Student loan rates doubled on Monday. This is not a disaster, despite what youâ€™ve heard from Washington.
President Obama made the expiration of a 3.4 percent student loan rate a big campaign issue last year, traveling across the country warning of dire financial consequences for struggling students. Congress extended the rate for a year. Now that extension is expired, and each side is bashing the other for allowing that 3.4 percent rate to adjust upward, though Republicans are yelling the loudest. â€śThe divisions among the president and his own party,â€ť House Speaker John Boehner proclaimed on Monday, â€śare directly responsible for the current impasse that will now result in higher borrowing costs for students already coping with skyrocketing tuition bills.â€ť
But thereâ€™s a whole lot that the politicians usually leave out. First, the rate in question is not on all federal student loans, but one class of them â€” subsidized stafford loans. Second, the government isnâ€™t hiking the rate on any existing loans â€” only on new ones. Any loans issued before Monday keep the rate they originally came with. Third, even at 6.8 percent, students are getting a great deal. They are risky borrowers, and no private lender would ever front them money at anything like the rates the government is offering â€” not to mention the terms.
Oh, yes, the terms. The interest rate is only one thing that determines how much student borrowers end up paying after graduating. Much more important, in fact, are the repayment options the government extends to needy debtors. Under an income-based repayment program Obama championed, student borrowers are never required to pay any more than 10 percent of their disposable income in debt service. And the government will forgive any remaining loan balance after 20 years, as long as those borrowers qualify. It makes much more sense to target financial relief at graduates who end up needing it rather than offering lower rates up front to lots of students, many of whom might go on to make loads of money after college.
If the political hysterics weâ€™ve heard arenâ€™t warranted, what is? How about taking the politics out of setting student loan rates, finally. The funny thing about the current fight is both Obama and House Republicans want to do that, and they even agree, though very broadly, on the way to do it: linking student loan rates to the rate at which the government borrows, instead of having Congress just fix the rate based on whatever lawmakers feel like. Studentsâ€™ rates would float with everyone elseâ€™s, reflecting economic reality. The New America Foundationâ€™s Jason Delisle points out that this is also fairer across generations of students, since the amount of help theyâ€™d each get from the government wouldnâ€™t fluctuate with interest rates, as it does now.
The problem has been that Obama and Republicans havenâ€™t agreed on some of the specifics, and Democrats such as Sen. Elizabeth Warren (D-Mass.) insist on continuing to set interest rates by congressional decree. Despite Ms. Warren, there should be room for a bipartisan deal here. And if an agreement doesnâ€™t materialize, once you consider the broader context, 6.8 percent just isnâ€™t so bad.