If the U.S. Senate passes the College Student Relief Act of 2007, college students could see the interest rates on their federal Stafford loans cut in half.
According to the House of Representatives' Committee on Education and Labor's Web site, the average college student graduates with $17,500 in loan debt. The College Student Relief Act, passed by the House on Jan. 17, would gradually lower interest rates on Stafford loans from 6.8 percent to 3.4 percent by 2011.
Patrick Barkey, Ball State University director of economic and policy studies, said the savings students would see could be pretty substantial. If a student was trying to pay off a $100,000 loan in 10 years, the difference between three and six percentage points would be significant, he said.
While Barkey said he sees the benefits the act would provide students, he remains skeptical as to whether the act would solve more problems than it creates.
"[The legislation] may be enabling universities and colleges to raise tuition prices faster," he said. "[The government] is essentially paying part of your tuition. If the government subsidizes the loan, the university has more room to push tuition up without hurting students."
Although he said he couldn't predict that happening, Barkey said it sounds possible. Students would probably be paying less, he said, but he expects that some of the savings would be taken by the pricing practices of universities.
However, Chris Munchel, associate director of admissions, said he could not imagine any universities or colleges deciding to increase tuition just because they could.
At Ball State, the Board of Trustees makes the decision to raise tuition prices, Munchel said. Universities generally raise tuition to adjust for inflation and to pay for quality faculty members and other student resources, he said.
Furthermore, Barkey said it seems like the act is not means tested, meaning students from families of all income levels would be eligible.
"[The government] may be subsidizing the education of people who can already afford it," he said.
To qualify for a subsidized Stafford loan, students must demonstrate financial need by filling out a Free Application for Federal Student Aid, or FAFSA. The amount of aid students will receive is determined by a number of factors, including expected family contribution and the cost of tuition at the school the student will be attending.
Barkey said college students' loans are a little different than other loans because students are typically younger and do not have expensive possessions, like a car or a house.
"If you get a loan from a bank, they usually want collateral in case you default [on the loan]," he said.
Therefore, to ensure that the banks do not suffer a huge market deficit if a student cannot pay off his or her loan, the government subsidizes the loan, meaning it pays part of the cost, Barkey said.
"When the government is lowering [interest] rates, it's not lowering the rates the private companies get," he said. "That's the reason why the government would subsidize the loan. Student loans have no collateral so markets may not make it."
Barkey said the size of the national debt worries him and the College Student Relief Act's use of government money might make it worse.
The Committee on Education and Labor's Web site said the act's plan will be able to cut interest rates at no new cost to taxpayers by making reforms such as lowering lender insurance rates for private lenders to 95 percent.
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