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Shuffling the cards makes winners and losers
Much in the press has highlighted the "victory" of keeping the interest rates on Stafford student loans from doubling to 6.8%. The 3.4% interest rates seems like a victory to the millions paying back their student debt. But is it really? Here is the full picture:
Background
Part of the deal Congress struck to expand the National Debt, was an agreement to rein in spending to curb the 40 - 60% excess annual spending over annual federal receipts. A super 
committee including representatives from each party met for months to determine how to cut spending to pre-agreed levels. While the spending cuts were minor relative to annual spending, the committee failed to reach an agreement. Anticipating this roadblock, Congress set some "automatic" spending cut levels that are now being faced throughout the government.
Student Aid Programs were not immune to these cuts and the popular Stafford Loan program was scheduled to have its interest rates doubled from 3.4% to 6.8%. With national student debt now exceeding credit card debt, this dramatic change in rates was quickly placed in the crosshairs of public opinion.
The Deal
In a deal announced in early July, 2012, the Democrats and Republicans agreed to extend the 3.4% interest rate for another year. Per the U.S. Student Aid Association, this change will save upwards of $1,000 per student and will help an estimated 7.4 million students who rely on this program. But this is only part of the story, as other cost cutting measures offset this interest rate extension. Here are the other provisions worth noting:
- The 3.4% rate is temporary. In twelve months the rates will once again be doubled, this despite the historic low interest rate on mortgages and the low cost of funds available to all lending authorities. The IRS' own interest rate publication called "AFRs" suggests a reasonable long-term loan rate in the low 3% range.
- Graduate Students are Omitted. The lower rate is now only available to undergraduate students. Graduate students must now pay the doubled rate.
- Grace Period....gone. Prior programs included subsidized interest payments while in school and for a 6-month grace period after leaving school. These grace periods are now gone.
- Repayment incentives...gone. Gone too are the repayment incentives to encourage early loan repayment for loans originated after 7/1/2012. While older loans will still have this provision, this enhanced repayment incentive is no longer available to new borrowers.
- Harder to Receive the Maximum. Other changes limit the amount of funding available, restrict the number of eligible semesters and generally make it more difficult to qualify for funding.
As the election near, expect to hear more about proposed changes in this area as the high annual increases in the cost of college meet head-on with the need to trim the national deficit and the related cost of educational funding programs.
