this year’s established interest rate is better than July’s, it has had no effect on the number of loans students can apply for. One reason, she said, is because students are more concerned with receiving an education than the long-term costs of repaying loans.

“This cap hasn’t increased or decreased anything because I really don’t think students are thinking about (the costs) at that point,” she said. “They’re just thinking, ‘I need this money.’”

Increasing students’ loan-borrowing limits would have more impact on the number of loans available to the student, Harfst said, but universities are hesitant because their goal is to make sure students graduate with the lowest amount of debt possible. She said the challenge of student loans is managing affordability, paying for college and keeping students out of debt.

Despite the fiscal challenge, Harfst said she doesn’t think the capped rates will affect the balancing act.

The possibility of paying more interest on loans has some students worried about how much debt they will incur along with their peers.

Noah Coleman, a sophomore from Du Quoin studying English, said his friend is already having problems with his loans and the possible increase would make it worse.

“My buddy is struggling enough already as it is with his loans,” he said. “If they’re raising it, then that’s going to suck for him a lot.”

Mykkia Henderson, a junior from East St. Louis studying psychology, said the rate cap will help, but is irrelevant compared to how much she will have to pay back anyway.

“It’ll help me to a certain extent, but at the same time, we still are going to have to be paying student loans back probably for the next 30-40 years of our lives after we graduate,” she said.

Advertisement