Federal Student Loan Interest Rate Update

Just before 1:00 a.m. this morning, Sens. Barbara Boxer (D-Calif.) and Jim Inhofe (R-Okla.) announced they had a reached a deal on extending federal highway funding for two years, rather than the anticipated one year. It also includes extending the 3.4 percent interest rate on select federal student loans.

More details are expected, but here’s what’s being reported so far.

The House Rules Committee will vote today on the Surface Transportation Extension Act of 2012 (H.R. 4348), and floor action is expected shortly thereafter. (See pp. 590-91, Division F—Miscellaneous Items, Title III—Student Loan Interest Rate Extension.)

The federal government will not be paying for undergraduates’ loan interest during the six months after they finish. Federally subsidized student loans also would be limited to six years for a four-year degree program (150 percent of the program length). After six years, those students would not be eligible to take out additional subsidized federal loans.

This change is expected to save $1.2 billion of the extension’s $6 billion cost. Another $5.5 billion in savings would reportedly come from changes to federal pension insurance.

The trouble is that $1.2 billion was supposed to help offset the looming 2014 Pell Grant program shortfall. (For more on Pell-related problems, see here and here). As Inside Higher Ed reports, “That means the next Congress will confront not only another scheduled increase in the interest rate—which would now double in 2014—but a $6 billion Pell Grant shortfall.” Other projections peg the Pell shortfall at $7.5 billion.

Senate Finance Committee Chairman Max Baucus (D-Mont.) said that the student loan interest extension “will also make a high-quality education affordable for millions of students across the country.” Actually, federal aid has not made college more affordable, and extending the lower student loan interest rate just kicks the can down the road.

Vicki E, Alger is a Research Fellow at the Independent Institute and Senior Fellow and Director of the Women for School Choice Project at the Independent Women’s Forum. She is the author of the Independent book, Failure: The Federal Misedukation of America’s Children.
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