Congress Nears Deal on Student Loan Rates. Spoiler Alert: They’re Going Up

The Senate hammered out an agreement last week to keep rates on some new student loans from doubling. It's welcome progress, but the compromise guarantees that rates will go up in the future. 

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In a moment of rare bipartisan collaboration, the Senate hammered out an agreement last week to keep rates on some new student loans from doubling, and it’s expected that a final version will be signed into law before the new academic year starts. It’s welcome progress, but here’s the rub: The compromise pretty much guarantees that rates will go up in the future. 

Lawmakers said that instead of the 6.8% rate that kicked in July 1, the rates on Stafford loans, both subsidized and unsubsidized, will be set at 3.86% retroactive to July and through the 2015 academic year, USA Today and others reported. The new agreement stipulates that students will pay the current yield on the 10-year Treasury note plus 2.05%. The new loan rate isn’t too far off the 3.4% students getting subsidized Stafford loans had been paying before, but that’s going to change: Treasuries are currently at historic lows, which will all but guarantee higher loan payments for future generations of students.

The GOP-led House had first endorsed the idea of a variable rate tied to Treasuries in its own version of a student loan bill, which it passed in May. Proponents of tying interest rates for loans to a market benchmark like Treasury rates say such a system is more fair because it doesn’t subject borrowers to political whims and wrangling. The Institute for College Access & Success (TICAS), though, called the deal a “missed opportunity” because it will lead to students paying more as the economy improves and Treasury rates rise.

(MORE: Student Loan Debt Crisis: How’d We Get Here and What Happens Next?)

“Over the next 10 years it is expected to cost borrowers $715 million more than if current rates were simply left in place, and current rates are already projected to generate $184 billion in profit,” TICAS president Lauren Asher said in a statement.

There is a limit on how high interest rates can go up under the proposed deal. The agreement in the Senate has a 8.25% cap on undergrad interest rates, and the House version has an 8.5% cap. Rates would never go higher than 9.5% for grad students, and interest rates for parents would not exceed 10.5%.

(MORE: Is the Student-Loan Debt Crisis Worse than We Thought?)

Not all lawmakers are happy with the Senate compromise. Massachusetts Senator Elizabeth Warren, who previously had proposed that student loan rates be lowered to 0.75% for one year, says the plan gouges students. “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. That’s wrong,” she told the Boston Globe. “We need to invest in our kids, not make it harder for them to get an education.”

1 comments
seanickson
seanickson

students loans have pretty high default rates, I highly doubt the U.S. will be making a profit from the student loan program.