Interest rates on subsidized loans to double without intervention from federal government

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UT students could see the interest rates on their federally subsidized loans double next month if the federal government doesn’t come to an agreement on how to contain rising student debt. 

Interest rates on federally subsidized Stafford Loans are set to increase from 3.4 percent to 6.8 percent July 1, which UT officials say will increase the average student’s debt by almost $2,600. The possibility has sparked a national debate and caused worry among higher education stakeholders around Texas who believe this burden will discourage students from pursuing college degrees. In the meantime, UT and state officials are urging students to graduate in four years to reduce debt.

According to state data, 85 percent of student aid in Texas comes from federal loans, which is 9 percent above the national average. The state currently ranks second in the number of students who take out federally subsidized loans. More than 460,000 Texas students owe the federal government a total of $1.69 billion. 

The average undergraduate student in the U.S. had about $26,000 in debt after graduation in 2011. 

Thomas Melecki, UT’s Office of Student Financial Services director, said the potential increase threatens UT affordability for many students. Melecki said doubling the interest rates would increase the total amount borrowed by UT students to more than $36.5 million. 

Melecki said the best way to borrow less money is to graduate in four years. UT currently
has a four-year graduation rate of 52 percent, the highest among Texas public universities, but hopes to increase it to 70 percent by 2016.

Student borrowers who graduate in four years average 29 percent less debt than those who graduate in five years and 67 percent less debt than those who graduate in six years, Melecki said. 

Surrounded by a crowd of students, President Barack Obama urged Congress this month to come to an agreement on a new student loan bill to avoid the automatic doubling. Obama criticized a bill the U.S. House of Representatives passed in May that would link student loan rates to how the economy is doing, meaning they could rise or fall every year. Obama has threatened to veto the bill because it does not lock-in rates, claiming it eliminates safeguards for low-income families.

“It could actually cost a freshman starting school this fall more over the next four years than if we did nothing at all,” Obama said. “The House bill isn’t smart, and it’s not fair.”

Dominic Chavez, senior director of External Relations for the Texas Higher Education Coordinating Board, said the board is concerned about the potential interest rate increase, as it would be another hurdle for financially needy students. However, Chavez said declaring a major early, planning coursework carefully and ending the practice of course-shopping may blunt the impact caused by the potential increase.

Chavez said the average Texas college student who graduates with a bachelor’s degree does so with 142 credit hours — 22 more than what is required for the average degree. 

If action is not taken in Washington, Chavez said raised interest rates may ultimately discourage Texas students from pursuing college degrees.

“Increasing the borrowing costs for students who want to attend college can, over the long-term, send a message that a college degree is too expensive,” Chavez said.

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