Student loan interest may double

Interest rates on federally subsidized Stafford student loans, now at 3.4 percent could rise back to 6.8 percent on July 1, affecting 7.4 million students nationwide, if Congress doesn’t find a bipartisan bill to extend the low rates.

SPSCC Financial Aid Loan Manager Amy Ybarra said she thinks Congress will probably extend the low rates, but she is unsure whether it will happen before July 1. Summer quarter borrowers probably will not lock in the lower rate because of the time and processing it will take to carry out, should it pass, but it is “still a good loan,” said Ybarra.

The Project on Student Debt (PSD) estimated the rate increase would cost the average indebted four-year student about $1,000 over the average 12-year life of their loans. That’s less than $10 per month, and even less for an SPSCC student.

The PSD study of 1,000 not-for-profit public and private four-year schools showed 59 percent of Washington’s graduates in the study had an average of $22,101 in student loans per student, about middle-of-the-road for the nation.

SPSCC, which mostly offers low-cost, two-year programs, releases about 17 percent of its students with debt, according to data Ybarra provided for 2011-2012 so far.  These students average about $9,000 for two years, the data suggested.

College President Gerald Pumphrey said he thinks keeping rates low is good if it keeps educational access open, especially in a time when student debt levels may represent a new “crisis.” However, he said he worries rates could get too low and lose their attraction to lenders, which would decrease the money available for education.

Pumphrey said he took no loans or grants for school while working full-time for minimum wage in the ‘80s. He said today he would have to work about three times what he worked to pay for school, because tuition has gone up so much more than earning power.

He also said getting a higher education is much more important than it used to be. “It is a generational unfairness,” he said.

Graduates have lately found it harder to manage their debt, according to a PSD study that reported an 8.8 percent default rate at the end of 2010 for those leaving school in 2009, compared to seven percent in 2009 for those leaving school in 2008. SPSCC had a 10.4 percent default rate last year, which is good for the area, Ybarra said.

“I don’t see that students pay that much attention, honestly, to interest rates,” she said, so a rate increase probably wouldn’t affect the amount of student debt. It may increase the school’s default rate, she said.

However, the standard way to calculate the default rate will be with a three-year horizon next year instead of the usual two-year horizon, she said, so the rate will probably go up regardless, which will make it hard to measure the effect of a rate increase on default rates.

Legislators want to keep the student vote but disagree on how to make up for the extended lower revenue of a low rate extension. Democrats proposed raising taxes on some S corporation shareholders above a $250,000 yearly income. Republicans said that targets small professional service company shareholders who receive the profits and tax liability “passed through” from an S corporation.

Republicans proposed cutting the Prevention and Public Health Fund to offset the lower expected revenue from student loans. The White House issued an April statement saying Obama’s senior advisors would recommend vetoing such a proposal.

Both plans failed to pass the Senate on May 24, with stronger support for the Democratic version.

The Student Loan Forgiveness Act of 2012 collected 950,000 signatures on signon.org before Rep. Hansen Clarke brought it before Congress in April. In addition to capping interest rates at 3.4 percent, it would offer loan forgiveness to students who have paid ten percent of their income for ten years, capping future loan forgiveness at about $45,000.

Anya Kementz, author of “DIY U: Edupunks, Edupreneurs, and the Coming Transformation of Higher Education,” wrote that she believes federal student loans should come with the usual consumer protections, such as bankruptcy protection.

Though Pumphrey said he believes lenders need to take on “some degree of risk,” he doesn’t think bankruptcy protection is a good idea, because it would encourage irresponsible borrowing.

“When students borrow money to go to school, they need to have an end in mind in terms of how they’re going to pay that back, which means a solid educational plan for some way to generate an income after they graduate,” he said. There are other ways to pay for school, he said.

Ybarra said she has seen students “blindly take loans” with no understanding of their rights and responsibilities. She also hears from one or two students every week who know they will have trouble paying or will be out of school for a while and want to know what they should expect; she said they must have listened when they received their financial aid counseling if they called her.

She said, the school promotes financial literacy to everyone who borrows, and, “It doesn’t just stop the day you leave SPSCC. Know that we are here to help.”

Pumphrey said the school continuously works on maintaining and improving the value of the education it offers, but faces recent challenges. He said when the school lost some of its state funding, the school raised tuition, but not enough to make up for the loss.

He said the school focused resources on the areas with highest demand, keeping all programs open, but cutting some courses and reducing the frequency of others. He said he envisions the college continuing its frequent review process as well as deans “keeping their ears to the ground” with regard to which technologies, professors and other resources will best prepare graduates for success.

He said that while student interest is important for deciding what to offer, it is much easier to get “job-side” information from an industry advisory committee about what kind of job availability exists to “absorb graduates.”

Student Dean Hobbs said the school best prepares graduates to work for others and serve industrial interests, but the school does a poor job preparing students for independence. He said the school should bring in entrepreneurial experts and investors to support students who could build local businesses.

Students considering borrowing for school can use the “Net Price Calculator” to simulate the true cost of school and borrowing, on the FAFSA website www.fafsa.ed.gov.