Federal student loan rates double as deficit fight continues

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After weeks of stalemate in Congress, the subsidy on Stafford subsidized student loans will expire on Monday, potentially saddling students around the country with unanticipated future debt.

The increase in interest rates from 3.4 to 6.8 percent will affect about 40 percent of UC Berkeley students who take out loans each year. In recent weeks, Democrats and Republicans in both houses of Congress have tried to pass proposals that would extend the subsidies or reform the federal student loans system, but disagreements over the government deficit and proposed reforms prevented a deal.

A proposal by Sen. Elizabeth Warren would fix the rate of subsidized loans to the rate given to major banks by the Federal Reserve at 0.75 percent. Another plan by House Republicans would tie student loan rates to the 10-year U.S. Treasury note, subject to market fluctuations but capped at 8.5 percent.

Rep. John Garamendi, D-Fairfield, a member of the House Committee on Education and the Workforce is outraged by the failure of Congress to pass effective legislation and attributes much of the inaction to the broader fight in the capitol over the deficit.

“You’ve got a large amount of money, a large number of loans to subsidize the interest rate and a great deal of conflict whether it ought to be done at all,” Garamendi said. “The question arises as to where the money should come from, so you’ve got the deficit issue.”

Rachelle Feldman, director of the UC Berkeley Financial Aid and Scholarship Office, said that some of the proposals put forth may have been more detrimental to students in the long run than the current expiration of the subsidy.

“We want student interest rates low in any permanent solution to the current problem,” Feldman said. “What we don’t want to see is for them to keep the interest rate on subsidized loans low at the expense of any other student-aid program.”

Currently, students who take out loans at UC Berkeley have an average of about $17,000 in debt upon graduation, compared to about $28,000 nationally. Because the subsidized loans have now doubled, Feldman estimates that the average borrower at UC Berkeley would see a difference in his or her monthly payment of about $15 a month over a 10-year repayment period, which amounts to about an extra $1,800 over 10 years.

The expiration of the Stafford subsidized loans will not affect the Stafford unsubsidized loans or the Stafford PLUS loans that graduate students and the families of students can take out that are offered by the financial aid department.

Brian McFadden, a junior at UC Berkeley, plans on taking out all Stafford loans offered to him for the coming year and until he graduates despite the rate increase. When asked about the increase in the interest rate, McFadden was quick to admit the difficulty of grasping the long-term consequences of the interest rate raise.

“People like me can’t think about it, since we have no experience of what it’s like after college being hit with all these debts,” McFadden said. “It’s just a number, an abstraction.”

But McFadden said he is cynical about the politics that surround the increase.

“The sad thing is that I am not surprised — this is business as usual for the country.”

Contact Chase Schweitzer at [email protected] and follow him on Twitter @ChaseSchweitz.