Even Without a Rate Drop, Stafford Loans Remain a Good Deal

For those hoping for a deal that would bring federal student loan rates back down to between 3% and 4%, the last week must have seemed like a see-saw between elation and disappointment. First, rumors swirled that federal lawmakers were on a verge of an agreement that would see the doubling of student loan rates reversed, and then came news that the deal was on the point of being scuttled because of its cost.

According to Jenna Johnson of The Washington Post, a Senate bipartisan panel was close to an agreement last week that would limit increases in federal student loan rates and tie them to market interest rates, but after cost estimates for the program came in at around $22 billion over the next decade, the plan was scrapped and a new round of negotiations began.

Unsurprisingly, the Senate Democrats want the loans at the lowest possible cost to the student. Senate Republicans want loans at the lowest possible cost for the government. The now-dropped plan would have provided a middle ground by capping student loan rates at 8.25% for undergraduates and 9.25% for graduate students, but for those originating loans this year, the rates would have stayed at between 2.6% and 5.2% for students and 6.3% for parents. That would have represented a 3.5% in savings over the current rates.

The tentative agreement was the result of discussions between Sen. Tom Harkin (D-Iowa), chairman of the education committee, Majority Whip Richard J. Durbin (D-Ill.) and six senators who had previously sponsored a similar bill.

Senators involved with the plan hope that they can tweak these numbers and find a plan that both parties can agree upon, according to the aides. They were confident that this development would not derail the negotiations.
On Tuesday, a bill that would have extended a 3.4 percent interest rate on one type of federal loan mostly taken out by low- and middle-income students failed to advance in the Senate. That rate expired July 1 and is now 6.8 percent.

Although the possibility of a deal ranges from “possibly” to “unlikely,” students and families should think long and hard before switching to different educational financing options even after taking into account higher rates. Even if interest rates remain where they are, federal student loans remain one of the best financing deals available.

Allison Lin of CNBC writes that student loan experts agree: private markets can’t come anywhere close to matching the interest rates offered by the federal government.

The interest rate on those loans gradually decreased from 6.8% in 2008 to 3.4% last year, before jumping back up to the 2008 level this week.

But experts say the loans still could be pretty reasonable, particularly when compared with what else is out there.
“Despite the doubling of the interest rate, it’s still a very good deal,” Kantrowitz said.

He pointed out that government-subsidized loans come with a substantial perk: Students are not charged interest while they are in school or during deferment periods. That’s not necessarily true for unsubsidized or private loans.