04/20 - Students could lose low rate on debt consolidation - East Valley Tribune: East Valley Education News

04/20 - Students could lose low rate on debt consolidation

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Posted: Tuesday, April 20, 2004 10:29 am | Updated: 5:26 pm, Thu Oct 6, 2011.

College students burdened by educational debt may no longer have the option of consolidating their loans at a low fixed-interest rate according to a proposal under consideration in Congress.

If Congress approves the plan to impose a variable interest rate on consolidated loans, students with an average educational debt of $17,000 will pay from $5,696 to $9,432 in interest on a 10- or 15-year loan, according to the Congressional Research Service.

"It’s a huge source of anxiety, especially at a school like ASU," said Heather Sapp, a third-year law student at Arizona State University. "We have a huge number of graduates going into public sector jobs, but if you graduate with $60,000 in debt it makes it harder to do that."

Loan consolidation was meant to solve the problem of student loan defaults, said Craig Fennell, ASU director of financial assistance.

It’s a popular option for students who have taken on massive educational debt with different lenders. It allows graduates to roll all their loans into one with an interest rate as low as 3.5 percent and pay a lower monthly payment for up to 25 years.

It’s so popular that the volume of consolidated loans rose from $5.8 billion in 1998 to more than $41 billion last year, according to the General Accounting Office.

But loan consolidation has come at a cost to the government. One of the Department of Education’s major loan programs, the Federal Family Education Loan Program, paid $2.1 billion in subsidies for loan consolidations made in 2003, according to the GAO. Those loans carry a governmentguaranteed rate of return to lenders, so when interest rates are low, the government must make up the difference.

That’s why some members of Congress have dragged loan consolidation into the debate over the higher education bill, which authorizes the federal government’s student aid programs.

Even presidential candidate Sen. John Kerry, D-Mass., weighed in on the issue, proposing Wednesday to completely overhaul the system by eliminating subsidies to lenders and forcing them to bid for student loan contracts.

Before Congress takes action, it should consider the cost to the government versus the cost of loan default, Fennell said.

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