By Tamar Lewin
The interest rate on many student loans is scheduled to double on July 1, to 6.8 percent from 3.4 percent — just as it was last year, when in the midst of an election campaign, Congress voted to extend the lower rate.
Again this year, no one wants the increase to happen, especially since even the current rate is well above market. But once again, there is likely to be a good deal of brinkmanship before the issue is settled. This time around, though, longer-term solutions may be on the horizon.
On Tuesday, the day before the White House plans to send its budget to Congress, student advocacy groups released an issue brief charging that the federal government should not be profiting from student loans, while more and more students bear a crushing debt burden.
The brief, citing a February report from the Congressional Budget Office, said the federal government makes 36 cents in profit on every student-loan dollar it puts out, and estimates that overall, student loans will bring in $34 billion next year.
“Higher education loans are meant to subsidize the cost of higher education, not profit from them, especially at a time when students are facing record debt,” said Ethan Senack, the higher education advocate at the U.S. Public Interest Research Group, which is issuing the brief with the United States Student Association and Young Invincibles, an organization for people 18 to 34.
“The revenue from student loans should be used to keep education affordable, and should never be used to pay down the deficit or for other federal programs,” Senack said.
While it has long been known that the government makes money on student loans, the numbers in the issue brief are surprising, said Terry Hartle, senior vice president of the American Council on Education.
“If the numbers are accurate, the government will make more money on student loans than Ford makes on automobiles,” he said. “Using student loans to create a profit center is not what anybody intended.”
Student loan borrowers graduate with an average debt of $27,000, and the scheduled interest rate increase on subsidized Stafford loans would cost almost 10 million borrowers about $1,000 more over the life of their loan, for each year of college.
According to the CBO report, the government will get 12.5 cents in revenue next year for every dollar lent through subsidized Staffords, 33.3 cents per dollar in unsubsidized Staffords, 54.8 cents on each dollar of graduate school loans, and 49 cents per dollar of parent loans, for a total of $34 billion a year.
Borrowers of subsidized Stafford loans make up more than a third of those using federal student aid. More than two-thirds of those borrowers are from families with an annual income under $50,000. Last April, in his re-election campaign, President Obama made a central issue of stopping the Stafford interest rate increase. A few days later, Mitt Romney expressed a similar view.
Now that the lower rate is about to expire, there is general agreement that it should not double. But a solution is unclear.
The White House budget is widely expected to include a proposal to move to a variable interest rate, pegged to the government’s cost of borrowing, that would be reset every year.
“The president’s plan will help middle-class students and their families afford college by stopping interest rates from doubling on July 1 as part of a long-term solution that is fair, fiscally responsible and benefits more borrowers by offering lower interest rates on nearly all federal student loans next year,” said an administration official, who declined to provide details of the plan.
Many Republicans favor a variable interest rate. But the Senate recently passed a budget resolution extending the 3.4 percent rate indefinitely, and Rep. Joe Courtney, D-Conn., said he planned to introduce legislation this week extending the 3.4 rate for two years, to give Congress time to rethink student loan interest rates as part of the higher education reauthorization bill.
“We have this very fragmented loan system, with subsidized loans and nonsubsidized loans and graduate students who may not qualify for anything,” Courtney said, “and we need some kind of long-term proposal that isn’t a one-year fix, but would use the low cost of money now as a sweetener.”