Student loan compromise by Democrats would raise borrowing costs

Government representatives have recently made several proposals to prevent the interest rates on federal subsidized Stafford student loans from doubling to 6.8% on July 1. But it turns out that letting the rate double might be a better alternative than some of the latest proposals in Congress, according to a recent Huffington Post article.

Student loan interest rates could rise even more

Under a new plan by Rep. George Miller (D-Calif.) and Sen. Dick Durbin (D-Ill.), beginning in 2016, college students and their parents, would pay more for about three-quarters of all new federal student loans, compared with what they’d pay under current law.

Under current law, Congress sets the interest rate on all federal student loans. But the Miller-Durbin plan would tie interest rates on federal student loans to the U.S. government’s cost to borrow over 10 years. According to the article, the interest rates and costs of student loans are projected to increase under Rep. Miller and Sen. Durbin’s plan:

A typical middle-income college student would pay about 7.5 percent for Stafford loans beginning in 2016, according to CBO forecasts, or roughly 0.7 percentage point more than under existing law. Parents of undergraduates whose children exhaust Stafford limits are forecast to pay about 8.5 percent, or 0.6 percentage point more than present rates.

Miller and Durbin would cap interest rates on Stafford loans at 8.25 percent, or nearly 1.5 percentage points higher than present rates. PLUS loans would be capped at 10.25 percent, or more than 2 percentage points above present rates. Rates on new loans would be set every year then fixed for the life of the loan.

Bad news for future college students and their parents

If the Miller-Durbin proposal passes, or a similar one by Sens. Angus King (I-Maine), Joe Manchin (D-W.Va.), Tom Coburn (R-Okla.) and Richard Burr (R-N.C.), it could be trouble for future college students and their families. While students who take loans in the next few years may benefit from the lower interest rates in the short term, future students and their families would pay more to take out federal student loans. With the cost of college continuing to rise each year, we could see the student loan crisis get even worse before it gets better.

Unfortunately for students and families already struggling with repayment, these federal proposals won’t do anything to help their situation. For advice on paying your student loans, check out our repayment strategies or reach out to one of our repayment counselors.