Update: The Senate failed to accept either of the proposals put forth by House Republicans and Democrats, the Associated Press reported on Thursday. Blayney told AdvisorOne on Friday, "I still believe that a last-minute one-year extension of current rates is possible, if not likely, as a way for Congress to avoid the enormous hue-and-cry that would result if they let rates double without any action whatsoever."
When a student takes out a loan to pay for college, she steps into the "catch-22 of the real world," Certified Financial Planner Board of Standards consumer advocate Eleanor Blayney wrote on the Board's blog Wednesday.
Students need the loans to get the education to get the job to pay back the loans, she wrote.
College graduates owe more than $1 trillion and an average $35,000 for this year's graduates, Blayney wrote. If Congress doesn't act by July 1, the current interest rate on Stafford loans could double to 6.8%.
"Most likely scenario, in my opinion, will be for Congress to kick the can down the road with a one-year extension of the current 3.4% on Stafford loans," Blayney, a 2013 IA 25 honoree, told AdvisorOne by email on Thursday.
Several legislators, including another well-known consumer advocate, Sen. Elizabeth Warren, D-Mass., introduced bills in mid-May that would help graduates tackle the extraordinary cost of their education. Warren's bill, the Bank on Students Loan Fairness Act, would allow students who are eligible for subsidized Stafford loans to borrow at the same rate banks get through the Federal Reserve discount window.
Another bill, introduced by Rep. John Kline, R-Minn. and chairman of the House education committee, and Rep. Virginia Foxx, R-N.C., ties subsidized and unsubsidized Stafford loans to the 10-year Treasury rate plus 2.5% and caps interest rates at 8.5%. For graduate student loans, the rate would be tied to the 10-year Treasury rate plus 4.5% with a 10.5% cap.
A third bill, this one introduced by House and Senate Democrats, would tie federal loan rates to the 91-day Treasury bill rate, plus an additional percentage to be determined by the education secretary. The bill would cap subsidized Stafford rates at 6.8%, and unsubsidized Stafford and graduate student loans at 8.25%.
"The various Republican proposals basically have loans keyed to market rates. In one scenario, new loans would be locked in at current rates; in another, the rates would be reset each year according to the market, with an overall cap," Blayney told AdvisorOne. "Democrats are not happy with the uncertainty this creates for student borrowers and have countered with plans that either set the rates at which banks get money from the Fed, at one low fixed rate, or indexed to 10-year Treasury rates with an overall cap based on borrower's income. Another major dividing point is the extent to which student loan interest paid back to the government will reduce the national deficit."
As the CFP Board's consumer advocate, Blayney directed her blog post to students struggling with debt rather than financial professionals. She urged graduates who were in the six-month grace period between graduation and the time they have to start paying back their loans to find the best payment strategy for them. To do that, she offered four suggestions:
Identify all loans. Blayney suggested students with federal loans go to the National Student Loan Data System to identify what kind of loans they had—such as Direct, Stafford, Plus or Perkins—and the amount of each. Those with private loans should contact the loan servicer, as the type of loan, the issuer, the amount and whether the borrower is the student or his parents will determine repayment options.
