BILL ANALYSIS Ó
AJR 20
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Date of Hearing: June 4, 2013
ASSEMBLY COMMITTEE ON HIGHER EDUCATION
Das Williams, Chair
AJR 20 (John A. Pérez) - As Introduced: May 13, 2013
SUBJECT : Federal Direct Stafford Loans: interest rates.
SUMMARY : Requests that Congress and the President of the
United States maintain the Federal Direct Stafford Loans (FDSL)
interest rate at 3.4 percent. Specifically, this resolution :
1)Requests that Congress and the President of the United States
enact legislation to maintain the interest rate of 3.4 percent
for FDSL.
2)Makes the following findings and declarations:
a) Just last year, Congress passed, and President Obama
signed, an extension to maintain the interest rate for
FDSL;
b) Unless action is taken by Congress and President Obama,
on July 1, 2013, the interest rate for FDSL will double
from 3.4 percent to 6.8 percent;
c) The average student loan borrower graduates with a debt
of $27,000, and the scheduled interest rate increase for
FDSL would cost almost 10 million borrowers an estimated
$1,000 more per year of education over the life of a loan;
d) FDSL have been a critical component for low- and
middle-income students working towards a postsecondary
degree, and over two-thirds of student loan borrowers are
from families with annual incomes under $50,000;
e) The higher interest rate level is the same level that
graduate students and unsubsidized loan borrowers pay,
which has the potential to limit access to California's
public postsecondary educational institutions by
discouraging students from using loans to aid in paying for
their postsecondary education;
f) Student loan debt affects Americans of all ages,
including the following:
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i) Forty-five percent of all American families hold
outstanding student loan debt,
ii) Thirty-six percent of families in households headed
by a person 45 to 54 years of age, inclusive, hold
student loan debt,
iii) Twenty-nine percent of families in households headed
by a person 55 to 64 years of age, inclusive, hold
student loan debt, and,
iv) Thirteen percent of families in households headed by
a person 65 to 73 years of age inclusive hold student
loan debt,
g) Student loan debt has a ripple effect on the economy, as
two million more adults 18 to 34 years of age, inclusive,
live in a household headed by their parents;
h) Student loan debt has a significant impact on
retirement, as 62 percent of workers 30 to 39 years of age
inclusive, 20 percent of whom hold more than $50,000 in
student loan debt, are projected to have insufficient
resources for retirement;
i) Each new household leads to an estimated $145,000 of
economic growth, suggesting that a delay in household
formation could be slowing broader economic growth;
j) Raising the interest rate of FDSL will make it even more
challenging for college graduates facing an already
difficult post-graduation job market to repay their loans;
aa) The Bipartisan Policy Center estimates that echo
boomers, people born between 1981 and 1995, will account
for 75 percent to 80 percent of owner-occupied home
acquisitions by the year 2020, yet the current
homeownership rate for echo boomers is among the lowest in
decades while the mortgage interest rates are at
historically low levels;
bb) According to the Congressional Budget Office, the
federal government makes 36 cents in profit for every
dollar it lends to all student borrowers, and student loans
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are estimated to bring in $34 billion next year alone; and,
cc) Higher education loans should be used to subsidize the
cost of higher education, not to be used as a source of
profit for the federal government.
EXISTING LAW : Several programs for student loans have been
established under federal law through the William D. Ford Direct
Loan Program, which is operated by the U.S. Department of
Education's Federal Student Aid Office. These loan programs
include:
1)Subsidized Stafford Loans : These are needs-based loans that
cover the difference between a student's resources and the
cost of attending a college or university; the amount of loan
is dependent on the level of need, dependent status, and year
in college. The federal government pays the interest while
the student is attending the college or university and
subsidizes the interest throughout the life of the loan.
2)Unsubsidized Stafford Loans : Not based on financial need,
these loans generally cover the difference between the
subsidized Stafford Loan and the total cost of attending
college. Loans are made by private lending institutions and
repayment is guaranteed by the federal government. The
federal government sets the interest rates and fees.
3)PLUS (Parent Loans for Undergraduate Students) : Available to
creditworthy parents of dependent students. These are not
needs-based and are federally guaranteed. Additionally, these
types of loans have been expanded for graduate or professional
degree students. The borrower is responsible for paying the
interest on PLUS loans during all periods, starting from the
date the loan is first disbursed.
