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CA Insurance License #0B33145 Janet Barr, MS, ChFC, CLU LPL Registered Principal 206 E. Victoria St Santa Barbara, CA 93101 805-965-0101 janet.barr@lpl.com www.janetbarrcfs.com
Background
You may have heard in the news that Congress was working on a bipartisan solution to avoid the interest rate increase. Yet despite several last-minute attempts at compromise, lawmakers disagreed over key details and no single plan won sufficient support. A House bill passed earlier this year would have tied the interest rate on Stafford Loans (subsidized and unsubsidized) to the 10-year Treasury note plus 2.5%, with the rate resetting (variable) each year. President Obama in his budget also proposed linking the rate on Stafford Loans to the yield on the 10-year Treasury note, but with a smaller difference between the two, and more importantly, fixing the rate for the life of the loan. The Senate had its own ideas, with Democrats and Republicans differing in the way the rate should be determined and other details, such as whether the government should use some of the money it makes on the loans to reduce the federal deficit. In the end, a deal didn't get done and the rate on subsidized Stafford Loans doubled from 3.4% to 6.8% on July 1 as it was scheduled to do. The issue has taken on added significance after many reports, including some by the Federal Reserve Bank of New York, have shown that despite more aggressive debt shedding by American consumers since the recession, student loan debt continues to grow (it now surpasses total outstanding credit card debt) and has increasingly become a financial black cloud for many students and their parents. Indeed, many observers have raised questions about the student debt domino effect on the overall economy as there are now 37 million borrowers with outstanding student loans.
What's next?
There's talk that legislators will reach a deal after they return from their July 4th recess, and that any deal will apply retroactively. In the meantime, students who plan on taking out new subsidized Stafford Loans for this academic year will need to wait and see whether their interest rate will stay at 6.8%, and colleges will be waiting to see what happens as they prepare to send out fall semester bills. Stay tuned.
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