Hugely Profitable Government Student Loan Rates About to Double for Half a Million in State

Friday, June 07, 2013
(graphic: ReadyForZero)

Although the federal government projects it will make $51 billion this year on student loans, it seems poised to raise the interest rates for borrowers one way or another.

The U.S. Senate, House and Obama administration are battling over competing plans as a July 1 deadline approaches that will trigger doubling of the current, subsidized 3.4% Stafford loan rate. That would cost 550,928 California college student loan borrowers $543.8 million (or $987 each) annually, according to the California Public Interest Research Group (CALPIRG).

The average California graduate owes $18,879, according to CALPIRG. Nationwide, student loan debt tops $1.1 trillion. It is the largest consumer debt in the country, just having passed credit credits, and the second largest debt behind mortgages. 

Yesterday’s festivities featured the Senate voting down competing proposals from the two political parties. The Democrats wanted to freeze the 3.4% rate set a couple years ago and Republicans wanted to replace it with a market-based variable rate. Both were expected to lose, and they did.   

The Los Angeles Times said Senator Lamar Alexander (R-Tennessee), a co-sponsor of the GOP bill, called it “the opening act at the circus.”

The Republican-controlled House approved its version of the bill along party lines last month. Stafford loans would have a variable rate, tied to 10-year Treasury notes plus 2.5%, that resets annually, and would cap at 8.5%. Loans for parents and graduate students would cap at 10.5%.

The Obama administration, which supported the Democratic Senate bill, would prefer, if left to its own devices, to tie the rate to Treasury notes, like the Republicans, but the rate would be fixed for the life of the loan. 

Most Senate Democrats favor extending subsidies and the current loan rates for two more years. But some, like New York Senator Kirsten Gillibrand, want a hard 4% rate and permission for graduate students to refinance at that rate.

Massachusetts Senator Elizabeth Warren proposed that students get the same miniscule rate—currently 0.75%—that big banks receive at the Federal Reserve discount window. It is doubtful her argument that the Fed rate—mostly secured temporary bridge loans, often paid off within a day—should apply to student loans, which are unsecured and years long, will carry the day.

In fact, she only proposed that it be in effect for a year while lawmakers addressed the larger issue raised by her analogy to the business sector—there are probably better, more thoughtful ways for a nation to treat its most valuable assets.

–Ken Broder


To Learn More:

Senate Blocks Bills to Stop Student Loan Rates Doubling (by Elvina Nawaguna, Reuters)

Student Loan Interest Rates to Double for 550,928 Californians (California Public Interest Research Group)

Interest on Student Loans to Give Government $34 Billion a Year in Revenue (by Matt Bewig, AllGov)

Student Loan Bill Passes House, Setting Up Face-Off (by Jonathan Weisman, New York Times)

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