Student Loan Interest Rates Set to Double

With the interest rates for federally subsidized student loans scheduled to double from 3.4 to 6.8 percent in July, the topic has suddenly become a hot political issue.

On Tuesday, President Obama gave a speech at the University of North Carolina where he told a crowd of students about his own experiences with student loans. He noted that he had only paid off his own student loans eight years ago. 

“Five years ago, Congress cut the rates on federal student loans in half,” he noted. “That was a good thing to do. But on July 1—that’s a little over two months from now—that rate cut expires. And if Congress does nothing, the interest rates on those loans will double overnight.... And just to give you some sense of perspective—for each year that Congress doesn’t act, the average student with these loans will rack up an additional $1,000 in debt—an extra thousand dollars. That’s basically a tax hike for more than 7 million students across America—more than 160,000 students here in North Carolina alone.”

His Republican rival, former Massachusetts Governor Mitt Romney, made a point of expressing his support for keeping the rates low on Monday. “Particularly with the number of college graduates who can't find work or who can only find work well beneath their skill level, I fully support the effort to extend the low interest rate on student loans,” he said during a campaign appearance with Senator Marco Rubio, R-Fla.

That appeared to be a reversal of a stance he had taken back in February, when he told a member of the audience who had asked him about the expected rise in interest rates, “The right course for America is for businesses and universities and colleges to compete, and for us to make sure that we provide loans to the extent we possibly can at an interest rate that doesn’t have the taxpayers having to subsidize people who want to go to school.”

However, with a growing proportion of the population finding themselves saddled with student loans well into adulthood, the student loan burden is turning into an issue affecting more and more voters. According to the Federal Reserve Bank of New York, approximately 37 million people, or 15 percent of Americans, are burdened with outstanding student loan debt. Those debts are not just from college education. In the aftermath of the recession, many people signed up for schools and training programs where they could learn new job skills to help them find work.

On Tuesday, Senate Majority Leader Harry Reid, D-Nev., introduced legislation to extend the interest rate for subsidized loans at the current rate for one more year. Senate Minority Leader Mitch McConnell, R-Ken., expressed his support, according to the Associated Press, but questioned how to pay for the $5.9 billion cost of the legislation.

It’s important to note that outstanding student loan debt is typically not forgiven, even after a bankruptcy, so it can burden a former student for well over a decade. There is talk now of allowing forgiveness of student loan debts, but that is likely to make it harder to get loans. Congressman Hansen Clarke, D-Mich., has introduced a student loan forgiveness bill that would forgive the outstanding loan balance for people who have paid the equivalent of 10 percent of their discretionary income for 10 years, according to the Christian Science Monitor. Some in Congress also want to modify the bankruptcy laws to allow for student loan debts to be discharged.

The overhang of student loan debt threatens to hold back not only young people, but also their parents, who frequently need to provide financial assistance, particularly if their children have trouble finding a job after graduation, an all-too-typical situation nowadays. Accountants can help their clients, particularly those with college-age children, find the best rates for student loans and other forms of financial aid to help reduce the principal that will eventually need to be paid. In any case, their clients can certainly benefit from advice about budgeting and loan payments to make sure that a college education turns out to be a good investment, as it usually is, instead of a financial burden.

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