Senate Poised to Raise Interest Rates on Future Student Loans

Senate Poised to Raise Interest Rates on Future Student Loans

Senate Poised to Raise Interest Rates on Future Student Loans

A bipartisan compromise nearly guarantees that rates will rise above current levels in a matter of years. 


(Creative Commons)

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.

“The U.S. loans to big banks at less than 1 percent interest, and here we turn around and demand profits on the back of our kids,” Warren told The Boston Globe after the deal was announced. “That’s wrong. This is not the business the U.S. government should be in.”

Many Democrats in the Senate had pressed for a temporary extension of last year’s rate, so that the question of a permanent fix could be taken up as part of a broader plan for college affordability during the reauthorization of the Higher Education Act, due next year. “When we think of comprehensive reform, interest rates are just one part of student loans policy,” explained Asher. “And student loans policy is just one part of the college affordability puzzle.” But after attempts to pass a one-year extension failed repeatedly in the Senate, a permanent solution looked like the only option to lawmakers desperate to diffuse the political risk of the July 1 hike.

“I’m just surprised that we seem to have to make this deal,” said Jim Dean, chair of Democracy for America. “Do they really want to raise the debt of people in their 20s, handicapping their purchasing power for years after they get out of school? This is something that affects all Americans—not just students. It also affects parents…who are struggling to help students pay.”

A vote could come as early as tomorrow. If the bill passes, the next step is to resolve differences between the Senate compromise and a plan passed by the House last month, with the intent to send the bill to the White House before the Capitol empties out for the August recess. The main difference is that in the House version interests rates fluctuate over the life of the loan, so that a student who borrows at a low rate next year would likely pay more in the future as Treasury yields rise. The Senate version keeps interest fixed at the loan’s initial rate.

It’s possible that the bill would be amended before it passes the Senate, or that lawmakers would reform this “permanent” fix next year. “Can we change it? Sure we can change it,” Senator Tom Harkin, chair of the committee that will oversee the Higher Education Act, told reporters last week. “This is not the Ten Commandments written in stone, for God’s sake.” Bernie Sanders proposed an amendment today placing a two-year limit on the deal.

The good news, as I wrote last month, is that it’s not just the interest rate that matters—particularly for current borrowers, who aren’t affected by the negotiations in Congress. In fact, there are several other ways to ease the student debt burden. Meanwhile, legislators in Oregon have passed a bill allowing students to attend public universities without taking out loans in any form.

Take Action: Tell Your Representatives to Follow Oregon's Lead to End Student Debt

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