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New Deal on Student Loans a Mixed Bag

The U.S. House of Representatives joined forces with the Senate late yesterday to temporarily lower federal student loan interest rates. In a show of bipartisan force, the House voted to provide 7 million students and their families with a measure of relief as they prepare to finance their futures this fall.  

The compromise, which awaits President Obama’s signature to become law, will remove the government’s role in setting interest rates for students. Instead, rates for federal student loans will rise and fall with the 10-year Treasury rate. As a result, students borrowing to afford college this year will pay a 3.86% interest rate, instead of the previous 6.8% rate.

As we’ve previously written, this bill is a mixed bag for students and their families for several reasons:

  1. While it helps college become more affordable for the next several years, it will make higher education more expensive for the families of the classes of 2021 and beyond. Because Treasury interest rates are expected to rise over the next couple of years, student loans will become more costly.
  2. The bill adds an unexplainable 2.05% fee to student loans, which is far more than the government needs to cover the cost of the program. This fee is also much higher than any other fee charged on government loans.
  3. The government is expected to net nearly $200 billion over the next 10 years from student debt payments, including an additional $700 million from this deal. Our government is using students to reduce the deficit, rather than asking corporations to pay their taxes.
  4. Students have borrowed at a 3.4% rate for the past few years. This deal charges students more.

More than 60% of America’s students depend on loans to finance their education, and college graduates already face a trillion-dollar mountain of outstanding education debt. While our elected representatives should be applauded for forging a compromise that lowers interest rates in the short term, the outcome is deeply troubling. 

To recap, the Senate rejected an amendment last week to lower the cap on student interest rates from 8.25% to 6.8%, and it rejected a bill to extend 3.4% interest rates for another year. It also did not give consideration to Sen. Elizabeth Warren’s (D-Mass) proposal to allow students to borrow at the same rate banks borrow from the Federal Reserve. Instead, Congress found a middle ground that takes advantage of the high cost of college to pay down the debt and does nothing to control the skyrocketing cost of higher education.

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