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Sapere aude - dare to be wise
Monday, June 07, 2004
Posted 12:14 PM by Brian D.
Variable Rates For Student Loans?

There is a proposal in Congress about ending the fixed rate on our student loans. The current program, as most of you should be familiar with, allows all student loans to have a fixed rate of interest over the life of the loan. If you consolidate your loans, the new rate is an average of the interest rates of all your previous student loans, which remains at a fixed rate. Currently this would be around 3% interest rate.

The measure would end the fixed-rate option, making all federal student loans issued after July 2006 subject to variable rates. Repayments would then rise and fall each year in sync with interest rates.

Representatives from both parties are split about the proposed change. Why the change in policy? Our student loans are different than a mortgage loan in the following way: the federal government guarantees a rate of return for the lenders. For other loans, such as a car or home loan, the interest rate is whatever was charged at the time.

That, in turn, has made the program more expensive for the government, which offers lenders a guaranteed rate of return. Millions of students have consolidated at low rates, forcing the government to pay lenders the difference.

A recent General Accounting Office report estimated that, simply on loans issued in 2003 under one of two major programs, subsidies would amount to $3 billion, up from $1.3 billion on loans issued in 2002.

Proponents of the change want more of the money to help prospective students get into college in the first place. Others note that the increase would put an even greater burden upon those to pay off student loans.

"To add on another $3,000, $4,000 even $5,000 to interest costs to somebody who is starting out as a teacher is not a minor event for that individual," said Rep. George Miller, D.-Calif.

I wonder what the numbers would be for students who have undergraduate debt combined with graduate debt such as law school or medical school? The change in interest could produce very scary numbers.

If you want to make your position known, whatever it may be, I highly recommend you contact your senator and representative.

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