Is Congress Going to Double the Interest on Your Student Loan?


Posted on 24 February 2012

Printer-friendly versionPrinter-friendly versionSend by emailSend by email

By Sarah Jaffe
AlterNet

Unless Congress acts soon, millions of college students could see the interest rate on their federal student loans double this summer—adding $5,000 to the cost of an education for students who pay off their loans in 10 years, and around $11,000 over 20 years.

Yet Republicans are claiming that keeping those rates low costs too much and isn't the federal government's job. Rep. Virginia Foxx, chair of the Higher Education Subcommittee, even argued that it's unnecessary for any student to borrow money to go to college in the first place.

Of course, that's entirely divorced from the reality students face today. “We've seen massive state divestment from education,” Rich Williams, higher education advocate at US Public Interest Research Group (US PIRG), an independent research and advocacy group, told AlterNet. “That's on top of a bad economy which has caused families to have fewer resources, and then of course the dialogue around Occupy Wall Street and the reality of student loan debt--it becomes clear to anyone paying attention, that in this economy we cannot double the interest rates on student loans."

Back in 2006, Democrats ran on a promise to cut interest rates on student loans in half during the midterm election—a midterm that swept them back into power in Congress. They kept the promise—sort of. But deficit hawks whining about the cost of the measure kept them from cutting those rates on all federal loans, or making those cuts permanent. What they actually did was enact a plan, the College Cost Reduction and Access Act, in 2007 that sliced the interest students pay on the subsidized Stafford loans, from the 6.8 percent it had been fixed at a few years earlier, down to 5.6 percent in 2009-2010, 4.5 percent in 2010-2011, and now to 3.4 percent. But the cut expires this summer, so next year's borrowers would once again face interest rates of 6.8 percent.

Students with families making under $40,000 a year—those who can least afford to see their interest rates jump--are the primary beneficiaries of the subsidized Stafford loan, which is awarded based on need and lent directly from the government. Stafford loans make up almost half of all federal student loans, and help families who are often not eligible for the Pell grants that help the neediest students.

Meanwhile, the government, which now lends money directly to students rather than subsidizing banks and student lenders like Sallie Mae to do so, is able to borrow at a significantly lower rate than 6.8 percent or even 3.4 percent. So, as Libby Nelson at Inside Higher Ed explained -- and contrary to what Republicans on the Congressional Education and the Workforce Committee say--the government is actually making money by lending to students.

[T]he government now keeps the difference, channeling some of the profits into financial aid programs and most of the rest toward deficit reduction (with some even flowing to administration priorities like early childhood education, as in the 2009 healthcare law). Once more direct and bank-based loans are consolidated, and when the student loan interest rate increases to 6.8 percent next year (when a several-year effort to halve the rate ends), federal student loans will become even more lucrative for the government.

The justification for charging higher interest on these loans is that it covers the risk of default by the borrower. But there is almost no way for borrowers to escape paying back their loan – thanks to the bankruptcy bill of 2005, student loans are not dischargeable in bankruptcy cases. The government can garnish wages, and even Social Security payments. There's almost no way for the government not to collect on a student loan, yet even supposedly forward-thinking outlets like the New America Foundation fall victim to the argument that the government needs protection from defaulting borrowers, and that rates should return to higher levels.

Indeed, a recent Wall Street Journal article reported, “After paying the companies that actually collect the loans and other costs, the U.S. Department of Education expects to recover 85 percent of defaulted federal loan dollars based on current value.” That's an extraordinary number, the Journal noted—banks often retrieve less than 10 percent of the value of overdue credit cards, for example.

The government might actually benefit from students who go into default. Mark Kantrowitz of FinAid.org told the Journal that the government would make a full $6,522 more in interest on a $10,000 loan that goes into default if it had been paid back in full in 10 years, and $2,010.44 more than if it had been paid back in 20. There's little need, then, for the government to make a chunk of interest in order to be protected from students who might go into default. Alan Collinge of Student Loan Justice told the Journal that there's a "perverted incentive" for the government to let loans default.

Williams pointed out to AlterNet that the federal government didn't get into the student lending business to make a profit, but rather to promote education as a social good for all. “In the Civil Rights era, America decided that making sure every student had access to a quality education regardless of financial barriers, they decided it was worth federal government investment,” he said. And when the Obama administration decided to stop subsidizing big banks and big lenders like Sallie Mae and NelNet and start lending money directly to students, it was in part to protect them from the predatory practices of those big lenders, as well as to save money, an estimated $61 billion over 10 years that won't be captured by banks.

