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Student-loan FAQ: What happened July 1, and what comes next

college grad
REUTERS/Mario Anzuoni
According to a recent report from the Minnesota Office of Higher Education, the state’s 2010 graduates owe an average of $29,800.

Hey MinnPost,

I’ve been trying to keep up with news reports about student loans, but all I really understand is that Congress failed to act and on July 1 interest rates doubled. Does anybody have an idea how much this will cost Minnesota students and their parents? Are college-bound 2013 high-school grads just exceptionally unlucky or can this be fixed? — Debtor to be

Dear Debtor,

Of course you’re confused. We’re talking about a minimum of five different kinds of loans and seven proposals for establishing interest rates. And like so many things financial, trying to compare the details can feel like a game of three-card Monte.

Making matters worse, these days the colleges where students tend to take out the highest loans are owned by for-profit corporations, which means you can’t necessarily do what some of us did back in the good old days and turn yourself over to your friendly local student aid adviser.

Think of what happened July 1 as a miniature fiscal cliff. Having failed to agree about pretty much anything, Congress has kicked the can down the road a couple of times on student aid. Last week lawmakers failed to kick it one last time, with the result that the time-buying compromise of years past expired.

On July 1, interest rates doubled from 3.4 percent to 6.8 percent on subsidized Stafford loans, which are for mostly undergraduate students whose low-income families cannot afford their college costs. Recipients may borrow $3,500 as freshmen, $4,500 as sophomores and $5,500 a year thereafter up to a cap of $23,000.

Year

Dependent Students (except students whose parents are unable to obtain PLUS Loans)

Independent Students (and dependent undergraduate students whose parents are unable to obtain PLUS Loans)

First-Year Undergraduate Annual Loan Limit

$5,500—No more than $3,500 of this amount may be in subsidized loans.

$9,500—No more than $3,500 of this amount may be in subsidized loans.

Second-Year Undergraduate Annual Loan Limit

$6,500—No more than $4,500 of this amount may be in subsidized loans.

$10,500—No more than $4,500 of this amount may be in subsidized loans.

Third-Year and Beyond  Undergraduate Annual Loan Limit

$7,500—No more than $5,500 of this amount may be in subsidized loans.

$12,500—No more than $5,500 of this amount may be in subsidized loans.

Graduate or Professional Students Annual Loan Limit

Not Applicable (all graduate and professional students are considered independent)

$20,500 (unsubsidized only)

Subsidized and Unsubsidized Aggregate Loan Limit

$31,000—No more than $23,000 of this amount may be in subsidized loans.

$57,500 for undergraduates—No more than $23,000 of this amount may be in subsidized loans.

$138,500 for graduate or professional students—No more than $65,500 of this amount may be in subsidized loans. The graduate aggregate limit includes all federal loans received for undergraduate study.

Notes:
  • The aggregate loan limits include any Subsidized Federal Stafford Loans or Unsubsidized Federal Stafford Loans you may have previously received under the Federal Family Education Loan (FFEL) Program. As a result of legislation that took effect July 1, 2010, no further loans are being made under the FFEL Program.
  • Effective for periods of enrollment beginning on or after July 1, 2012, graduate and professional students are no longer eligible to receive Direct Subsidized Loans. The $65,500 subsidized aggregate loan limit for graduate or professional students includes subsidized loans that a graduate or professional student may have received for periods of enrollment that began before July 1, 2012, or for prior undergraduate study.  

The subsidy: The federal government pays the interest on the loan while the student is in school and in certain other limited circumstances.

On June 30, unsubsidized Staffords had an interest rate of 6.8 percent, which did not change. They are also capped, but may be extended to students who are not from low-income families. Most students who are eligible for the subsidized loans end up with unsubsidized ones, too.

Nor did the 7.9 percent interest rates change on PLUS loans, uncapped loans that can be taken out by graduate and professional students and by the parents of undergrads with good credit. Also unchanged for now are terms on Perkins loans, for students with “exceptional need,” and on consolidation loans made to former students with several loans to pay off.  

According to the U.S. Department of Education, 55 percent of new loans this year are unsubsidized Staffords worth $59 billion. Subsidized Staffords account for 26 percent, or $28 billion, and PLUS loans 18 percent, or $19 billion. Perkins loans account for less than 1 percent of government student loans.

Rates apply only to new loans

These rates apply only to new loans — in other words you, Debtor to be, not your kin who are struggling to pay back past loans.

Hold on a second — I’m trying to figure out whether I can afford to start school in eight short weeks, not whether the Wharton School MBA person needs to understand this stuff was a good investment. What does this mean for my wallet? --Indebted for any Enlightenment

Congress can still act in time to change the picture for this fall; whether it will is another question. This week, Senate Democrats are expected to take a vote on whether to retroactively freeze new subsidized Stafford loans at 3.4 percent for one more year, for example. However, Republicans have reportedly vowed to filibuster such a plan. Most experts seem to think that if corrective action of some kind isn't agreed to by the August recess, the July 1 changes will affect students taking out subsidized Stafford loans now.

