A possible decrease in the interest rate of federally funded student loans could actually hurt students in the long run. The change may cause lenders who fund federally guaranteed student loans to pull out of the industry, creating a shortage of student loans across the nation.
Unless Congress changes the Higher Education Act, which in part determines the interest rate on all federal student loans, the interest rate will drop from 7.8 percent to 7 percent, potentially influencing lenders to not offer loans.
"Some lenders will pull out of the student loan program. You will see a diminishing of loan funds for students," said Denise Rossitto, manager of corporate communications for Sallie Mae, a corporation that helps fund the Federal Family Education Loan program, known as the guaranteed loan program.
Rossitto said 6,000 lenders have left the loan industry in recent years because the profit return isn't high enough. Congress has the ability to end this trend by providing a 7.65 interest rate when it discusses the reauthorization of the act next Wednesday, Rossitto said.
The federally guaranteed loans funded by lenders are not offered at the University. But if enough lenders pull out of the guaranteed loan industry, it would increase demand for the direct loans used by University students.
Congress "has recognized that this is a problem," Rossitto said. "We're confident that this will be solved so that students and lenders will be content, and the program can stay as healthy as it is now."
But it may take more than optimism to salvage the loan program since legislators and lenders hold such different outlooks on the loan rate. Rossitto said many legislators are advocating a 7-percent rate, which could save each public college or university student who takes out a loan $650 per year.
U.S. Rep. Dale Kildee (D-Flint) spoke with committee members yesterday to develop a solution to satisfy students and lenders, said Christopher Mansour, Kildee's chief of staff.
"He's trying to find the best rate for the students while keeping the lenders in the program," Mansour said.
"We're close to getting something solid here, but it's always subject to blow up at any second," he said.
David Longanecker, assistant secretary for post-secondary education in the Department of Education, informed Congress this past Thursday that for lenders to make a profit, they must provide short-term return for lenders.
"Under this alternative approach, student interest rates will be tied to the 91-day Treasury Bill rate - the same benchmark used currently - rather than to the 10- to 20-year note used in the scheduled change," Longanecker said.
His "proposal would reduce lender costs, because the use of this benchmark would more closely match their own financing practices," Longanecker said.
Thomas Butts, the University's associate vice president for government relations, said the interest rate has a more direct on Wayne State University, Hope College, Kalamazoo College and Michigan State University, where students have guaranteed loans.
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