In his budget request for fiscal year 2014, President Barack Obama is proposing a more market-based approach to subsidized federal student loan interest rates.
If the president’s proposal is enacted, the rate on new loans would be set each year based on a current market interest rate, which would remain fixed throughout the duration of the loan.
Right now, subsidized student loans have an interest rate fixed by Congress at 3.4 percent. This rate was scheduled to double to 6.8 percent on July 1, 2012, but Congress passed a one-year extension, which brings the new doubling date to July 1 of this year. Obama’s budget proposal is an attempt to prevent student loan interest rates from doubling in a few weeks.
The Obama administration has promised its proposal would save students thousands of dollars by preventing the doubling on July 1. The administration says the new policy would ensure that students will not pay more than 10 percent of their discretionary income on loan payments. Although the interest rate for new loans would fluctuate from year to year, students would have a predictable rate after locking in the rate for their particular student loan, which would not change for the life of the loan.
Not everybody has embraced the President’s proposal. Molly Corbet Broad, president of the American Council on Education, noted in an article on the organization’s site that many organizations are not supportive of the proposal for more market-based loans, wanting instead to see fixed rates on the loans. However, according to the article, Broad says that Obama has put forward an “important idea” in trying to deal with the doubling of the loan rate. “It provides a useful compass point in working with Congress and the administration to reform the loan programs to keep borrowing as affordable as possible for students,” she says.
Student loan debt is a major problem in the United State. The $1 trillion in student loan debt is greater than any other kind of consumer debt except for home mortgages. The Treasury Department’s Office of Financial Research warned about the danger of massive student loan debt to the United States economy, saying that students with large amounts of debt are likely to spend less money and have fewer chances in securing a home mortgage. “These factors could significantly depress demand for mortgage credit and dampen consumption,” it says in its 2012 Annual Report.
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