Student Loan Compromise Hides Interest Rate Surprise

The last few weeks have been a case of “good news – bad news” for college students. As the rules that preserved the low interest rates for students loans passed at the last minute, so did the rules eliminating the loan’s post-graduation “grace periods.” Previously, the government picked up the tab on the interest rates for undergraduates for six months after graduation, and those leaving graduates schools could take advantage of the similar window. Starting this Sunday, both of these benefits will be eliminated.

Although the change hasn’t received as much coverage in the press as the provision that will keep student loan interest rates at their previous 3.4%, the elimination of the grace period will mean that students will be on the hook for an additional $20 billion of loan repayments. But the change is already having an impact on the choices made by some students, like Clarise McCants who says that she will not have to delay enrolling in the graduate degree program, as she had previously planned.

“I don’t want to hastily make a decision that could waste thousands of dollars I don’t have,” said McCants, who said she will have to put off graduate school after finishing her undergraduate degree at Howard University in the spring. “That could kind of prove disastrous for my finances.”

The new rules are considered a compromise between the Obama administration and the Republican leaders in Congress. The politicians lauded it as a fair trade-off for stopping student loan interest rates from doubling to 6.8%. Starting next year, students who take out loans to fund their graduate degrees will begin accruing interest immediately, as opposed to have it subsidized by the federal government for the duration of the program and for 6 months following graduation. While the federal government will continue to subsidize interest for undergraduate loans while the student remains in school, students will now be charged the interest immediately after they leave school as opposed to 6 months later.

The graduate loan subsidy is a casualty of last summer’s debate over the national debt ceiling. Lawmakers eliminated the program to cover a shortfall in funding loans for low-income students.

“It’s a difficult question, because as some experts point out . . . [subsidies are]  a back-end benefit to students,” said Julie Morgan, associate director for post-secondary education at the Center for American Progress. “They do save them money . . . but they don’t encourage students to attend school.”