Students Bracing for Hike in School Loan Interest Rate this Summer

Students are bracing this summer for an increase in the student loan interest rate. It is agreed that it will most likely to double to 6.8 percent because the Republicans and President Barack Obama cannot agree on what should be done on Jul. 1, though they do concur with each other that something must be done.

The Republican-controlled House of Representatives passed legislation that would prevent the rates from rising now, but permit them to rise at a later time. The president confirmed that he would most likely veto the bill because he disagreed with the approach to addressing the student loan bubble and the interest rates.

It is expected that more than seven million students will take out the subsidized student loans this summer and pay more to pay the taxpayers back. The Brookings Institution told CNN that about one-third of all undergraduate students will be affected.

Many Washington officials are proposing to start over on the student loans issue. One concept being put forward is to alter the interest rates to move them in line with the present economic conditions. President Obama and GOP members of Congress have also suggested of tying the student loan rates to 10-year Treasury notes, which would add costs to borrow – rates would fall in a downwards economy and rise in an improved economy.

Essentially what this means is that student lending rates would be reset each year based on the interest rate of a 10-year Treasury plus 2.5 percent. This year, in that scenario, interest rates would jump from 3.4 percent to five percent and increase until it hits the cap of 8.5 percent.

“People who took out loans in 2007 were heavily subsidized (when interest rates were higher), but students today are receiving a much smaller subsidy,” said Jason Delisle, director of the Federal Education Budget Project at the New America Foundation, in an interview with the news outlet. “Let’s make the rate more sensitive to what’s happening in the economy.”

Massachusetts Democratic Senator Elizabeth Warren has proposed fixing the student loan rates at 0.75 percent “If we can invest in big banks by giving them low interest rates on government loans, we certainly can do the same to help students get an education,” Warren said in a statement.

Student loans have entered into a bubble and are ready to pop at anytime. Unpaid student loans reached an all-time high this month by surpassing the $1 trillion. About 11 percent of student loans are delinquent by 90 days or more. This is more than credit card debt, automobile loans and other non-mortgage debt.