Why the student loan compromise compromises students

The problem with the compromise that the Obama administration and the Republicans struck over student loan rates is that it compromises students.

The deal, which the Senate passed late Wednesday, would bring down student loan rates, which were 3.4 percent until they doubled on July 1 to 6.8 percent because Congress failed to meet a deadline to act on the issue. But it also will link student loan rates to financial markets, which means that students could face much higher rates in years to come.

Under the deal, undergraduates could borrow money this fall at a 3.9 percent interest rate, though the rate could rise later to as high as 8.25 percent. Graduate students could borrow this fall at a 5.4 percent interest rate  with the rate able to rise later as high as 9.5 percent. And parents could borrow for their children’s education at a 6.4 percent interest rate, with the rate permitted to top out at 10.5 percent. By 2017, it is projected that interest rates will be higher than they are now.

of the Rochester City Paper argues that even the 3.9 percent rate is higher than it should be, noting that  “Chase bank offers a standard 60-month auto loan at a 3.14 percent interest rate.”

I don’t think it’s a stretch to argue that society’s better off when someone goes to college than it is when someone buys a car.

Good point (though I’m sure there are people out there who will argue the point).

You’d think an administration that is as keen on raising college graduation rates as the Obama administration is would reject linking the rates to markets that allow the cost of a loan to rise significantly, making it harder than it is now for young people to afford college. On the other hand, the administration has been backing corporate-influenced K-12 school reform for years, so this isn’t a big surprise.

Liberal Democrats led by Sen. Elizabeth Warren of Massachusetts rightly protested, saying that student loans should be as low as possible and not tied to market rates. She said that that under the compromise, the government is expected to make nearly $200 billion over the next 10 years because of the new rates. She said in an email to constituents:

I can’t support a proposal that squeezes even more profits out of our kids. In fact, I think this whole system stinks.

Good point (although I’m sure some of you will argue otherwise).

Other Senate Democrats acknowledged that the deal wasn’t ideal. But they said it was the best that could be reached right now, and that it was important to go along with the deal so that loan rates could come down right away. Congress can tackle it again down the road, they said.

That’s one thing Congress is good at doing.

 

 

 

Valerie Strauss covers education and runs The Answer Sheet blog.
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Valerie Strauss · July 24, 2013