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Federal student aid rates fan fears

Thursday, July 4, 2013, 12:01 a.m.
 

Doubling of interest rates on subsidized federal student loans, from 3.4 to 6.8 percent, may exact a more costly toll on some students, experts fear.

Megan McClean of the National Association of Student Financial Aid Administrators said the rates on Stafford loans, which increased on Monday, appear unreasonable to some students and parents who notice banks advertising private loans with adjustable rates starting as low as 2.7 percent.

“It's making things difficult for our members,” McClean said. “Almost always, we urge our students to exhaust all federal aid options before turning to private loans. But now we hear parental pushback. Parents and students are saying that private loans have better rates.”

Yet rates on private loans can escalate dramatically.

“Those rates have nowhere to go but up,” said financial aid expert Mark Kantrowitz.

Kantrowitz, senior vice president and publisher of Edvisors network, said interest rates have climbed as high as 14 to 15 percent on some adjustable-rate private student loans. He, too, advises students to exhaust federal loan eligibility before turning to private lenders.

Pauline Abernathy, vice president of the Institute for College Access & Success, an organization that studies college costs, said her group and others warned for weeks that less-than-savvy borrowers could be drawn into risky private loans if rates on subsidized federal loans increased.

Although rates on subsidized federal loans increased up to 8.25 percent in the 1990s and early 2000s, Congress reduced them to 3.4 percent because of the 2008 recession. Rates bounced back to 6.8 percent on new loans this week when Congress did not extend the lower rate.

Abernathy's group was among more than two dozen organizations that raised alarms about the potential impact of the rate hike.

“We are deeply concerned that the doubling of interest rates during a period of record–low market interest rates will lead to a significant increase in students mistakenly turning to costly and risky private loans for higher education,” they wrote in a June 17 letter to Richard Cordray, director of the federal Consumer Financial Protection Bureau.

University of Pittsburgh sophomore Neil Debski said he's glad his parents shopped around for a private loan to help underwrite his costs this fall. They secured a 6.3 percent fixed-rate loan so he won't be caught in the spiral of rising payments.

Debski, an engineering major from Baldwin Borough, works two jobs and has student loans to help cover his costs at Pitt, which recently ranked as the priciest public university in the nation.

“We didn't want to go to a variable rate,” he said.

Abernathy said even at a 6.8 percent fixed rate, students and parents should remember that federal loans carry features that private loans do not offer.

“It's not just how much you borrow and the rate, but how you borrow, and federal loans come with a whole range of protections not available on private loans,” Abernathy said.

“Federal loans have better back-end benefits,” McClean said. “They have a grace period for payment to begin, they have income-based repayment options, and there are provisions for discharge on death and disability.”

Debra Erdley is a Trib Total Media staff writer. Reach her at 412-320-7996 or derdley@tribweb.com.

 

 

 
 


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