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Obama proposes variable rate federal student loans


Monday, April 29, 2013

As the cost of higher education continues to rise, the topic of student debt remains contentious. According to Education Week, recent proposals put forth by President Barack Obama have proven divisive, and the new policy recommendations could have a serious impact on the amount of debt students will carry after graduating from college.

Desperate measures
At the heart of the matter is the looming prospect of interest rates on Stafford Loans doubling. If Congress does not take action in the coming weeks, interest rates on Stafford Loans could increase from 3.4 to 6.8 percent in July. To avoid this eventuality, Obama proposed changing federal student loans to a variable interest rate determined by the market rate at the time students took out their loans. Although this system could result in lower interest rates, economic instability could also result in significantly higher repayment rates than students currently face.

Opponents of the proposal, including student advocacy groups, are concerned that the new model will create another level of financial insecurity for students and their families struggling to pay college costs.

"Shifting all federal student loans from a fixed rate to an unrestricted market-based rate will increase the vulnerability of middle-class students and families struggling to afford a higher education," said Tom Harkin, Democratic Senator for Iowa, as quoted by the news source.

The sky's the limit
According to Bloomberg Businessweek, one of the most controversial aspects of the president's proposal is the lack of a cap on interest rates. In the past, federal student loan interest rates were tied to market rates, but were capped at between 8.25 and 9 percent, depending on the year. Obama's current proposals lack such a cap, meaning students could end up paying significantly more over the course of their loan.

However, the president's plan does extend the existing Pay As You Earn program, where borrowers' loan repayments are capped at 10 percent of their annual income. All federal student debt is forgiven after a period of 20 years under this plan, which may provide students with high debt balances but lower incomes with some respite when it comes to repaying their loans.

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