The Senate will vote this week on a proposal to change the way the government sets federal student loan rates, in the hopes of ending weeks of stalemate.
Don’t be fooled by any triumphant rhetoric. The plan the Senate is voting on—to peg interest rates on federal student loans to the financial market—promises low rates in the short term, and nearly guarantees that they will rise above current levels in a matter of years.
“This is really more of a missed opportunity than a cause for celebration,” said Lauren Asher, president of the Institute for College Access and Success (TICAS). “It is going to cost families more over the next ten years than if we’d left current rates in place.”
The fix on the table now is permanent, and it allows both parties to dodge blame for the sudden rate hike that occurred July 1, when subsidized Stafford rates jumped from 3.4 to 6.8 percent. The plan does bring rates back below 4 percent for Stafford loans in the coming year, benefitting new undergraduates quite a bit.
But it won’t keep the rates below that threshold for long; instead, the Senate plan puts rates on track to exceed 6.8 percent in only four years.
The bipartisan compromise uses the interest rate for ten-year Treasury notes as the benchmark, plus a set amount that varies depending on the type of loan. Undergraduates taking out subsidized and unsubsidized Stafford loans next year would pay 3.86 percent in interest. Graduate students would pay 5.41 percent on the coming year’s loans, and parents taking out PLUS loans would pay 6.41 percent.
Because Treasury rates are expected to rise as the economy picks up speed, the rates that students pay on new loans will go up, too. By 2017, according to TICAS, the rates on undergraduate loans will pass 6.8 percent. Graduate students would see rates above that threshold in just two years, and PLUS loan rates will exceed their current 7.9 percent in three years.
Lawmakers have imposed caps on how high the rates can go, but student advocates say they are too high to protect students from unmanageable debt. Rates paid by undergraduates with Stafford loans could rise as high as 8.25 percent. Graduates would pay up to 9.5 percent, and parents up to 10.5 percent.
The Senate’s “fix” would add about $5,462 to an undergraduate’s total loan burden compared with the rate that has been in effect for the last two years, according to Congressional Budget Office projections. On the other hand, the CBO predicts that the deal will add $715 million to federal coffers over ten years.
Supporters of the Senate compromise say the plan is fairer for students because it allows markets to decide the rates instead of letting the government choose an arbitrary percentage. Critics aren’t necessarily opposed to a market-based rate per se, but they’d like to see the rates tied to a lower market benchmark, like the rate that banks pay when they take a short-term loan from the Federal Reserve, currently about 0.75 percent (as Elizabeth Warren suggested). Furthermore, they argue that interest charged on top of the market benchmark should be limited to the administrative costs of running the federal loan program.