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Increasing Student Loan Rates

Increasing Student Loan Rates
Will Harm Minorities, Experts Say

Some interest rates may increase by 2 percentage points.
By Charles Dervarics

For Carmen Berkley, an African-American student leader with five college loans and some knowledge of the financial aid system, the large increase in student loan interest rates on July 1 is still a little bewildering.

“It’s very daunting, and I still don’t understand it. I don’t think a lot of students understand,” says the University of Pittsburgh senior who worked with a national lobby group in Washington, D.C., to protect student interests. She is besieged by advertisings and mailings urging her to consolidate her various loans, which total more than $50,000. And, the ads say, she should do this before the July 1 rate increases on Stafford student loans and parent PLUS loans.

Berkley and thousands of other college students will have to come to grips with a shifting student loan market. Gone are the low interest rates of recent years, replaced by higher variable rates that will add up to larger repayments after students leave school.

“We’ve had a solid decade of happy news on interest rates,” says Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers. “That’s coming to an end.”

For minority students, the rate increase may also increase their reticence about incurring large college loan debts.

“A lot of students of color feel it was a stretch just to go to college,” says Berkley, a board member of the U.S. Student Association. She says her grandmother co-signs her loans and often expresses skepticism about adding more debt. As an out-of-state student at Pitt, tuition and fees run about $22,000 annually.

This past spring semester, Berkley put off buying her textbooks for one month because of a lack of funds. “I’m just a student with a lot of debt,” she says.

Her plight is not unusual, says Nassirian. “Students of color tend to be skeptical of debt financing.” Whether to avoid credit problems or because of unknown fears, he says, “They’ve been trained to shun debt.”

While interest rates alone may not persuade minority students to put off their education, it is one of several trends that may affect access, says Thomas Mortensen, a higher education analyst with Postsecondary Education Opportunity.

“Higher interest rates, along with freezing the Pell Grant maximum and escalating tuition, works to the disadvantage of low-income minority students,” he says. As a result, more may attend lower-cost institutions or delay college.

 “Poor people are inherently risk-averse,” Mortensen says. “For low-income people, college is a risky investment to begin with. Borrowing against future income is pretty scary for people who survive day to day.”

Rates on existing Stafford Loans are expected to increase nearly 2 percentage points, to 6.7 percent, after July 1. Rates on existing PLUS loans will jump to 8 percent.

Under law, rates on these existing loans vary each July based on the yield of 91-day Treasury bills. In the past year, the Federal Reserve has repeatedly raised interest rates in a move to stem inflation.
Interest rates for new Stafford and most new PLUS loans will also jump based on legislation the U.S. Congress approved last winter to cut federal spending.

Lenders say the answer for most students is a consolidation loan, through which borrowers can combine their various loans under one interest rate. The rate would be a weighted average of existing loans rounded to the nearest 1/8th of a percent.

“Student loan consolidation is the best way to protect yourself from a very significant interest rate increase on July 1,” says Keith D’Ambra, senior vice president of loan consolidation for Sallie Mae, one of the nation’s main loan providers.

Loan consolidation can result in a rate as low as 4.75 percent, according to Sallie Mae. The lender says it also provides an additional discount for those who make on-time payments over a three-year period.

Nassirian agrees that consolidation loans are “highly advisable.” But he says there’s little incentive for students to act on the loans this summer since they generally do not begin repayment until they leave school.
Students also are not very price-sensitive to interest rates, he says, since their first goal is to obtain the necessary college funds. In addition, many youth tend to “exaggerate their earnings potential” in the years after graduation, Nassirian says.

Despite recognizing the benefits of consolidation loans, Berkley is still unsure whether she will combine her loans in hopes of a lower rate. Her concern is whether she can get a six-month grace period from repayment on a consolidation loan after graduation. Most of her existing loans carry this benefit, which she thinks will give her more time to find a good job.

“This is my education I’m investing in,” she says.

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