I've bolded the relevant info. If you think about it, it's not that bad. Rates are permanently locked at 6.8% which isn't bad considering it provides protection from volatility in interest rates. Granted it's not as good of a deal as it is now but when the economy picks up again, I'm sure we'll see interest rates start to rise anyway.
http://www.ama-assn.org/ama/pub/article/6294-6225.html
AMA Statement to the Senate HELP Committee re: Student Loans
STATEMENT of the American Medical Association to the Committee on Health, Education Labor and Pensions United States Senate
RE: VARIABLE RATE CONSOLIDATED STUDENT LOANS
FOR HIGHER EDUCATION
May 9, 2002
On behalf of the medical student, resident physician, and physician members of the American Medical Association (AMA), we are pleased to submit this statement on the critical issue of consolidated student loans.
Introduction
In 1986, the Federal Consolidation Loan program was established by Congress to help student borrowers with the burden of federal student loan debt. A Federal Consolidation Loan allows an individual to consolidate his or her federal student loans into a single loan, choose a flexible repayment term and have a fixed interest rate for the life of the loan.
According to recent press accounts, a proposal for a variable interest rate for consolidated student loans has been under discussion. The AMA urges Congress to allow the student loan consolidation program to continue with the fixed interest rate. Consolidated loans with a fixed interest rate benefit all student loan borrowers who chose to consolidate their loans. If Congress accepts the variable interest rate proposal, it would effectively raise the interest on education loans for millions of Americans entering the workforce.
The Federal Consolidation Loan Program Explained
The Federal Consolidation Loan program was established by Congress to assist student borrowers with the burden of federal student loan debt. The amount of a Federal Consolidation Loan reflects the total amount of loans one consolidates.
According to law, each year on July 1 the Department of Education resets the student loan interest rate based on the 91-day Treasury Bill. The formula for loans in repayment is 91-day T-bill + 2.3; the formula for in-school loans is 91-day T-bill + 1.7 (thus, it is better for a student to consolidate his or her loans while in school, or during the six-month automatic deferment period).
The interest rate on consolidated loans is the weighted average (rounded up to the nearest 1/8%), or 8.25%, whichever is less, of the interest rate on each loan. Unless consolidated, federal student loans have variable interest rates, which are set by the Federal Government each July. Consolidation converts the variable interest rate to this fixed rate for the life of the loan.
Federal Regulations do not allow lenders to consolidate loans that are currently in default. A loan is considered to be in default only after a borrower fails to make payment on the loan for 270 consecutive days. Any loans that are not in default are eligible for consolidation.
Student borrowers, out of school borrowers and parent borrowers are all eligible to consolidate the following loans (one may consolidate a Consolidation Loan only if he or she is combining that loan with at least one other eligible loan):
Subsidized Federal Stafford Loans, formerly Guaranteed Student Loans (GSL)
Direct Subsidized Stafford Loans
Unsubsidized and Nonsubsidized Federal Stafford Loans
Direct Unsubsidized Stafford Loans
Federal Supplemental Loans for Student (formerly Auxiliary Loans to Assist Students/ALAS and Student PLUS Loans)
Federal Perkins Loans, formerly National Defense/National Direct Student Loans (NDSL)
Health Professions Student Loans, including Loans for Disadvantaged Students
Health Education Assistance Loans
Federal Insured Student Loans
Federal PLUS (Parent) Loans
Direct PLUS Loans
Subsidized Federal Consolidation Loans
Direct Subsidized Consolidation Loans
Unsubsidized Federal Consolidation Loans
Direct Unsubsidized Consolidation Loan, including Direct PLUS Consolidation Loans
Federal Nursing Loans
Consequences of High Loan Debt
Students are taking on a tremendous burden as they move through college and graduate school in order to pursue higher education. Roughly two out of three college graduates leave college with debt. Presently, 39% of college students graduate with debt that is more than 8% of their monthly income, creating a severe financial burden on them. Within the last eight years, the student loan obligation has doubled for American students.
