WASHINGTON—Students will be able to borrow more money for college but they'll pay it back at higher interest rates if the House of Representatives passes the Deficit Reduction Act on Wednesday.
The legislation, which the Senate has passed, would take a $12.7 billion bite out of federal student-loan financing, the biggest cut in the program's history. The Treasury would recover the money through higher interest rates, cuts in federal subsidies to private lenders and mandatory borrower's fees.
"This bill roots out excess lender subsidies in the student loan program while increasing student access to loans. It's a win-win for students and taxpayers," said Don Seymour, the press secretary for Rep. John Boehner, R-Ohio, chairman of the House Education and Workforce Committee.
The savings on student loans amount to about a third of the $40 billion package of revenue-saving benefit reductions, including cuts to Medicare and Medicaid, backed by the Bush administration. The vote may be close if moderate House Republicans balk at cutting popular programs so much. According to the College Board, 47 percent of students get help from federal loans.
For four-year private colleges, tuition and fees average $21,235 for 2005-06, the board reports. For four-year public colleges, they total $5,491. That's a 6 percent increase for private colleges and 7 percent for public ones over the year before.
Under the pending bill's new loan rules, freshmen and sophomores would be able to borrow $3,500 and $4,500 a year, respectively. That's an increase of about $1,000 from previous limits. Graduate students would be able to borrow as much as $12,000 a year, and the interest payments on $7,000 of that each year would be subsidized while they're in school.
But interest rates would be fixed at 6.8 percent, a shift from the variable rates that students pay now, currently 5.3 percent and capped at 8.25 percent. The 6.8 rate looks good from one perspective: the many years in which market rates rarely fell that low. However, it's higher than students have paid in recent years.
"Five years ago, 6.8 percent sounded pretty good," said Barmak Nassirian, a spokesman for the American Association of Collegiate Registrars and Admissions Officers. "The problem is it represents a significant rate hike today."
Nassirian suggests that students who are carrying loans now "run, not walk" to consolidate them at the 5.3 percent rate before the changes are instituted.
Under the deficit-cutting bill, student financial aid would continue to be provided by two programs: Federal Family Education Loans or direct loans, depending on which a school has chosen. Direct loans come directly from the federal government; Federal Family Education Loans come from private lenders whose rates are government-subsidized.
If a student defaults on the loan, the government currently reimburses loan guarantee agencies up to 98 percent of the borrowed amount. The bill would reduce reimbursements to these insurers to 97 percent.
Most of the savings would come from a new requirement that private lenders return to the federal government the money that they make when students pay a higher interest rate than the one lenders are guaranteed for participating in the below-market-rate loan program. Until now, they've kept that money.
About $3.75 billion of the projected savings would go to a new grant program for low-income students. It would provide low-income freshmen, sophomores and upperclassmen $750, $1,300 and $4,000 a year, respectively, if they major in math, science or certain foreign languages and maintain B averages.
The aid would be in addition to Pell Grants for low-income students, which are capped at $4,050 a year.
Parents also would face increased rates if they choose to take out unsubsidized loans for dependent students from the federal government. The current fixed rate of 7.9 percent for such so-called PLUS loans would rise to 8.5 percent under the bill, but would be available to graduate students for the first time.
(c) 2006, Knight Ridder/Tribune Information Services.
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