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Congress Raising Cost of Student Loans to Taxpayers' Children

November 18, 2005

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Tuition costs for college are steadily rising, and mounting student loan debt is taking its toll on each graduating class. Now Congress may is considering a law that would shift more of the loan burden onto students.

The House of Representatives has passed a bill to change funding rules for student loans, as part of a massive budget reconciliation effort.

The "College Access and Opportunities Act" (H.R. 609) would cut $14.3 billion from current student loan programs. It would change many of the lending terms and rates, leaving students with loan cost increases of as much as $5,800. The average student borrower already carries $17,500 in debt at graduation.

The bill passed by a two-vote margin of 217 to 215, after a ferocious late-night House session and a previous GOP defeat on a $602 billion spending bill that would have cut funding for primary education and health programs.

The current reconciliation bill must now be reconciled with the Senate's bill, which has much more modest cuts to social spending, before it can become law.

Rep. George Miller (D-CA) called the bill's passage "an absolute tragedy for young Americans." Miller is the senior Democratic member of the House Committee on Education and the Workforce, which issued a report highly critical of the changes.

"These unprecedented cuts will jeopardize the ability of the nation's colleges and universities to train new leaders in math, science, engineering, K-12 education, and technology to ensure our global competitiveness," it said.

The current rate for student loans is 8.25 percent, scheduled to be reduced to 6.8 percent in 2006, as part of previously authorized legislation. The pending bill would continue interest rates at their current level, and increase the number of loans that carry variable interest rates.

In addition, the new legislation would increase lending fees for loans originated through the Department of Education's "direct loan" program, from 1.5 to 3 percent. Students who want to find better terms with different lenders will also have to pay higher fees if they want to switch.

The Department of Education (DOE) will be issuing $80 billion in loans for 2006, including $62 billion in direct student loans and $18 billion for Pell Grants. According to the DOE's budget summary, extending the variable interest rate would allow students "to benefit from projected low-interest loans."

Student loan debt and higher education costs affect graduates across the spectrum. A report from the American Council on Education found student loan volume increased from $19.8 billion to $50.5 billion between 1993 and 2004.

The predominant volume of loans were to low-income students and families, but families with incomes of $100,000 and over contributed 48.4 percent of student loans in 2003-04, an increase from 13.3 percent in 1995-96.

The report also cautioned against students' increasing reliance on credit cards for expenses, particularly for graduate and post-graduate courses.

"Given the high interest rates on most credit cards, and the fact that many graduates will incur substantial personal expenses as they transition from college to full-time work, the level of credit card debt could have serious implications for individuals as they begin repaying their student loans," the report's author, Jacqueline King, said.

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