Congress hikes rates, limits on student, parent college loans

By capturing difference between interest paid by students, lenders, government could generate $14B.

Jonathan D. Glater / New York Times

With the narrow passage of the budget bill by Congress this week, students and their parents will be able to borrow more money to pay for higher education, but will face higher interest rates on these federal loans beginning in July.

Some critics have argued that the higher interest rates are, in effect, a cut in student aid.

Yet the bill could potentially generate nearly $14 billion in revenue for the government over five years by capturing what has at times been a windfall to lenders: the difference between the interest rates paid by students and rates paid by lenders.

Before, lenders could keep profits generated when rates they had to pay were lower than those paid by borrowers; now, that spread will have to be paid to the government.

The impact


Loans taken out by parents: Known as PLUS loans, the rate on them had been scheduled to rise to 7.9 percent from the current 6.1 percent on July 1; it will now increase to 8.5 percent as of that date. Nearly 800,000 parents take out PLUS loans each year, according to the Education Department.


Loans taken out by students: Under current law, the interest rate on federal Stafford loans will rise to 6.8 percent from 5.3 percent. Nearly 10 million students take out Stafford loans each year.


Loan amount: The law raises the maximum amount students can borrow through the Stafford program, putting more costly educational opportunities within reach, but also deepening the potential hole students may find themselves in after graduation. It also makes some types of loans available to graduate and professional students.

The partisan pitches


Republicans: "With this bill, we were able to reduce spending through changes in the way lenders operate, but at the same time we shielded the direct impact to students and actually increased student opportunities," Sen. Michael B. Enzi, R-Wyo., chairman of the Committee on Health, Education, Labor and Pensions, said in a statement after the bill passed the Senate.


Democrats: Rep. George Miller, D-Calif., called the bill too harsh on families.

Student advocates cry foul

The changes have led some advocacy groups, which had hoped to have the windfall money returned to students, to describe the new system as a hidden tax on borrowers.

"This bill turns to students and families as the predominant source of revenue, rather than trying to identify inefficiencies in the loan programs," said Luke Swarthout, higher education associate for the State Public Interest Research Groups, a nonprofit consumer organization that opposed the law. "This bill asks students and parents to pay for tax cuts."

Government windfall

Democrats and Republicans have sought to characterize the bill as cutting expenses, although it raises revenue, said Michael Dannenberg of the New America Foundation, a public policy institute in Washington. "Republicans want to say that they're cutting the program because they want to say that they're cutting down the size of government," Dannenberg said. Democrats want to say that Republicans are cutting the program "because it plays into the image that Republicans are anti-education."