Relief From Student Loans

Those who take out student loans to help finance their educations were happy last month to hear that the House voted to cut interest rates on federal loans in half. The bill, entitled the College Student Relief Act of 2007, would reduce the rate on subsidized Stafford loans from the current fixed rate of 6.8 percent to a fixed rate of 3.4 percent over five years. Subsidized Stafford loans are awarded based on financial need, and as long as you're in school the federal government covers the interest. Unsubsidized Stafford loans are available to any student and interest accrues as you study. These unsubsidized loans would not be included in the proposed bill and would remain at the fixed rate of 6.8 percent.

The proposed bill will without a doubt help many college students. It will decrease the amount of debt they are accruing while still in college. According to data from the College Board, the average level of debt for college graduates who took out loans to pay for a private four year college was $19,500. The average level of debt for those who took out loans to pay for four year public universities was $15,500. At these rates students are becoming increasingly indebted. While the proposed bill wouldn't lower the amount that students have to borrow, it would make the debt more affordable.

With the proposed College Student Relief Act of 2007, the gradual rate drop would mean some students would take out loans at a new fixed rate each year. As of July 1, 2007 the rate would be 6.12 percent, 5.88 percent in 2008, 4.76 percent in 2009, 4.08 percent in 2010, and a low 3.4 percent after July 2011. If these percents were translated into dollars, you would save about $2,100 in interest over the expected ten year repayment period if you borrowed the maximum subsidized Stafford loan for four years. For those starting college in 2011, the savings would nearly double.

The Senate is supposed to take up the issue of lower student loan rates this month but the outlook is uncertain. Senator Edward Kennedy, who is the chairman of the Senate Health, Education, Labor and Pensions Committee, plans to introduce a more comprehensive bill than the House bill, this one with benefits. Such benefits would include an increase in the maximum Pell grant, awarded to undergraduate students with the most financial need, from $4,050 to $5,100, capping monthly student loan payments to 15 percent of the borrower's income and raising the allowable tax deduction for college tuition to $12,000. The Senate isn't optimistic that they will be able to get all of that done this year. One reason for this is because the Democrats have a smaller majority in the Senate. In addition to that, they need to figure out how to pay for the proposed changes. The House bill is expected to cost around $6 billion. Most of these costs would be offset by reducing subsidies paid to private lenders that administer federal student loans such as Sallie Mae, Citibank, and the National Education Loan Network. The Senate has yet to come up with an estimate of how much their proposed bill would costs. Since the Senate bill includes more benefits than the proposed House bill, the expected costs would exceed the House's $6 billion.

In the event that either of these proposals were passed, not every student would benefit. For the people who've already been through college, this would do nothing for the loans they're paying back. The rate for these students would still be the fixed rate of 6.8 percent. Students pursuing graduate degrees also wouldn't qualify for the rate cut. With the rising costs of education, there is a need for some kind of proposal to lower expenses for students. It would be nice if colleges and universities would lower the costs of tuition, room and board but that's nor forseeable in the near future. In fact, the price of education will most likely continue to increase and students will have to take out more loans in order to finance their education. I'm sure those college students who would benefit from wither of these proposed bills will be keeping their fingers crossed for a decrease in student loan payment rates.