By Anne Marie Chaker
The Wall Street Journal Online
Congress yesterday cut funding for federal student-loan programs, a move that is expected to increase the debt burden for many future college graduates and their families.
The reduced financing is part of a $40 billion deficit-reduction package passed by the Senate. Federal student-loan programs make up the largest chunk of the spending trims — $12.7 billion over five years. To help limit spending, Congress raised interest rates on the popular Stafford loans to a fixed 6.8%, even if commercial rates are lower...
The interest rate on a Stafford loan is variable and reset annually, depending on a formula that looks at prevailing market interest rates. Today, that rate is as low as 4.7%, and students can lock it in thanks to the federal consolidation loan Program, which allows for a one-time opportunity to refinance.
Under the new legislation, the interest rate changes to a fixed rate of 6.8% starting July 1, 2006, on Stafford loans...
Until now, students could lock in a single, fixed interest rate on their loans when they consolidated them. Over the past year, many lenders said they saw a record number of consolidations as interest rates on federal student loans had hit an all-time low.
Yet the new law, by setting fixed rates for student loans, makes consolidating less attractive. "It essentially removes any financial incentive or benefit to consolidate," says Mark Kantrowitz, a Pittsburgh-based financial-aid expert, who points out that the only remaining incentives for consolidating include a single monthly payment and access to a variety of alternate repayment provisions, such as extending repayment when a student is experiencing financial difficulty.
When compared with today's low rates, switching to fixed rates would cost students and their parents thousands of dollars over the life of the loan, according to estimates by Mr. Kantrowitz. If a student consolidated a typical Stafford loan balance of $20,000 at the new rate compared with the current low rate, he would be paying over $2,000 more in interest over a standard 10-year life of the loan...
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