Congressional Digest

    Controlling College Costs — The Latest on Reducing Loan Rates, Debt, and Tuition

By , Editor,
September 04, 2013
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From 2000 to 2011, the cost of undergraduate tuition, room, and board rose 42 percent at public institutions and 31 percent at private not-for-profit institutions after adjusting for inflation, according to the U.S. Department of Education. The Consumer Financial Protection Bureau estimates that, as of May 2013, outstanding student loan debt was approaching $1.2 trillion. No one disputes that the situation is out of control, and there is no shortage of proposals from Congress and the White House to control costs and reduce student loan debt.

New Student Loan Interest Rates

On August 9, President Barack Obama signed into law the Bipartisan Student Loan Certainty Act of 2013, which links Federal student loan rates to the financial markets. Specifically, it bases them on the current 10-year U.S. Treasury note interest rate, which is already used as a benchmark for many corporate and private loans. The student loan rate will be locked in for the lifetime of a loan, but can be reset and adjusted each year for new loans. The law is retroactive to all loans taken out since July 1. That is when the previous law expired, causing rates to jump briefly to 6.8 percent from 3.4 percent.

For the 2013-2014 school year, the interest rate is 3.86 percent for undergraduates and 5.41 percent for graduate students. For PLUS loans, which are taken out by parents on students’ behalf, the rate is 6.41 percent.

Congress also imposed caps on how high the rates can go in future years, as follows:

• Stafford Loans (undergraduates): 8.25 percent

• Stafford Loans (graduates): 9.25 percent

• PLUS Loans: 10.5 percent

Although many view the new law as a long-term solution, some are concerned that the loan rates will exceed their old fixed rate of 6.8 percent or rise even higher to the level of the caps within a few years as the economy improves ― in which case, Congress might have to act again. In the meantime, the Congressional Budget Office estimates that student loans will generate $184 million in profits for the Federal Government over the next decade.

The President’s Plan to Rein In Tuition Costs

On August 22, at a speech at a speech in Buffalo, NY, the President outlined his plan to address the soaring costs of college education and make it more widely affordable.

First, the President wants to rate colleges based on such measures as tuition, graduation rates, debt and earnings of graduates, and the percentage of lower-income students who attend. Starting in 2018, the ratings would be tied to financial aid, so that students at highly rated colleges might get larger Federal grants and more affordable loans. Such a program would require new legislation. Other parts of the plan would encourage colleges to provide more online classes to shorten the time it takes to earn certain degrees and provide more options to help students repay loan debt.

The President will also request that Congress create a $1 billion fund to encourage States to maintain funding for higher education.  In recent years, state support for higher education has declined significantly, and colleges have imposed tuition increases to compensate for the loss. A new report from the Center on Budget and Policy Priorities found that States are spending 28 percent less per student in the 2013 Fiscal Year than they did in 2008.

 

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