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President Proposes Linking Student Loans to Market Interest Rates

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In a proposed budget plan, interest rates for federal student loans will be linked to the government’s cost of borrowing.

In President Obama’s new budget request, which spans a lengthy 244 pages, several large changes to the federal student loan program were announced.

Other plans for the year’s budget include additional funding for community colleges, more federal work-study programs and increasing the maximum amount that Pell Grants deliver.

But one of the most discussed items dealing with higher education is the change to the student loan interest rate. Instead of the current system, where student loan interest rates are fixed by law and subject to congressional changes, the President’s new budget proposes changing the interest rates to market-based fluctuations.

The plan is a way to reduce the growing student loan debt problem in the country, and to reduce the overall cost of higher education. Student loan debt passed the $1 trillion in late 2011 or early 2012, and the number is not set to decrease unless large scale plans are enacted.

If the interest rate change became law, it would reduce the current cost of students’ payments. But interest rates change constantly. Since the market is on an upswing, the rates will likely rise past the current fixed rate. Unless a cap is set, student borrowers could wind up owing even more than they do now in future years.

But Obama’s plan is just that — a plan. It is not a law yet.

And critics dispute whether or not the plan has any chance of passing. Some experts believe the plan stands little chance of becoming a law, whereas others believe it will pass in the next few months.

Interest rates on unsubsidized Stafford loans are set to double to 6.8 percent on July 1, 2013 unless Congress enacts another freeze on the rates. If Congress does not pass another freeze, borrowers are predicted to owe a significant amount more.

According to a U.S. Public Interest Research Group report released Tuesday, the millions of students who owe debts on these loans will be forced to pay $1,000 or more per year.

At the very least, even if the interest rate aspect does not pass, it could still open up dialogue about the student loan debt issue. It could begin congressional debates about unique ways to reform the student loan program and how to reduce the national student debt figure.