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Possible Student Loan Debt Deal Emerges Which Would Cost Students More to Borrow for College

Possible Student Loan Debt Emerges Which Would Cost Students More to Borrow for College

Since interest rates doubled for the 7 million working families expected to take out federal Stafford student loans this fall, the political battle to avert the huge spike in borrowing costs has raced and roared. Senate leaders have been considering several solutions all week to prevent students who already graduate college with a mountain of debt from paying an average of $4,000 extra over the life of the loan.

Last Wednesday, Republicans filibustered a Democratic proposal to restore the 3.4% interest rate on new student loans and the bill failed to make it to an up-or-down vote by a 51-49 margin. Afterwards, a bipartisan group of Senators met with Democratic leaders and agreed to tie the loan to the Treasury 10 year note rate plus a 1.85% fee, a plan similar to the House GOP proposal President Obama pledged to veto. This plan would cap interest rates for undergraduates at 8.25%, much higher than the current 6.8%. However, the deal hit a snag last night when the Congressional Budget Office estimated the bill could increase the deficit by $22 billion over the next ten years. Republicans are insisting any deal to reduce student loan interest rates is “revenue neutral,” so the solution can’t cost the government any of the $15 billion in profits it made off of student loans this year alone.

So, would this be a good deal for students and their families? As it stands, the compromise would charge undergraduates a 4.5% interest rate this year, but that would increase to 6% within 2 years and to 7% within 4 years, more than they are currently slated to pay. Historically, 10 year notes have been above 6.4%, suggesting the interest rate could rise until it hits that cap. AFL-CIO Chief Economist Bill Spriggs notes attaching a 1.8% fee to a loan is unnecessarily expensive and almost unheard of. No other group is charged such a huge fee, even by banks. Why should students be hit with such a huge charge?

If the average student graduates from college with $27,000 in debt, is it reasonable to expect her to pay off that debt in only 10 years, especially with wages stagnating and high unemployment? So why is Congress proposing to tie student loans to a 10 year interest rate, rather than the lower rates that accompany longer term debt like mortgages?

Meanwhile, Sen. Elizabeth Warren (D-Mass.) has introduced a bill to allow students to borrow at the same rate that banks receive from the Federal Reserve, 0.75%. The bill has not been considered despite the proposal’s widespread public support and its potential to render higher education dramatically more affordable.

To review, under the proposal the Senate is currently debating, it would cost students significantly more to borrow for college than it would for corporations to borrow from the Federal Reserve. As Sen. Warren said this week:

“I’m frustrated the GOP has once again blocked a sensible compromise proposal to keep interest rates on student loans from doubling. The federal government continues to make billions of dollars in profits off the backs of our students – producing higher profits than any Fortune 500 company – but the GOP’s proposal would make another billion on top of that, continuing to squeeze our students to cover other government costs. It’s unbelievable that Republicans would demand $40 billion for a new border fence, yet refuse to invest a single dime in a better future or our kids and our economy.”

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