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Davis, California

Monday, June 17, 2024

Federal loans not immediately impacted by U.S. credit rating

Standard & Poor’s (S&P) downgraded the U.S. credit rating on Aug. 5. This has since ignited a flurry of panic that the downgrade may lead the country to another recession.

The U.S. government was initially at an AAA credit rating, meaning the country had a very strong ability to pay back its public and private debt. Since the decision, the U.S. is at an AA+ credit rating, meaning it still has the means to pay back its debt, but there is a long-term risk at hand.

As of now, there is no certainty as to what will ensue from the downgrade. Some economists predict it could cause interest rates on long-term and short-term debts to fluctuate as well as decrease the U.S.’s borrowing costs.

The downgrade will not affect student loans at this moment.

“There is no known immediate impact on federal student loans,” said University of California Director of Ethnic Media Communications, Ricardo Vazquez, in an e-mail. “Federal student loans are administered directly by the U.S. Department of Education and the terms of the loans are set in law.”

In particular, the interest rate for federal, or direct government-backed, loans is already fixed for this year.

“Rates wouldn’t be affected this year,” said UC Davis Financial Aid Office Director Kathryn Maloney. “They set it in July, so it can’t change between now and next July.”

The interest rate has been fixed for the past couple of years. According to California State University’s media relations specialist, Erik Fallis, it should be fixed for the next two years.

“As part of the negotiations of the Obama administration that moved everything over to direct lending, the interest rate for student loans is now fixed,” Fallis said. “But if it goes back to the variable system, in which the rate fluctuates with the market, then we may have a circumstance where if interest rates really rose, then student loans might have a higher interest rate.”

There are three different types of student loans available: subsidized and unsubsidized federal loans and private loans.

“For subsidized loans, the government is paying the interest the whole time,” Maloney said. “For unsubsidized loans, the interest is going the whole time, like a credit card, where you pay more than you originally borrowed.”

Private loans, according to Maloney, are considered as a last resort at UC Davis because banks do not have as good of terms and have higher interest rates. She stated they should only be considered if a student has exhausted all federal loans.

According to Vazquez, the downgrade in relation to private loans could be affected, but that is a totally different issue at hand since the downgrade impacts banks separately from how it impacts federal loans.

The UC Davis Financial Aid Office redid every student’s financial aid package because of the tuition increase.

“In general, all the aid programs have been increasing every year,” Maloney said. “More people are getting loans and more people are getting grants.”

Grants are based on a need component, which affects eligibility for students. According to Fallis, there is a possibility of seeing more grants.

“In a poor economy, more people are struggling, family incomes are beyond the decline, so there is greater need, and in turn greater eligibility for grant programs.”

Fallis also has some words of advice for students.

“I caution students to keep track of what is going on and be aware of interest rates when taking out student loans, either direct or private,” Fallis said. “It is also important for students to be advocates for themselves, especially when policies affecting student affordability are being made in Washington.”

Unrelated to the credit rating downgrade, the interest rate on federal student loans will increase next year from its current rate of 3.4 to 6.8 percent.

“Obviously, we cannot predict how the law could be changed in the future due to the economy, but major new changes are not anticipated,” Vazquez said.

CLAIRE TAN can be reached at city@theaggie.org.


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