WASHINGTON – For the millions of borrowers who collectively face billions in college debt, the impact of a congressional proposal to slash interest rates on student loans remains murky. Although college debtors would welcome some relief, its form is in question.
The student-loan bill, likely to pass in the House Wednesday, would whittle annual interest rates from 6.8 percent to 3.4 percent over five years on new subsidized Stafford loans for undergraduate students. The bill does not specify what rates would be for new loans at the end of this five-year period.
The bill will likely affect more than 5.5 million Federal Stafford Subsidized Loan borrowers, according to 2004-05 statistics from the College Board, an association serving colleges and universities.
Last year, about $144 billion in federal aid was given to about 11.4 million student and parent borrowers to pay for college, according to the Department of Education.
The vast majority of undergraduates can't pay for college without some help. About 76 percent of full-time undergraduates received some financial aid in 2003-04, according to lender Nellie Mae. About half of them took out student loans.
"The College Student Relief Act of 2007 represents the prompt fulfillment of a campaign promise that will benefit millions of students and their families," said Bill Parsons, associate director of government relations for the American Council on Education, which represents students, administrators and faculty members from all sectors of higher education.
The bill would save an average four-year college student starting school in 2007 about $2,300 over the life of the subsidized loans, according to U.S. PIRG, the federation of state Public Interest Research Groups. When the bill is fully phased in, the savings would jump to $4,420.
To help pay the $6 billion price tag for the rate cut, the bill would trim subsidies to private lenders, who fund most of the loans under a government guarantee on most of the principal. These subsidies, which the government offers lenders to offset the lower interest rates, were already trimmed last year.
Lenders worry that they will wind up funding the rate cut.
Alexa Marrero, a spokeswoman for the Education Finance Council, said she worries that the not-for-profit lenders the organization represents will have to cut some of their programs to help foot the bill of the legislation.
"I think the fact that higher education affordability and accessibility is included in the first 100 hours [of the new Congress] is a positive sign," Marrero said. "The question now is exactly how that is achieved."
Student loan debt has become an increasing issue as more and more students are taking on debt to pay for college. The average undergraduate debt in 2002 was $18,900, up 66 percent from $11,400 in 1997.
To some extent, the rising debt reflects rising tuition, which continues to balloon faster than inflation. Last year alone, average total tuition and fees at four-year public colleges rose 6.3 percent to $5,836, according to a study by College Board. For private four-year colleges it rose 5.9 percent to $22,218.
Regardless of the fate of the House student-loan bill, which faces an uncertain future in the Senate, a larger bill addressing student-loan interest rates and many other aspects of higher education is up for re-examination in both the House and Senate this year.
Sen. Edward M. Kennedy, D-Mass., chairman of the Senate education committee, has indicated that the issue of student-loan interest rates will be addressed as part of this larger bill.
Higher education advocates are behind the house bill introduced by House education committee chairman George Miller, D-Calif.
"We support it and we look forward to working with chairman Miller and members on both sides of the aisles to make progress on the full range of student aid issues facing the congress this year," Parsons said.
Copyright (c) 2006 MarketWatch, Inc.