A study released by the Congressional Research Study concluded if current law changes prevent students from consolidating loans at low interest rates, students could pay up to $5,484 in additional interest.
Congress is currently considering various changes to the student-loan program along with the re-authorization of the Higher Education Act.
House Democrats have proposed legislation, which would replace the fixed interest rate with variable rates that would fluctuate as the market does.
Rep. George Miller, D-Calif., favors making some changes to the current program but not eliminating the fixed interest rate altogether.
“The Congressional Research Service’s analysis makes it clear that the big banks’ plan to eliminate the low fixed rate on student consolidation loans is a raw deal for students,” Rep. Miller said in a release. “There are better ways to change the program without putting college even further out of reach for many students.”
The CRS analysis found students who have $17,000 in student loans would pay $3,115 more in interest on a variable rate for a 10-year loan. The same loan amount would cost $5,484 of additional interest over 15 years.
The current program was created to allow students who had loans from various sources, such as from banks or the government, to consolidate them into one loan. While most student loans have a maximum repayment time frame of 10 years, loan consolidation allows the borrower to extend the time period up to 30 years and lock into interest rates as low as 3.5 percent.
When the market interest rate rises above the rate loan consolidators have locked into, the government has to make up the difference to the lender.
Dan Davenport, former chair of the National Direct Student Loan Coalition, said the group has no official stance on the issue because “even among financial-aid people, you find different opinions.”
Davenport also pointed out one option is to provide lower interest rates for students who are still in school and remove the option for consolidating under lower interest rates for graduates.
“At what point does the value of higher education become so expensive that it outweighs the benefits?” Davenport asked.
Steve Van Ess, director of financial services at the University of Wisconsin, said the current program offers a valuable but unintended benefit.
“A lot of lenders are against consolidation. It’s kind of a political game going on,” Van Ess said. “It’s definitely to the borrower’s benefit the way interest rates are now.”
Davenport agreed a political game is being played.
“Whether or not legislation will be passed depends on which party is the majority in Congress,” Davenport said. “Sallie Mae has a huge impact monetarily on the current administration. But if there’s a change, and Democrats are the majority in the House or Senate, I think you may not see a [loan program] change.”
Van Ess said while he is unsure of his stance on the proposed changes, he does not want the benefit for students to be completely lost.
“The worst possible scenario is that past nor present students benefit from program changes,” Van Ess said.
