The latest edition of "Barack Obama Holds an Event with Regular Folks to Try and Get Congress to Do Something" will take place on Friday. The regular folks will be college students; the "something" this time around is preventing a doubling of the interest rate on student loans. Those college students better bring their game faces, too: If the interest rate hike isn't prevented, college educations are about to get over $5 billion more expensive, with a lot of that cost falling on those least able to afford it.
If you have existing loans, there's no need to worry, for now. The hike, which would raise the interest rate on subsidized Stafford loans from 3.4 percent to 6.8 percent, only affects loans that originate from July 1 on. But if you're taking out a loan for next year, the difference could be significant.
In January, the Congressional Research Service figured out what the hike would mean for the average loan recipient. For the 2013-2014 school year, it figured that the average loan amount would be $3,385. When you add in the interest rates, the difference becomes clear: under the higher rate, students will pay $768 more on that loan.
The costs multiply when a student gets a loan for each of his or her four years (if he or she finishes in four years). The maximum loan amount increases in the second and third years, meaning that the total amount owed and interest amounts do, too. If a student who will be a freshman this year gets loans for all four at current rates, that 6.8 percent interest rate makes a massive difference. Over the course of the loans, totaling $19,000, he or she will pay an additional $4,311 in interest — over $8,100 in total.
It's worth noting that this additional cost will largely be felt by lower income families. The last time the government determined the income break-down of loan recipients was for the 2007-2008 educational year. That year, the loans issued fell into ten different income brackets. (These are for dependent students; the income figures are for their parents.) Across the ten brackets, the distribution is pretty equal.
But those brackets are heavily weighted toward lower income households. In the graph above, every pie slice that's below $50,000 is in green. Each slice that's between $50,000 and $100,000 is in purple. The $100,000-plus range is in red.
If the same percentages hold for the next school year, we can estimate the distribution of the additional costs by income bracket. The CBO indicates that 7.4 million students got loans last year. If this year's number is similar, that means about 3.6 million students coming from households making under $50,000 will receive student loans. And if they get four years of loans at the new 6.8 percent rate, that group will end up paying about $2.7 billion more than they would otherwise have paid. That's per year. Over the course of four years? The increase could be as much as $15.5 billion.
Here's the breakdown by income bracket.
Both Obama and the Republicans in Congress recognize that this is a problem. As they often do, they envision different solutions. The New York Times reports on the GOP's:
The House bill would allow student lending rates to reset each year, based on the interest rate of a 10-year Treasury note, plus 2.5 percentage points for Stafford loans. The Congressional Budget Office projected that rates on Stafford loans would rise to 5 percent in 2014 and 7.7 percent in 2023.
Under the legislation, Stafford loans would be capped at 8.5 percent, while loans for parents and graduate students would have a 10.5 percent cap.
The president's proposal is somewhat simpler: Keep the rates where they are, at least for now. (Update: Libby Nelson of Inside Higher Ed points us to her analysis of Democrats' long-term plans.) With total student debt passing $1 trillion last year, there's been a consistent call to keep costs down. But a better argument may be found in another CBO report, released yesterday. It found that tax breaks comprise the largest part of the federal budget — and heavily favor the extremely wealthy. In this case, Congress is considering whether or not to remove one of the few benefits that not only favors lower income levels, but is also directly correlated to future earnings and success. If Obama can't make the argument for that on Friday, maybe the college students whose wallets will be affected can.
Photo: Obama receives a free diploma. (AP)
This article is from the archive of our partner The Wire.
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