Before July 1, 2010, Stafford, PLUS, and Consolidation Loans
were also made by private lenders under the Federal Family
Education Loan Program. As a result of the Health Care and
Education Reconciliation Act of 2010, all new Stafford and PLUS
Loans come directly from the Department of Education under the
Direct Loan Program.
FISCAL EFFECT : Unknown. This resolution is keyed non-fiscal
by the Legislative Counsel.
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COMMENTS : Background . Congress last year passed, and
President Obama signed into law an extension to maintain the
current interest rate for FDSL at 3.4 percent through June 30,
2013. On July 1, 2013, unless actions are taken, the interest
rate for FDSL will double from 3.4 percent to 6.8 percent,
costing student loan borrowers to pay significantly more over
the life of their loans.
The cost of higher education has increased over the last decade,
forcing students to take out increasingly higher levels of debt
to finance their education. The College Board's Trends in
Student Aid 2011 report notes that over the decade from 2000-01
to 2010-11, undergraduate borrowing increased by 56 percent per
full-time equivalent student. In California, cuts to public
higher education institutions have had an impact on how students
finance college and where they choose to attend school. In June
2012, the Public Policy Institute of California issued,
Defunding Higher Education, which found that, from 2007-2011,
fees at the University of California (UC) increased by 50
percent and by 47 percent at the California State University
(CSU).
In October of 2012, The Institute for College Access and Success
(TICAS) issued, Student Debt and the Class of 2011, which found
that state averages for debt at graduation from four-year
colleges ranged widely in 2011, from $17,250 to $32,450. TICAS
found that two-thirds of college seniors who graduated in 2011
had student loan debt averaging $26,600.
Additionally, TICAS found that the average debt of California
college graduates (from four-year public and private nonprofit
colleges) in 2011 was $18,879 and 51 percent of California
students graduated with debt. California ranks 46 among the 50
states and the District of Columbia in average student debt and
41 in percentage of students graduating with debt. To note,
high-debt states are mainly in the Northeast and Midwest and
low-debt states are mainly in the West and South.
Federal Direct Student Loans . FDSL are loans for eligible
students to help cover the cost of higher education at a
four-year college or university, community college, or trade,
career, or technical school. The U.S. Department of Education
offers eligible students at participating schools direct
subsidized loans and direct unsubsidized loans. The goal of
FDSL is to make higher education more accessible to Americans by
AJR 20
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providing reliable financial assistance to students that
qualify. These loans play a critical component, in addition to
other forms of financial aid, for low- and middle-income
students working towards a postsecondary degree; over two-thirds
of student loan borrowers are from families with annual incomes
under $50,000.
To maximize accessibility to higher education, subsidized FDSL
have a fixed interest rate of 3.4 percent. The current interest
rate has been the subject of debate at the federal level as it
relates to the impact of the sequestration and new budget
proposals.
Need for the resolution . According to the author, "A doubling
of the student loan interest rate will only exacerbate the
unacceptable trend of skyrocketing student loan debt. Other
proposals seek to increase the interest rates for Stafford Loans
without any limit, which can further drive students into debt
and out of higher education. Ensuring that FDSL continue to
have low interest rates is crucial to keeping higher education
accessible and affordable for all Americans."
According to the University of California Office of the
President (UCOP), during 2011-2012, the most recent year for
which UCOP has full information from all UC campuses, about
78,000 low-income UC undergraduates who demonstrated financial
need borrowed $337,586,878 in subsidized FDSL at an interest
rate of 3.4 percent. Additionally, many UC graduate and
professional degree students and also parents of undergraduates
borrowed unsubsidized FDSL, as well as Graduate PLUS and Parent
PLUS loans. Those borrowers, too, would be affected by a change
in how Congress decides to set federal education loan interest
rates going forward.
According to the CSU Office of the Chancellor, during 2011-2012,
the most recent year for which the CSU has full information from
all CSU campuses, approximately 146,000 undergraduate and
teacher credential CSU students received subsidized FDSL.
According to the California Community College (CCC) Chancellor's
Office, most CCC students do not take out FDSL.
REGISTERED SUPPORT / OPPOSITION :
Support
AJR 20
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University of California
Opposition
None on file.
Analysis Prepared by : Jeanice Warden / HIGHER ED. / (916)
319-3960