Federal budget cutbacks to increase loan rates

Fabian Arzuaga News Editor

College students and their families will soon feel the impact of the narrowly passed Budget Reconciliation bill when interest rates for federal loans rise this July. The bill, passed on Feb. 1 in the House of Representatives 216 to 214, with 13 Republicans voting against it, covered a range of spending reductions, including government health and education programs.

“I don’t see any benefit to students in this particular measure,” said Director of Financial Aid Michael Fraher. Referring to the Parent Loans for Undergraduate Students (PLUS), Fraher said parents would pay an extra $1,200 in interest than they currently do on a $10,000 loan.

“What I find annoying is that legislators give lip service to education and the future of this country, yet they cut tax revenues by reducing taxes on oil companies, but you pay for that with student rates,” added Fraher.

In terms of education costs, the bill targets PLUS loans as well as the ones that students take out themselves, known as Stafford Loans. The rate for PLUS loans had been planned to raise to a fixed 7.9 percent from its current floating rate of 6.1 percent. The Republican-backed Feb. 1 bill will now push those rates to 8.5 percent.

Stafford loan rates will rise from 5.3 percent to 6.8 percent. Although the change will also allow students to borrow more during their first two years, the Stafford ceiling will remain the same at $23,000. The rate change will mean that a $17,000 loan will cost an additional $1,000 for students.

Before the measure was put to the floor of the House, there was a flurry of e-mail campaigns from student advocacy groups who opposed the bill. “I was very dissappointed,” said Abe Lackman, President of The Commission on Independent Colleges and Universities (CICU) of the Feb. 1 bill. “These are tough times to afford higher education.”

CICU estimated the cut to be $12.9 billion. “This is the largest single cut to the federal student loan program in history,” said Lackman.

Supporters of the bill—including Hudson Valley Congresswoman Sue Kelly, Republican—say it will help generate billions in revenue by correcting certain mechanisms that benefit lenders, while protecting students.

Although Fraher agrees that certain changes were appropriately made to heed the immense profit made by lenders, he said, “To put it on the back of a student when [Congress] makes decisions on tax cuts for other constituencies is not right…it’s a matter of priorities.”

Nearly half of all Vassar students receive either PLUS or Stafford loans, or both, amounting to almost $9 million for the 2005-2006 academic year. According to Fraher, direct Vassar scholarships totaled about $25 million for 1,225 Vassar students this year.

Almost ten million students nationwide take out Stafford loans each year, and about 800,000 parents receive PLUS loans, according to the Department of Education.

“No matter what, it’s going to cost Vassar students more money to borrow,” Fraher said. However, Fraher also mentioned one possible trade-off. Although the bill raised borrowing rates, legislators have proposed to eliminate what is known as an “origination fee” over the next four years. This fee is a charge by lenders on borrowers for loan application processing, determined by a certain percentage of the loan amount.

“So, on the one hand, students will be paying, say, $1,000 more on their student loans, but they would have actually gotten $500 more in student loans applied to their bill,” if the fee is eliminated, said Fraher. The caveat, explained Fraher, is that two of the four Vassar preferred lenders do not even have origination fees. “For Vassar students, if they don't pick the right lender, they won’t gain anything from this bill,” said Fraher.

The Feb. 1 bill, which passed in the Senate in December and is expected to be signed into law by President Bush, is one of many upcoming changes in student finance. “Given earlier propositions, we got away kind of light. We were looking at more draconian measures,” said Fraher. “They're talking about even more cuts for eliminating the Perkins Loan entirely.”

Perkins loans are need-based, federally subsidized, low-interest student loans provided by colleges. Although they were left out of the Feb. 1 legislation, their elimination has been proposed by Bush tentative 2007 budget.

According to the New York Times, the bill represents the first major effort by Congress since 1997 to cut “so-called entitlement programs,” including student loans, crop subsidies, and Medicare, where spending is dictated by eligibility criteria. The total budget-cutting package is estimated at $39.5 billion.