Make no mistake, without action the indebtedness in question will make your wallet lighter indeed. According to a recent report from the Minnesota Office of Higher Education, the state’s 2010 graduates owe an average of $29,800. Graduates of the aforementioned for-profits owe an average of $41,500.

These averages include students who never finish college as well as those who complete only inexpensive two-year programs at public community colleges. Getting a four-year degree or beyond can run up that debt load considerably.

“According to the Federal Reserve Bank of New York, almost 13 percent of student-loan borrowers of all ages owe more than $50,000, and nearly 4 percent owe more than $100,000,” Minnesota 2020 Hindsight Community Fellow Ronald Goldser writes.

“Economist Joseph Stiglitz notes that approximately 17 percent of student-loan borrowers were 90 days or more behind in payments at the end of 2012. If student loan interest rates go up, this problem is going to get worse.”

Goldser’s Minnesota 2020 colleagues have done the math. Assuming Ms. Average Graduate takes 10 years to pay back her loans, the change that went into effect July 1 would cost her $11,352 in interest, vs. $6,294 if Congress had extended the pre-July 1 rate a year or two.

Wait, you’re saying to yourself, you just did that math on all loans, not just the subsidized Staffords that got a new rate. You’re right — this is where it starts to get mondo confusing. The proposed fixes would affect all government student loans, and some of them would be even more expensive to borrowers.

Politicians currently set the rates

Right now, politicians set the rates at which students and families borrow. President Barack Obama and U.S. Rep. John Kline, the Lakeville Republican who chairs the powerful House Committee on Education and the Workforce, both want interest rates to go up and down with the market. But their proposals differ greatly.

Both proposals would peg interest rates to the Treasury rate, the interest the government pays investors who buy its debt. The rates go up and down depending on the market and on how long the investments last.

Kline’s Smarter Solutions for Students Act, which passed the House in May and which Obama has threatened to veto, would have created variable interest rates for all loans, pegging both kinds of Staffords to the 10-year Treasury bill plus 2.5 percent.

Right now, that would make the interest on those loans 4.7 percent. But the Congressional Budget Office foresees rising rates, which means that within five years they could reach a proposed cap of 8.5 percent. At that point, this year’s 6.8 percent would start to look like a bargain.

Just to inject a little more uncertainty, under this GOP proposal the interest rate would fluctuate during the life of the loan. So you might start school with a rate of 4.7 and end up paying nearly twice that.

Obama's approach

By contrast, Obama would keep interest rates fixed during the life of the loan, and would not cap them. He would peg subsidized Staffords at the 10-year Treasury rate plus 0.93 percent and the unsubsidized Stafford at the 10-year rate plus 2.93 percent.  

The PLUS loans available to parents and grad students would become more expensive under both plans, too, in essentially proportional rates.

The other five proposals? We’ll spare you the fine print, Indebted, which involve things like using the 90-day Treasury bill instead of the 10-year, except to note that another member of the Minnesota delegation, Minneapolis DFLer Keith Ellison, backed an idea advanced by Massachusetts Sen. Elizabeth Warren.

You can’t lie to Warren about things like debt and T-bills. Her plan would have made the loans darn near free by pegging them to the rock bottom federal discount rate. So naturally it died before it got out of the gate.

You’re sounding awfully cynical. Almost like you think they’re making this too complicated for most people to understand on purpose. Do you think they’re trying to hide a profit motive or something? — Doubtful about all this Indebtedness

What you likely consider an unbearable yoke of indebtedness the financial services industry refers to as a “loan product.” A loan product many of your compatriots will use to attend an institution that must please not just members of the academy but shareholders. 

And there’s some truth to the notion that easy student credit doesn’t create many incentives for nonprofit and public universities to take a hard look at costs and at runaway tuition increases. So it shouldn’t surprise you that they’re not all for-profits.

Although Kline is the far and away winner in this story, Democrats and Republicans alike have received donations from and been lobbied by the financial services industry and education sector. Good luck finding a federal-level elected official who can’t be tied to the debate in that way.

The for-profits

Before we part, let’s circle — briefly and cynically — back to the start of our chat. According to the state study mentioned up top, the highest student debt loads in Minnesota were acquired by students at the Art Institutes International, at $36,000 and $55,000 for two- and four-year degrees — many of them in low-paying “passion” fields such as cooking.

The Art Institutes are owned by the publicly traded Education Management Corp., the nation’s second-largest owner of for-profit institutions of higher ed with 110 schools in 32 states and Canada. It gave $10,500 to Kline in the 2012 election cycle — a drop in the bucket.

If that doesn’t surprise you, consider this: Goldman Sachs owns 40 percent of Education Management. Goldman Sachs makes student loans and buys and sells securities that — shades of the mortgage bubble bursting — are made up of student loans.   

And so as you are contemplating the loan product that may or may not get you the degree that’s your ticket to a prosperous future, know this: The entire juggernaut can’t survive without students, Doubtful.

Profit makes this particular republic go round, so there are all kinds of folks willing to lobby to keep the fiscal taps on.

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