Loan Interest Freeze Provides Boost, and New Barriers, for Students of Color

Last week's agreement brought welcome news, but difficult cuts, for student borrowers.

By Julianne Hing Jul 05, 2012

After months of wrangling, and even some slow jamming from President Obama on the matter, Congress approved a deal last Friday which stalled an interest rate increase on some student loans, but also cut back benefits for student borrowers. Students of color are expected to benefit from, yet be disproportionately and adversely affected by the mixed bag of new rules.

The agreement froze the interest rate on federally-subsidized student loans for undergraduate students until a year from now. In order to pay for the interest rate freeze, Congress also trimmed benefits. Starting next July, students receiving subsidized federal Stafford student loans, in which the federal government pays down the interest rate for students while they’re in school, will only be eligible for the subsidy for 150 percent of their program’s time. That is, students receiving such loans at four-year schools will only receive the subsidy for six years. In addition, as part of last week’s package students attending college without a GED or high school diploma will no longer be eligible for federal student aid.

Student advocates nevertheless hailed the news as a welcome, if short-term win.

"For communities of color, this brings short term relief in a time where money is tight and we can’t afford to have interest rates double," said Victor Sanchez, the president of the United States Student Association, which organized students to fight the interest rate increase.

The student loan freeze is expected to benefit 7.4 million students, and save them on average $9 a month, or $1,000 over the course of their lifetime. It’s a key win for students of color, who are more likely to depend on loans to pay for school, and more likely to graduate with high debt loads once they leave school. According to the White House, nearly a million Latino students and 1.5 million black students will benefit, as will more than 300,000 Asian American students and 36,000 Native American student borrowers.

"In addition to reducing the amount students will have to repay, it also makes it less likely that students will turn to private student loans before they’ve taken out as much as they can from safer federal student loans," said Pauline Abernathy, vice president of The Institute on College Access and Success, a higher education access research and advocacy organization.

Still, Abernathy said, the package of changes came with some cuts that will have an adverse impact on students of color. Over the course of the last year, other changes on federal student loans have also eliminated the subsidized loan program for graduate students, and cut the lifetime limits on eligibility for Pell Grants, which are given to low-income students. The Pell Grant cuts are expected to have an adverse impact on black student borrowers in particular, Abernathy said.

The agreement came at a key political moment. With the presidential election just months away, both parties used the issue to advance their key issues–Republicans wanted to pay for the interest rate freeze by cutting into Obama’s healthcare law, while Democrats wanted the funds for the $6-billion rate freeze to come from taxing wealthy business owners. Yet for students, it’s the economic context which has driven the need for reform.

Student loan debt passed the $1 trillion mark this year. Student loan debt in the U.S. already surpasses credit card debt at a time when college tuition is ballooning and public funding for education is waning. In this recession, students have faced a dismal job market upon graduation, and jobless students with no other options are forced to go into forbearance or default on their loans faster than they’d otherwise.

The one-year fix is no longterm solution for the real conversation these economic dynamics demand, said Sanchez. "We’re really postponing a fight that’s just going to happen again next year, which is unfortunate."

"In the same way that corporate interests stand up for themselves in policy debates, it’s important for students and families to do the same," Abernathy said, adding that it was student agitation which led to last week’s agreement. "Students need to remember that’s why this happened."