On Wednesday, the Senate took steps to retroactively reduce the interest rate charged on subsidized Stafford student loans and to change the way the rate is determined in the future. Senate Majority Leader Harry Reid (D-Nev.) has indicated that a vote on the resolution could come as early as Thursday, although a vote next week is more probable.
“It would save students in 11 million families billions of dollars,” said Sen. Lamar Alexander (R-Tenn.). “We’d like to be able to do this together and we hope that we can come to a decision right away because families need to make their plans.”
A 2011 law that kept interest rates low temporarily expired on July 1, causing interest rates on subsidized Stafford Loans to double from 3.4 percent to 6.8 percent. The Stafford loan program is a significant part of the Department of Education’s higher education financial aid package, and a higher loan rate would saddle millions of students with additional college debt.
Under the new deal, which would be enforced retroactively as of July 1, Stafford loan interest rates would be set at the 10-year Treasury note yield plus a set additional percentage — 2.05 percentage points for undergraduates. At current market rates, this would set the current undergraduate loan rate at a projected 3.86 percent. Graduate students’ rates would be set at the Treasury rate plus 3.6 percentage points, and parents who take out loans for their kids would add 4.6 percentage points.
However, because the Treasury note yield rate is expected to rise as the Federal Reserve’s stimulus plan comes to an end, the student loan interest rate is expected to climb in the future. Democrats won concessions on this point with a cap on interest rates of 8.25 percent for undergraduate students, 9.5 percent for graduate students and 10.5 percent for Plus loans.
A bipartisan agreement
The compromise came after months of partisan bickering over how to set the loan rate. While both Republicans and Democrats wanted a correction to the current rate model, they differed on how to go about it. Republicans and the White House wanted a rate based on the market with a direct, immediate link to bond rates. Congressional Democrats rejected this approach, arguing that it could lead to skyrocketing loan costs for students.
“This is supposed to be the new family-friendly Republican Party. This is the party that learned its lesson Nov. 6 of last year. So, here come the real test: if you are family-friendly, will you help working families put their kids through college?” said Assistant Senate Majority Leader Dick Durbin (D-Ill.) on July 6 after bipartisan negotiations on student loan rates failed. “Do you accept the fact that kids coming out of school is anywhere between $24,000 and $33,000 in debt, and if you allow the rate to double, they would be paying thousands more on those loans — of which their parents are co-signing those loans? The Republicans have a choice: They are either going to stand with their position to dramatically increase interest rates or they are going to stand with these working families who are trying to put their kids through school.
“That what we offered to them, and what they basically said is, ‘We don’t want to run the risk of closing tax loopholes on the wealthiest people in America to pay for this, so we will let the working parents and the students bear the burden.'”
Ambiguity in federal-held education debt
A key rationale in the Democrats’ rejection of market-based loan rates is the moral ambiguity of the federal government profiting off of student borrowers. With over $1 trillion in overall student loan debt in the federal loan program, the federal government is projected to take in $51 billion in profit from the servicing of Stafford and Plus loans, according to the Congressional Budget Office. This will bring the nation’s five-year profit from student loans to nearly $120 billion, or more than one-tenth of the nation’s total federal loan portfolio. The CBO projects $184 billion in profits for new debts over the next 10 years.
Republicans count on these profits as part of their federal budget-balancing plan. Without it, their math become untenable. At the national Generation Progress conference in Washington, D.C., on Wednesday, Sen. Elizabeth Warren (D-Mass.) called this practice inexcusable.
“Instead of helping our students, the government is making a profit on student loans,” Warren said of the profit figures. “That is wrong. It is morally wrong. That is obscene.”
“The government should not be making profits off the backs of our students,” she said. “Period.”
The Consumer Financial Protection Bureau recently classified the student loan market “too big to fail.”
“Unlike other consumer credit products, student debt keeps growing at a steady clip,” a CFPB blog post read. “Students borrowed $117 billion in just federal student loans last year. And students continue to borrow private student loans, which lack the income-based repayment and deferment options of federal student loans. If current trends continue, there will be consequences not just for young people, but for all of us.”
“What’s frustrating is that many people in Washington don’t really look at it urgently,” said the blog post’s author and CFPB student loan ombudsman, Rohit Chopra, at Wednesday’s conference. “Student debt is unquestionably strangling our people, and I think to say that it’s not having a broader impact in some ways may be naive.”
Student debt burdens are “not going to cause some immediate doomsday, but the long-term effect can be very, very real,” Chopra added. “If younger households are not being able to benefit from low interest rates, I think economic historians will look back and say, ‘Why didn’t we get this right?'”
In May, the House passed a student loan rate bill that also attached rates to the market’s 10-year Treasury bond rate, but without caps or fixed rates — meaning that, under the House plan, the interest rate can change yearly on an already-originated loan. Senators hope the House will be able to quickly rectify the differences between the bills and approve a final version quickly.
“The House can hopefully accept it, send it to the president, and it [can] all be done by the end of the month,” Alexander said.
The current proposal will reduce the budget deficit by $715 million.
“Republicans still want to raise money off of students, and we don’t want to do that,” Sen. Tom Harkin said in an interview with Politico.
Despite this, no one believes that there will be any objection to this bill reaching the Senate floor.