Student Loans—First Do No Harm!
The interest rate on federally subsidized student loans increased from 3.4 to 6.8 percent on July 1. Even before this increase took effect, the Congressional Budget Office (CBO) estimated that the government earned a $50-billion profit on federal student and parent loans last year.
Lost in the hype is the fact that this increase applies only to a loan type that fewer than 40 percent of all undergraduates are eligible to receive. Most college students already pay the 6.8 percent rate, and graduate students and parents pay an even higher rate of 7.9 percent. At a time when interest rates are near historic lows, the government profits by charging students and parents above-market rates.
And despite the heated rhetoric and partisan finger-pointing, Washington doesn’t seem to see a problem. The proposals that have been considered—with one exception—do not reduce the government profit on education loans. Instead, under the guise of letting the market set rates, they temporarily reduce rates for some borrowers while increasing rates on others.
The House-passed Republican proposal converts student and parent loans from fixed- to variable-rate loans that reset each year. Using Congressional Budget Office (CBO) interest rate projections, the subsidized student loan would convert from today’s 3.4 percent fixed rate (stays the same for the life of the loan) to a 5 percent variable rate (changes each year). By 2017, however, this rate is projected to rise to 7.4 percent. The same is true for PLUS loans (used by parents and graduate students)–the interest rate drops briefly but by 2016 climbs to nearly 9 percent.
President Obama has offered a similar proposal. Subsidized student loan rates would be set each year (unlike the House proposal, remaining the same for the life of the loan). Using the same CBO projections, the rate would remain low the first year and rise and rise to 6.13 percent by 2018.
To pay for this, in 2016 the federal student loan taken by the majority of students would rise from today’s 6.8 percent to above 7 percent and keep rising in successive years, with no established maximum. In addition, graduate students and parents who borrow PLUS loans would pay higher rates beginning in 2016.
The same is true of the “bipartisan” Senate proposal: Today’s student borrowers would receive slightly lower rates that would bepaid for by charging higher rates to future borrowers. All of this is further subsidized by increasing the rates paid by graduate students and parents in 2016 and beyond.
The Vermont Congressional delegation has worked hard to bring these issues to the public attention. We at VSAC, and state agencies across the country, are working to combat these inequities by offering state-based student loan rates that reflect the market. VSAC’s fixed-rate loans are as low as 5.6 percent. There is no reason that the federal government cannot do the same.
One of the guiding principles of good legislative policy is to “First do no harm.” Unfortunately, most of the solutions before us do not meet this test. Many borrowers—particularly middle income borrowers– are actually better off under current law—even with the interest rate hike—than they would be under the proposals now being put forward.