Any day now President Obama is going to sign legislation that will at least temporarily lower the interest rates on federal student loans.
This might sound like a welcome development, but it isn’t because the federal government will be continuing to make huge profits off parents and students who borrow.
The legislation could eventually make the financial pain worse for millions of families who need help to cover the cost of college.
In my last post, I shared some of the background on the Congressional student loan debate. If you missed the post, here it is:
Without Congressional action, the interest rate on subsidized Stafford Loans had automatically jumped on July 1, but the pressure to roll back the rate hike didn’t abate.
Congress reacted by agreeing to what was hailed as a rare bipartisan compromise on Capitol Hill. In the legislation, Congress dropped the rates on the following three federal loans that will be effective retroactive to July 1 once Obama signs the bill.
Here are the old rates and the newer lower interest rates:
- Stafford Loan 6.8% to 3.9%
- Parent PLUS Loan 7.9% to 6.4%
- Graduate Stafford Loans 6.8% to 5.4%
Congress set the previous rates years ago through legislation which explains why students were paying an outrageous 6.8% for a student loan when the cost of borrowing money has been at historic lows. The rate for the parent loan was even more outrageous.
Linking College Loan Rates To the Market
The new rates for undergrads, grads and parents will be tied to the 10-year U.S. Treasury, which means that the rate for each year’s crop of new federal college loans will fluctuate.
Students who take out a Stafford this year will never have to pay more than 3.9% interest on the debt, but if they turn to a Stafford for the next school year the rate could be higher depending on what’s happening with the 10-year Treasury.
The Democrats insisted that a cap be placed on how high the rates can go. For their part, Republicans insisted that the subsidized Stafford rate not be lower than the unsubsidized Stafford. Low and middle-income students are the ones who qualify for the subsidized Stafford, which had enjoyed a lower rate up until July 1.
Interest Rate Cushions
Tying college loan interest rates to the market is fine, but what I found unacceptable were the fat interest-rate cushions.
In addition to the 10-Year Treasury rate:
- Stafford Loan borrowers will pay an extra 2.05 percent points on their loans up to a maximum interest rate of 8.25%.
- Stafford Grad student will pay an extra 3.6 percentage points on their loans up to a maximum interest rate of 9.25%
- Parent PLUS Loan borrower will pay an extra 4.6 percentage points on their loans up to a maximum interest rate of 10.5%.
There is no reason why the government should pad the bill for parents and students when it was already making obscene amounts of money off millions of college borrowers.
The Congressional Budget Office estimates that the government will generate $184 billion in profits from its college loan program over the next decade. For this year, the CBO projects that the federal government will make a record $50 billion on federal students loans!! In comparison, ExxonMobil, the most profitable company in the country, made $44.9 billion in 2012.
Sen. Elizabeth Warren (D-MA) has called these profits “morally wrong” and “obscene” and I agree.