Student Loan Bill Doesn’t End Controversy Over Rates

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Photo Credit: Liberty Alliance

President Barack Obama and Congress finally reached agreement on interest rates for student loans, but the controversy surrounding the issue is not close to being over. Obama signed the Bipartisan Student Loan Certainty Act of 2013 on Aug. 9, and critics immediately went after the obvious misnomer in the bill’s name and the amount of profit the government will make for issuing loans.

The bill ties student loan interest rates to the 10-year U.S. Treasury note, a virtual guarantee that there will be no “certainty” over rates. They will change year-to-year based on the whims of financial markets. In fact, Congress was so certain that rates were going up that it imposed caps of 8.25 percent on undergraduate loans; 9.25 percent on graduate loans and 10.5 percent on PLUS Loans taken by parents to help their children pay for college.

In addition, the Congressional Budget Office, which reviews the future impact of legislation, projected that the federal government would take in nearly $185 billion in profits from student loans over the next 10 years. Nevertheless, Obama and members of Congress were thrilled with themselves for actually passing some legislation. “This is a common-sense approach to keeping student interest rates at a reasonable level so people have a better opportunity to go to college,” Obama said at the bill-signing ceremony. “They will get the education they need to better their own lies and strengthen their country’s economy.”

“This bipartisan agreement is a victory for students, for parents, and for our economy,” Republican House Speaker John Boehner said after the House approved the bill.

That would depend on how you looked at it.

This year’s rates do offer relief for the three major types of student loans. Undergraduate students will pay 3.86 percent; graduate students 5.41 percent; and PLUS Loans, which go to parents of students, will carry a 6.41 interest rate. The rates would have been 6.8 percent for undergraduate and graduate students and 7.9 percent for PLUS Loans.

However, experts predict that rates on the Treasury note will rise as the economy improves in the next few years and student loan interest rates will go up with them. Forecasts show that undergraduate loans could exceed the 6.8 percent mark within two years. PLUS Loans are expected to pass the 7.9 percent rate within three years. The caps on all three loans are considerably higher than the old rates.

The other area of concern with the bill is the amount of money the federal government is making on student loans. They CBO projected that the government will make a record $50 billion on student loans in 2013 alone and another $185 billion over the next 10 years.

The easy access to student loans is cited as one of the leading causes for tuition hikes that average 5 percent a year over the last decade. Obama made mention of that during the signing ceremony, but offered no hint as to how the government would address it.

“Even though we’ve been able to stabilize the interest rates on student loans, our job is not done,” he said. “The cost of college remains extraordinarily high and it’s out of reach for a lot of folks.

“For those who do attend, the amount of debt young people have coming out of school is a huge burden on them and their families. It has a depressing effect on our economy. We’ve got to do something about it. I’ll have more to say about that in the weeks to come.”

Bill Fay is a writer for Debt.org, focused mainly on news stories about the spending habits of families and government. He spent 21 years in the newspaper business and eight more in television and radio, dealing with college and professional sports, then seven forgettable years writing speeches and marketing materials for a government agency. 

This post was provided by Bill Fay, a writer for Debt.org, who was a guest on College Smart Radio “Tackling the Runaway Costs of College” on August 31st, 2013.  Listen to this broadcast on YouTube here.

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