It's worth noting, as well, that many of the big banks that make a killing on private student loans and still have billions of government-subsidized student debt on their books, are able to borrow money from the government through the Federal Reserve's discount window at nearly no interest at all. Why, then, are young people, who aren't guilty of trashing the economy but remain the victims of a rate of unemployment nearly twice that of the rest of the population, expected to pay more?

Obama has called for a one-year extension of the 3.4 percent interest rate for students, which he claims will save 7.4 million student loan borrowers an average of $1000, but members of Congress are going further. The House and Senate have introduced legislation that would keep the rate fixed at 3.4 percent and doesn't include an expiration date.

Sen. Bernie Sanders, I-Vermont, one of the cosponsors of the Senate bill, said, “At a time of rising college costs and unsustainable student debt, it is essential that we do all we can to make college affordable for students and working families. The productivity and strength of our economy depends upon a well-educated work force. It is a great waste of intellectual capital when an increasing number of high school graduates are not able to afford a higher education. Further, our nation suffers, as do millions of families, when students graduate college deeply in debt."

Of course, even if Congress does pass an extension, temporary or not, of the lowered interest rate, all that will do is keep the student debt bubble, which is now over $1 trillion, slightly smaller. It will do nothing to reduce the size of the debt students are already carrying, as it only applies to new loans, and it does nothing to reduce the cost of tuition or help those indebted students find work after school so they can pay down their debt. Student debt remains at a crisis point, and any step the federal government can take to help keep it low, while not a solution, will have a real impact on millions of young people, and through them, the U.S. economy.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Sarah Jaffe is an associate editor at AlterNet, a rabblerouser and frequent Twitterer. You can follow her at @seasonothebitch.

Framing the question of whether or not the government makes money on defaults in the context of "protecting the taxpayer" is completely wrongheaded, not to mention arrogant, sociopathic, and dishonorable. It also viciously inflicts dramatic financial and other harm upon millions of citizens.

If someone offered you a loan to start a business, but you found out that he actually wanted you to fail so he could make far more money, what would you think? Would you take the loan?

No. The answer is No. No way. Get out of my face NO. I'm inclined to report you to the State or Federal AG office NO.

But this is just the knee jerk interpretation. Think about the effects of such a system generally, where the lenders, guarantors, and even the governmental oversight entity stood to make more money when the loans defaulted. Would the governmental oversight entity try very hard to police the supplier (the schools) to ensure a high quality product was being purchased at a low cost? Would the lending entity try very hard to help the borrowers through meaningful, effective customer service? Would the guarantors of these loans police the lenders closely to ensure proper due diligence on default certifications when (particularly given that 60% of their huge revenues were from penalties and fees attached to defaulted loans)? Of course not. One might even suspect that they would tend to do something like the opposite...and the record on all of these fronts show beyond a shadow of a doubt that indeed, this is what is happening. Consider:

Sallie Mae, Corus Bank, and others have been caught for defaulting loans without even attempting to collect on the debt...en masse!

Guarantors have been found to be entering into schemes with lenders where the latter pay the former for ambiguous "services" contracts, when the former are supposed to be overseeing the latter to ensure proper loan handling.

And the Department of Education Never bothered to warn students and their families that the default rate, on average, was about 1 in 4 when the lenders and schools were telling them that the rates were far, far lower.

The Department also never bothered, apparently, to tell Congress that the default rates were extremely high every time Congress considered, and ultimately did increase the federal lending limits.

This is the problem that must be fixed before any other modifications are considered. We've already seen that fixes like gainful employment, and the like will be lobbied and bureaucretized into meaningless rubble while the Overseers at the Department of Ed are incented against the citizens.

Interest rates reductions do nothing to solve this. Beefing up Pell Grants won't either. This is a corporate culture that has been corrupted, and can only be fixed by forcing the Department of Education to be properly incentived...in other words, they must have skin in the game FOR the students instead of agains them.

Congress screwed this up by removing bankruptcy and other protections. Conversely, Bankruptcy protections must be restored before anything else is considered, and be advised that national confidence will evaporate if the default rate gets any worse, and Congress fails to act swiftly. This so obvious as to be almost ridiculous. Letting this problem perpetuate even 6 more months without this, or better remedies would be potentially fatal to the validity/acceptance of the lending system as a whole, I suspect strongly.

I hope Congress and the Executive Branch will do the right thing, and make this into a demonstration to the rest of the world on correcting bad government, rather than doing nothing, and allowing this issue to explode like the subprime problem never did, with all the attendent social damage.

Think they would provide great loan administration? Think they would mind if the price of whatever was being purchased went up artificially? Think th

Hi-

I spent something like an hour writing a comment for this story. Did you not get it?