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The June Fight over Student Loans

Illustration by thisisbossi/flickr
The June Fight Over Student Loans originally appeared on the Campaign for America’s Future Blog.

Today (Friday), President Obama will join college students at a White House event launching a new push to keep student loan rates from doubling in July. Among the various plans offered, Sen. Elizabeth Warren’s (D-Mass.) plan is the most affordable for students, while the Republican plan tries to “make money” off of students using fluctuating “market rates.”

Student Loan Rates Set to Double

Loan rates for more than 7.4 million students with federal “Stafford loans” are scheduled to double July 1 from 3.4% to 6.8% if nothing is done. The amount of student loan debt is massive. U.S. students currently owe nearly $1.1 trillion in student loan debt, and this amount is increasing at a rate of about $2,853.88 per second. This amount is greater than total credit card debt currently owed. Among people younger than 30, 35% are near default on their student loans, as well as about 32% of those ages 30 to 49.

In 2005, average student loan debt was just over $17,000. By 2012, it was above $27,250. This was a 58% increase in just seven years. This debt creates a drag on the U.S. economy—homeownership and car ownership have declined for young households.

Click here for an infographic that shows the extent of the problem.

There are various plans before Congress to avoid the July 1 rate-doubling. But Republicans are holding the action hostage with their bill that makes a college education much more expensive. It is going right down to the July 1 wire, and students don’t know what their rates will be.

Republican Plan and Obama Plan

House Republicans passed the “Smarter Solutions for Students Act,” which lets loan rates fluctuate yearly, pegged to the 10-year rate plus 2.5%, but capping the rate at 8.5% (loans for parents and graduate students would have a 10.5% cap). This means that rates, even on existing loans, will go up as rates climb, likely all the way to the 8.5% cap as the economy recovers. This is more than if Congress does nothing and just lets the rates double July 1. The Congressional Budget Office (CBO) projects rates would rise to 7.7% in 2023, which is more than double the current rate. Many are calling the Republican plan the “Bill to Make College More Expensive.”

Republicans say students should pay “market-rates,” regardless of what people need or how much having a better educated population does for the country and economy. Republicans want rates high because the government makes a profit off of the student loans, reducing the need to ask the wealthy and corporations to pay higher tax rates. Shahien Nasiripour points out at The Huffington Post that the Education Department is forecast to generate a $51 billion profit this year from lending to college students and their families—more than Exxon Mobil’s 2012 profits. So cutting these payments would “grow the deficit.”

President Obama has offered a plan that sets a fixed (once a student has the loan, the rate doesn’t change) rate to the 10-year Treasury note, plus 0.9% with no interest rate cap. However, repayment obligations are restricted to 10% of income. The president’s plan is focused on being “budget neutral.”

The Warren Plan

Sen. Warren has introduced the Bank on Students Loan Fairness Act that lets students borrow money at a rate of 0.75%—matching the rate at which the Federal Reserve lets banks borrow. The Warren plan is backed by a number of organizations and members of Congress. (View the fact sheet and the full bill.)

Watch as Warren introduces and explains the Bank on Students Loan Fairness Act:


Economist Joseph Stiglitz endorsed the Warren bill.

College graduation has become a big factor in whether students succeed later in life, Stiglitz says. “The life chances of a young American are more dependent on the income and education of their parents than in other industrial countries.”

Most other industrialized nations make paying for college easier, says Stiglitz. For example, Australia’s loan program caps payments as a percentage of income, essentially enabling most people to pay for college without going bankrupt. Many European countries directly subsidize college, although those subsidies have fallen due to the financial crisis.

Other Plans

Sens. Jack Reed (D-R.I.) and Tom Harkin (D-Iowa) have introduced the Reed-Harkin Student Loan Affordability Act of 2013 (S. 953), which keeps the current 3.4% rate in place for two more years. The bill “pays for” this by closing corporate tax loopholes.

Sen. Kirsten Gillibrand (D-N.Y.) has a bill, the Federal Student Loan Refinancing Act, to allow students to renegotiate into fixed, 4% loans. Some 90% of federal (not private) student loans—and 37 million borrowers—would be affected by the Gillibrand bill.

In Proposals to Bring Student-Loan Interest Rates Under Control, the Center for American Progress compares different plans to address the student loan rate problem:

Support the Warren Plan to Give Students the Same Break Banks Get

Click here to Give Students the Same Break Banks Get:

Sen. Elizabeth Warren has a great, simple idea, and she’s made it her first bill. Give students the same loan rates that the big banks get:

Right now, a big bank can get a loan through the Federal Reserve discount window at a rate of about 0.75%. But this summer a student who is trying to get a loan to go to college will pay almost 7%. In other words, the federal government is going to charge students interest rates that are nine times higher than the rates for the biggest banks—the same banks that destroyed millions of jobs and nearly broke this economy. That isn’t right.

What’s Wrong with Free?

We are stuck arguing about how much of a crushing debt burden students take on to get educated because ideology dictates that we provide “market solutions” (aka “make bankers richer[er]”) instead of just being able to go to college if that’s the right path for them. We the people should just provide an education that makes people’s lives better and helps both the country and our larger economy at the same time. Is our government supposed to be about making our lives better, or making bankers richer?

P.S. Here is what House Speaker John Boehner’s spokesperson said:

Boehner’s spokesperson responded to the new student loan initiative, saying that Obama’s efforts to continue governing the country is a “cynical event” and a “PR stunt” that is intended “to change the subject from its growing list of scandals.”

Read more today on student loans here.

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