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.

At $867 billion, according to FinAid.org, the student loan market now currently outpaces both credit card debt and auto loan debt in the U.S. The federal government holds about $450 billion of all that college debt, effectively putting taxpayers at risk of having to cover the loans if college graduates wind up defaulting.

Even if private lenders get into the market more aggressively, Fitch says that the costs linked to college loans would likely rise anyway.

"In the current interest rate environment, private lenders could potentially offer college students variable-rate loans that would initially be much cheaper versus a 6.8% subsidized Stafford loan rate," Fitch says. "But while variable-rate loans may be cheaper now, they could prove to be more costly over the 10-30 year average maturity of the loans should interest rates rise."

But lenders may shy away if, as expected, the government allows student loan debt to be dischargeable in bankruptcy, and policy changes expected from the U.S Consumer Financial Protection Bureau may favor borrowers but penalize lenders.

"As a result, some banks have sharply reduced student lending activities while others have exited the business altogether," Fitch adds.

No doubt, the student loan market is a mess right now. And even if Congress stops its squabbling long enough to keep interest rates at 3.4%, that's no guarantee, as Fitch points out, that college loan costs won't rise just the same.

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