The subsidy that the U.S. Department of Education uses to pay interest on federal student loans for undergraduates while borrowers are enrolled in college has been placed on the table in federal debt limit negotiations.
During budget negotiations last week between the White House and Congressional Republicans, Rep. Eric Cantor, the Republican majority leader, reportedly proposed ending subsidy payments on federal student loans and making students pay the interest on their college loans while in school. The proposal would end the subsidized Stafford loan program, save the government $40 billion over 10 years, and affect borrowers immediately.
While ending subsidized student loans is not a new idea — it was previously kicked around by the bipartisan federal debt commission, the College Board’s Rethinking Student Aid program, and, to a smaller degree, by President Obama himself in his 2012 budget proposal — other plans to end federal subsidies to borrowers of student loans mandated that savings would go toward expanding financial aid for needy students rather than pay down the deficit, as Cantor’s plan proposes.
President Obama, frustrated with the negotiations — which included spending cuts to Medicare and Medicaid and, now, student loans, while preserving tax cuts for oil companies and the wealthy — reportedly asked Republican leaders how they expected him to take their ideas seriously. “I’m not going to do that,” Obama reportedly said. “I’m not going to take money from old people and screw students” without a compromise on tax increases (“GOP Pushes New Cuts,” The Daily Beast, July 11, 2011).
Cutting Student Loans Would be Bad, but Not as Bad as Other Financial Aid Cuts
Subsidized loans are based on financial need and make up just under half of all Stafford loans, the federal government’s largest segment of student loans. If Cantor’s proposal works its way into the final budget compromise, students, who are already financially vulnerable, will have their problems exacerbated, according to Rich Williams, the higher education advocate for the U.S. Public Interest Research Group.
Compared to what students owe under the current subsidized loan program, Cantor’s plan would mean that students who borrow the maximum amount of subsidized student loans, $23,000, and take six years to graduate would owe $5,000 more at graduation and $9,000 more after a 20-year repayment period, said Pauline Abernathy, vice president of the Institute for College Access and Success.
While advocates of subsidized college loans are critical of Cantor’s proposal, some say that while losing the interest subsidy is far from ideal, it could be worse, especially if maintaining the subsidy causes other need-based financial aid programs, such as Pell grants, to be cut instead (“The End of Subsidized Loans?” Inside Higher Ed, July 13, 2011).
Justin Draeger, president of the National Association of Student Financial Aid Administrators, who strongly opposes cutting interest subsidies in order to pay down the debt rather than expand financial aid programs, said that while losing the interest subsidy “would be a blow to students … it doesn’t decrease the total amount of aid available to them up front to pay for college.”
Decreasing the Pell grant would have a far more dramatic affect on college affordability, Draeger said.