Maybe you heard the good news: The interest rate on college student loans is about to fall. On ABC‘s World News (8/9/13), Diane Sawyer said:
One more note out of Washington today. President Obama signed a compromise on student loans. The fractious debate over. The law lowers interest rates for an estimated 11 million students. And it will save the average undergraduate $1,500 in interest this year alone.
On CBS Evening News (8/9/13), Jeff Glor told viewers:
It is not a common sight in Washington these days: Bipartisanship. Democrats and Republicans gathered around the President today as he signed a bill lowering the interest rate on federal college loans for the coming school year. It will be 3.9 percent. The rate is tied to financial markets, but cannot go above eight and a quarter percent.
But hold on–why did I get a press release from the office of Sen. Bernie Sanders (Ind.-Vt.) that was headlined, “Student Loan Rates Rising”?
Because, in a way, they are.
What happened was a 2007 law lowered interest rates to 3.4 percent. But that law expired in 2012; there was a one-year extension of the law; on July 1, because no new law had been passed, it was announced that rates were going up to 6.8 percent.
This new law sets these loans at 3.86 percent for the current year.
But every year after, the interest rate on new loans will tied to the interest rates set by the U.S. Treasury, which will rise over the next few years. According to some calculations from the Congressional Budget Office, the new rates could be over 7 percent; the law sets an upper limit of 8.25 percent for undergraduate loans. So that’s why Sanders is calling this a rate increase–future borrowers will pay more.
And he’s not the only one. Here’s a CNN chart illustrating the expected increase in borrowing rates in the next few years:
And here’s commentary from Christine Lindstrom of the U.S. Public Interest Research Group (Chronicle of Higher Education, 8/8/13):
The deal is designed to be “revenue neutral” over the next 10 years. That means that the low interest rates given to students now must be balanced by higher rates down the road. In essence, the law forces today’s 13-year-olds to take on extra debt when they go to college, all in order to pay for the cheap loans being offered for borrowers over the next several years.
Under the new law, five years from now an undergraduate who takes out the maximum in subsidized and unsubsidized Stafford loans will most likely pay $4,700 more over the life of the loan than she would have last year–and $900 more than if Congress had done nothing and the 6.8-percent rate had simply stayed in place, according to an analysis by the Institute for College Access and Success.
So the new law lowers rates–and then, almost certainly, raises them in the near future. But hey–at least it’s bipartisan.