Student loans could see rule change

College seniors -- who now typically graduate with $17,000 in debt -- may see a rare opportunity to slash thousands of dollars off their student-loan interest payments blocked by a new Bush administration proposal.\nFederal student-loan rates are likely to dip to a historic low of about four percent on July 1, giving students an incentive to consolidate multiple loans and lock in the low rate.\nBut in an effort to cover a projected $1.3 billion budget shortfall in a federal student-grant program, President Bush has asked Congress to change the rules of the federal student-loan program to make consolidation-loan rates variable, subject to change each year, and not fixed, as they are now.\nTrent Duffy, a spokesman for Bush's Office of Management and Budget, said that making the consolidation rate variable would enable future student-loan holders to benefit when rates go down. He noted that if variable consolidation rates existed in the past, the one million people who consolidated student loans between 1997 and 2000 at a much higher rate would benefit from lower rates today.\nBut student advocates aren't buying that argument, citing the possibility that rates will go up.\n"It's a terrible deal for students," said Ellynne Bannon, higher-education advocate with the nonprofit State Public Interest Research Groups.\nThe organization has calculated that students graduate on average with just under $17,000 in federal loan debt. By consolidating at the four percent rate expected this summer, the organization says, such a student would save $2,800 on interest over a 10-year repayment schedule.\nR. Barbara Gitenstein, president of the College of New Jersey in Ewing, called the Bush proposal "disturbing and shortsighted," because it would "moderate government financial responsibility by limiting our students' and their families' abilities to control their personal financial indebtedness."\nGreg Mitton, director of financial aid at Muhlenberg College in Allentown, Pa., said the Bush proposal in effect "eliminates the loan-consolidation program altogether."\nHe said the proposal "comes as a tremendous disappointment" to graduating seniors. "This raises questions about the priority given to higher education as a matter of public policy by this administration."\nSome educators say low-income students will be hit hardest by the Bush proposal.\n"The Bush administration is trying to have students pay for the Pell grant shortfall," Bannon said.\nFederal funding of the Pell grant program -- which does not require repayment -- has not kept pace with the rising cost of college tuition. As a result, low-income students who qualify for Pell grants have had to take out larger student loans to attend college -- even at public institutions.\nIn 1975, the maximum Pell award covered 84 percent of the cost of going to a public four-year college. By 2000, it covered only 39 percent.\nThat has forced students to borrow more. In 1992, for instance, students from families with incomes under $25,000 borrowed $1,812 a year to attend a state college. By 1999, they were borrowing nearly $3,000 a year.\nPell grant recipients graduate with an average federal loan debt of $19,000 -- $2,000 more than the typical student, according to the research group. The new four percent consolidation rate would save them $3,100 over a 10-year repayment schedule, compared with the current interest rates on their loans.\nThe consolidation program has only recently been used by student borrowers as a way to refinance loans. In the past, loan rates hovered much closer to the 8.25 percent cap. The consolidation program was established in 1986, and was designed to make loan payments easier by combining several loans into a single monthly payment, and to make monthly payments more manageable by extending the payment schedule over as many as 30 years.\nConsolidation rates are based on a weighted average of students' existing loan rates. Each July, the federal government adjusts the Stafford loan rates based on Treasury bill rates.\nThe government -- which reimburses banks to offer students below-market loan rates -- would save money if fewer students consolidated under the new proposal.\nThe $1.3 billion shortfall in the Pell grant program that the Bush administration seeks to address was caused in part by the economic downturn. When the economy sags, more people decide to go to college, particularly community college, increasing the number of students eligible for Pell grants.