As previously mentioned, a proposal has been considered that would replace the fixed interest rate with a variable rate for consolidated student loans. This approach was suggested in order to offset a deficit in the Pell grant program, which benefits low-income college students. Such a measure could cost students and graduates (including Pell grant recipients) on average, $2,800 in higher interest rates. This figure applies to the national average of $16,000 in student loan debt by college graduates.
Medical school graduates enter their residency with an average of almost $100,000 in student loan debt. Such debt is a tremendous hardship throughout the repayment period of the loan, but it is especially difficult during the years a physician is undergoing his or her three to eight years of training in a residency program.
Almost all first-year residents make less than $31,000 a year. This figure does not substantially increase throughout residency training. Under a variable rate system it is assumed that there is an increase of $2,800 for every $16,000 in loans. Thus, for $100,000 in loans, the variable interest rate would increase interest by an additional $17,500 over a 10-year period, and, $39,375 more in loan interest over a 20-year repayment period.
When education is so costly, graduates? career choices are affected. With such high loan debt, careers serving the public often are put aside for more lucrative jobs so the loan borrower is able to pay off his or her loans. Thus, those who may be considering whether to practice medicine in an "underserved" area, enter the public health service, start a career in medical education or research, or practice primary care medicine are often deterred from such paths.
Continued Progress Required For the Affordable Financing of Higher Education
Recently, Congress passed and the President signed into law a number of provisions assisting student loan borrowers. Included in the "Restoring Earnings to Lift Individuals and Empower Families Act of 2001" (P.L. 107-16) is a provision that greatly expands previous law allowing student-loan borrowers to receive a tax deduction on the interest paid on their student loans. Specifically, the law:
Increases the income threshold for the phase out of the tax deduction for student loan interest up to a modified adjusted gross income of $65,000 (up to $130,000 for joint returns);
Adjusts the income phase-out ranges for inflation after 2001;
Repeals the 60-month limitation on the tax deduction; and
Repeals the restriction that voluntary interest payments are not tax deductible.
Another provision of P.L. 107-16 allows recipients who earn scholarships granted by the National Health Service Corps (NHSC) and the Armed Forces to receive tax-free status as "qualified scholarships" without regard to any service obligations by the recipient.
In February 2002, additional legislation (P.L. 107-139) was enacted that will:
Fix the student loan interest rate at 6.8% beginning in 2006,
Extend the current rate structure until that date,
Fix the interest rate on PLUS loans (loans taken out by students? parents) at 7.9%, and
Fix the student loan consolidation rate at no more than 8.25%.
Given these positive developments relating to the financing of higher education, it would be a tremendous step backward to allow the latest proposal on loan consolidation to go forward. It is essential that all student loan borrowers be able to avail themselves of the best possible loan terms when seeking to refinance their debt.
Smart Education Policy
Keeping higher education affordable and keeping the student loan interest rates at an affordable level contributes to the United States overall competitiveness as a nation. When individuals make career choices based on how much money will be earned to pay back student loans, it affects how diverse the country is in terms of chosen career paths. The entire country benefits when the federal government contributes to the higher education system by offering student borrowers with affordable interest rates.
The AMA believes that it is in our national interest to encourage the best and brightest to complete their education, to be involved in the communities of this country, and to contribute to our Nation?s values. One such value is to pay off our debts. Since the federal government has allowed student loan consolidation, the default rate has dropped from 22% to 5.6%. Additionally, by allowing students to lock in today?s historically low interest rates, it will assist students in lowering their overall debt load.
At a time when many states are cutting their higher education budgets and more individuals are struggling to pay for a college education, we need the Federal government to assist students in obtaining their goal of a college degree and graduate study, when possible.
Conclusion
Thank you for the opportunity to submit our views regarding the proposal to change loan consolidation interest rates from a fixed-interest rate to a variable-interest rate. The AMA looks forward to working with the Committee on finding solutions to the critical issue of financing higher education for all American
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