Student Loan Rates May Rise Regardless of Politics: Fitch

NEW YORK (bankingmyway.com) -- Both President Obama and Republican party standard-bearer Mitt Romney support extending low-interest rate student loans. But regardless of whether that happens, student loans could still wind up being more expensive.

Currently, political wrangling on how Congress would pay for the bill that would extend student loan rates at their present levels of 3.4% threatens to scuttle any deal. The GOP favors taking it out of the health care budget while the Democrats want to raise taxes on small business owners, or by hiking taxes on wealthy Americans.

If no deal is cut, federally funded student loan rates would double to 6.8% on June 30 -- essentially a $6 billion tuition hike for financially embattled U.S. families.

Make no mistake, affordable student loan advocates aren't happy about the bickering.

"Political mudslinging over the $6 billion investment has taken this critical issue hostage and threatens to saddle students with even more unnecessary debt", notes Tiffany Dena Loftin, vice president of the Washington D.C.-based United States Student Association, which represents four million students on 400 U.S. college campuses.

But even if a deal is reached in Washington, there's no guarantee that college students won't be paying even more for student loans.

That's the consensus of a new white paper released by Fitch Ratings, which says that students and families may gain in the short term, but "regulatory uncertainties" may add to loan costs in the long run.

"A scheduled doubling of interest rates on subsidized undergraduate Stafford student loans could create a short-term opportunity for private lenders, although Fitch Ratings believes that regulatory uncertainty with respect to the student lending business, a dwindling number of lenders in the space, and longer-term interest rate dynamics would all likely result in little response from private lenders. Left with few alternative financing sources, future undergraduate students could face higher interest rates as a result."

Fitch notes that a higher rate environment could boost private lending to college-going students and their families. If rates did pop up to 6.8%, the firm says that banks and other lenders would surely swoop in and undercut the high rate to grab a larger slice of the burgeoning student loan market.

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