Worries Mount With Rising Student Loan Rates

Feb. 9, 2006 — -- Chris Sweeten has a double major in international and ethnic studies at the University of California at San Diego. He is in his fourth year of college, but he won't be graduating this spring.

To supplement his student loans and pay his college and living costs, he works full time at a FedEx Kinko's store. So he'll have to complete a fifth year of college to complete his graduation requirements.

"It's a struggle," said Sweeten, who shares an apartment with six others to save money.

That struggle got tougher for Sweeten and about 5 million other student-loan recipients when President Bush signed a $39 billion deficit-cutting bill that included wide-reaching changes to the federal student loan program. It provides more loan money to more students, but it could also add as much as 2 percentage points to interest rates on some of these loans. And that's on top of steadily rising college costs, which have already gone up 46 percent over the past five years.

"When your interest rates are going up as well, you're paying more," said Sweeten, the youngest of his siblings and the first in his family to go to college. "It really is disheartening, and a lot of the time I just want to leave and just walk away ... I can't think about how I'm going to pay the loans back and how I'm supposed to ... give my nieces and nephews the same hope" to go to college.

Previously, the interest rates on loans taken out by students, called Stafford loans, and those taken out by parents, called Plus loans, were variable, adjusted each year to reflect current market conditions -- good when interest rates are going down but bad when they're going up. The new law makes the loans fixed rate, which means interest rates will now be locked in for the life of the loan -- just as rates are increasing.

Under the old law, the interest rate on Stafford loans had been set at 5.3 percent. While the new rate will be determined by the results of a U.S. Treasury bond auction in June, it could go up as much as 1.5 percentage points. And while the old law had called for interest rates on Plus loans to rise to 7.9 percent from the current 6.1 percent on July 1, the new law sets the new rate at 8.5 percent.

"It can mean thousands of dollars in additional costs to American families," said Mark Brenner, vice chairman of College Loan Corp., a leading provider of federally subsidized tuition loans for students and their parents. "And those with higher debts are definitely looking at significant increases. So those families who most need to borrow are the ones that will be most affected."