Colleges, universities wary of Federal student loan interest rate hikes
JEFFERSON CITY, Mo. — In early July, Congress failed to prevent a doubling of the interest rates for federally subsidized loans for undergraduate college students. The rate increase was scheduled to automatically double on July 1.
The rate hike means any student taking out a new Subsidized Stafford Loan will pay an interest rate of 6.8 percent, as opposed to the 3.4 percent in previous years. The loans are based on a display of financial need and are sought after because they do not accumulate interest while the student is in school — the federal government covers that portion, allowing a student to effectively borrow the money for free during their time as a full time student. The federal government also guarantees the loans, meaning repayment falls on them should the burrower default. This makes the loans especially popular to low-income students.
“It’s a terrible disappointment,” said Vicki Mattocks, Director of the Office of Student Financial Aid at Missouri State University. Mattocks has been working in financial aid at MSU for 26 years. She said financial aid employees across the state and country felt “confused” and even angry about the “congressional failure.”
“We have a feeling as if they have no contact or connection with us, or with the institution of higher education,” Mattocks told The Missouri Times. “They really appear to lack an understanding on what this is doing to students and to student lives.”
The concern for many is the default rate going up. As new students are burdened with larger debt upon graduation in an increasingly unstable job market, Mattocks said that default rates since the recession have more than doubled. In just four years at MSU, the cohort default rate jumped from 3 percent to 6.9 percent.
A cohort is a measurement of students who enter repayment during a specific time period. Often they are measured in three-year stretches.
Students who began repayment on Stafford Loans in 2010 are part of a three-year cohort of all students who entered repayment between 2010-2012. Default rates on this cohort, as opposed to pre-recession years, are higher nationwide according to statistics provided by the U.S. Department of Education.
A provision within Title IV, which states that any school with a three-year cohort default rate exceeding 20 percent could lose the right to offer any federal aid for its students. At MSU, 7,500 to 8,000 students of the 20,000 total are currently on some form of federally subsidized Stafford Loan. Mattocks said the potential impact of students no longer collected federal aid on MSU could be “devastating.”
Leanne Cardwell, MDHE Education Assistant Commissioner for the Missouri Student Loan Program, said it was common for default rates to spike, but that they appeared to be leveling off now.
“It’s not unexpected to see that happen,” Cardwell said. “There was a delayed impact from the recession, but ultimately default rates have stayed fairly low in Missouri. It’s always been under 10 percent of the total population of students taking out loans.”
Cardwell said that unemployment is one of the biggest factors in determining a default rate, along with graduation. Students that graduate are far more likely to repay loans. And as unemployment rose during the worst of the recession, recent graduates who couldn’t find work stopped paying their loans. Cardwell did say that higher rates would probably lead to a temporary hike in default rates in the next three-year cohort.
Missouri took in more than $1.3 billion in federal funds for higher education in 2011 — the most recent year data was available from the MDHE — for several programs including Stafford Loans, Pell Grants, Federal Perkins loans, federal supplemental educational opportunity grants (FSEOG) and federal work-study funds. Most of those funds were not affected by the Stafford Loan rate change.
And while the student loan bubble has been compared to the housing loan bubble, which played a significant role in the 2008 financial crisis, Cardwell said she doesn’t believe the two markets aren’t exactly comparable as federal student loans are unlikely to burst.
“There are a lot of options with a Stafford Loan when you are having trouble making payments,” Cardwell said. “With the housing crisis, you had foreclosures all over, but that’s not how it will work with a Stafford Loan. Some folks end up making payments of [zero dollars] for a short time if the determination is made based on income and family size that they can’t make payments, typically other kinds of lenders don’t have that flexibility with a burrower.”