Graduates May See Student Loans Tied to Variable Rates

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A proposed change in how much interest should be paid on federal student loans has divided education groups as well as congressional Democrats and Republicans.

The proposal, which is part of the reauthorization of the Higher Education Act, would tie federal student loans to interest rates as they change each year. Now, students can lock in a rate of about 3 percent, which is the lowest in 35 years, the Associated Press reported.

The idea is to provide more federal subsidies for students trying to get to college, rather than use it to help those who have already graduated.

"It's all about reshuffling the resources within the deck and making sure low-income students who are in danger of not receiving a college degree are put back at the front of the line," said David Schnittger, a spokesman for the House Education and Workforce Committee.

Lenders approve the idea, as does the National Association of Student Financial Aid Administrators and College Parents of America. Presumed Democratic presidential nominee Sen. John Kerry has said variable rates would harm students and enrich lenders.

"This is the most visible and contentious issue in the reauthorization," said Terry Hartle, senior vice president of the American Council on Education. His group supports variable rates, but with a 6.8 percent rate cap. The current proposal would keep the existing cap of 8.25 percent.

About 7 million Americans receive more than $50 billion in federal student loans each year. For the average borrower graduating this year, a variable rate loan would cost an extra $3,000 over 10 years, the Congressional Research Service estimated. On the other hand, the CRS found that in 13 of the last 18 years, a variable rate would have saved average borrowers as much as $4,000 over the course of a loan.

Opponents of the variable rate plan say many graduates, especially those who choose public service, find paying off their loans a struggle.

"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., the committee's ranking Democrat.

Students were allowed to consolidate their student loans starting in 1986. As interest rates dropped, millions of students have used consolidation to refinance debt. Since the government guarantees lenders a certain rate of return, the government must pay lenders the difference, increasing the cost of the program.

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