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By Christine Benz and Adam Zoll | 06-06-2013 12:00 PM

College Expectations, Loan Rates at Crossroads

Debates on Stafford Loan rates continue in Washington as the July 1 deadline approaches, while this year's college grads might be too optimistic of near-term job success.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com, and welcome to College Radar. A popular type of college loan will become more costly unless Congress takes action soon. Joining me to discuss this and other college funding news is Adam Zoll. He's assistant site editor for Morningstar.

Adam, thank you so much for being here.

Adam Zoll: Thanks for having me.

Benz: Adam, we have discussed the Stafford Loans in the past. The deadline is July 1. Congress has to come up with some kind of resolution, otherwise the interest rate will double. So, let's talk about where this loan is right now. Where it is in Congress and what the differing views are on what the rate should be.

Zoll: First of all, we're talking about just the subsidized Stafford Loans, so these are lower-rate loans that are available to low- and middle-income students, and right now, those students pay 3.4% on those loans. Once they graduate, that would double to 6.8%, which is the regular Stafford rate, on July 1, for new loans, for this coming school year, if Congress does nothing. Now, right now in the House, there seems to be widespread agreement that nobody wants these rates to double; however, there's no agreement on the solution. House Republicans have voted a package that would basically tie these rates to market rates, to the 10-year Treasury plus, I believe, 2.5% for undergraduates. The president also wants to tie the rates to market rates, but he wants a subsidized rate that would be 1 percentage point above the 10-year Treasury, and an unsubsidized rate that would be 3 points above Treasuries. Then Senate Democrats want to keep the status quo for another two years. So, again, there's no agreement on what's going to happen other than the fact that nobody seems to want these rates to double overnight on July 1.

Benz: So, it sounds like it's going to come down to the wire like so many things in Congress have been recently. I guess, if I'm looking at these different ideas, which will be the most friendly for college borrowers? Do you have a sense of that or does it depend on what happens to interest rates down the line?

Zoll: Well, you could look at the near term or look at the long term. In the near term, tying the rates to market rates, the lower the markup the better. However, for the long term people are getting nervous about rates starting to increase, so down the road there could be concern about that.

The president's plan is a little different than the Republican plan in that rates change from year to year, but once those loans are made, the rate is set. The Republican plan would continue to keep those rates variable year to year, but there would be an 8.5% cap on many of those Stafford rates. So, it's a little tricky to say which loan would be most beneficial for borrowers, but there's a lot of different sort of balls in the air right now.

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