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.
Interest is the cost of money. It is stupid for congres to set borrowing interest rates for students since the price of money is determined by demmand and supply of money. If market rate is 15% than 6% is a steal and anyone who lends the money at that rate is losing money. If, on the other hand, market rate is 3%, than 6% is unusually high and only most desparate would take such an arangement. By tying the student loan rate to 10 year treasury would make student loan rate a bit more reasonable (assuming that government retains it’s investment rating).
Tell me, why the hell are we saddling less affluent students with a mountain of debt again? It COULDN’T be to hamstring them in case they actually choose to do something about the plight of the poor, eh?
Education should be FREE to the student, as it is in the civilized world…
Don’t know, Mirza. About the interest rates and the “supply of money.” Seems to me the Fed has been doing a lot of QE–which tends to keep interest rates low. QE doesn’t increase the supply of money; it only is used to buy existing debt. So, why doesn’t the Fed bail out students with mountains of credit so that interest rates can stay low? Only you and your Wall Street banker knows.
@Richard Fidler
QE does INDEED increase supply of the money. You are right that QE is Fed buying the existing debt, but ask yourself, where does the money to buy the debt come from? Answer: money that Fed uses to buy the debts in QE comes from “thin air”. Federal reserve is the bank of banks. They can simply make up money and write checks to buy the debt and that is how supply of money is created and how it enters the circulation. When the economy is good, the Fed is supposed to then sell those bonds, get the money back and reduce the supply. However the political pressure is to always create money and never to destroy it.
These “bipartisian” loans should really be declared and called what they really are; another version of the face sucking vampire squid actions of Wall St. and the banking loons that come up with these ideas. What happened to those Americans of prior graduating classes who had reasonable loans and were living in a more reasonable and sane America?
How did Congress get so many stupid people, and all at one time? Wow, the “Ask not what your country can do for you…” generation and their kids are now DOING to the nation.
The Congress of the 1960s and 70s… what a team, what progress, but apparently, what an historical anomoly. Passing the torch in America….yeah, well that used to be a good thing, but now what you are passing is the end with the fire pointing right at the people, the people of the burnt and very sad future. What a sad nation we have become.
What a sad legacy. From birth kids and families are told over and over again:” if you don’t attend nursery school, you’ll be left behind. If you don’t graduate from high school, you’ll be left behind. If you don’t go to college , you’ll be left behind.”
Maybe that used to be true in America, but now, buried under these loans with no careers in sight, let alone livable wage jobs, it’s pretty much the end of America.
Who will come up with the future ideas, the plans, the know how, if debt crushes any and all plans? It’s not just the students that lose, but an entire generation or two, or three, that looks forward to an empty hull of an imploding infrastructure of a spied upon public on a dying planet. But hey, we’ve got drones, so we must be “Masters of the Universe.”
GLORIANA AGAIN YOU ARE CONFUSING ECONOMIC REALITIES WITH SOCIAL JUSTICE.You should work for Obama.The rest of the bloggers here get it.This is one tough nut to crack.First lets agree this is getting unaffordable.And lets lay the blame also on the schools.For each dime the State school in my state gets…..it seems they build a new building….so they can up the tuition.I know a person who make an amazing salary as a prof.Works 3 days a week.Goes in at 9.Does his e mails.Teaches a class and goes home by 12.Did I underline AMAZING SALARY.And of course all that goes with it.Anyway “a change is a commin”How about cyber schools?More and more you see them.More and more schools are going to be forced to allow their credits.Prof from Harvard teaches history.Decides to leave Harvard and teach his class on line.How or why should Harvard try to stop him.MONEY folks.It is too expensive.Things will change!
President Obama signed a compromise on student loans due to which there is decrease in student loan.And these low rates need to be balanced and these may be balanced by higher rates down the road.But it may rise in the future.
For the most part the posts here seem to understand what is going on…again the younger generations are being “asked” (hoodwinked, bamboozled…lied to) to foot the bill for generations of excess and political opportunism (and I’m sorry Gloriana your romanticism of the 60s and 70s is what cemented the foundation for the “economic realities” of today if we are talking economics). But the rough draft of all that has already been pointed out by Michael and Mirza.
It all begs some simple questions though. One: if fed lender banks can borrow “dollars” (IOUs) at practically negative interest rates (when inflation is considered), than how “moral” is it for this President or this Congress to claim they are doing students a favor by making them pay whatever the FED RSRV manipulators determine the interests rates should be in the future? Honestly, at some point the FED will loose control of their bond buying (you are seeing cracks in that market already) and have little control over interest rates.
But the most important “political” question here 2: Why wouldn’t a President intent on salvaging some sort of legacy announce a new “economic stimulus plan” both cutting the federal budget by whatever percent (probably around 5 or 6% right now) and toss $250 Billion toward the student loan debt crisis (and it is a crisis as I’ll explain later) for 4 years basically absorbing all the debt? Before you answer, consider all this in context:
-Their is direct causation between the easy credit thrown in to higher education in the form of these loans and incredible rates of increased cost in higher ed over the last 2 decades. It’s a bubble (one of a few) that was used to mask the transition from a value added economy to whatever the hell you call this disaster of one. Colleges will not become more efficient until that cash flow to them (which saddles students practically their entire adult lives) is eliminated.
-Default rates on student loans are rising yearly and with no jobs policy in sight wages will continue to decline for the foreseeable future meaning at some point all that paper debt will be all but worthless anyway.
-Every student loan payment made in the meantime is one less house, car, etc. bought or vacation, clothing, etc. purchased. In a supply side economy with the demographic issues ours has this will result in something in between a “lost generation or two…or three” to an economic death spiral.
Since a massive default of student loans is being realized in real time already, why not get ahead of it and gain political points by doing the obvious. While the “right” might harp that this only encourages “moral hazard” they would at the same time “embrace” the cutting of federal spending as a “responsible way of paying for it” and see it all as an opportunity to “realize what spending was happening that was never needed in the first place”.
On the “left” you will hear all the romantic anointments of Prez Obama finally helping the young, the working class and poor and education all at the same time. Seems like a win/win politically to me…so why not? Because he and so many previous Presidents are owned by the corporatist banks…and the end game to all of this is to steal the wealth of productive people and replace that wealth with a sytematic program of debt control…and either Obama isn’t smart enough to realize that or he’s been a fraud from the beginning (I think it could be a little of both actually).
And then higher education will need to be rethought…the existence of the greatest library in the history of mankind at billions of people’s fingertips daily already has that outcome baked in the cake anyway.
Education is a huge problem ,and lower the interest rate on federal college loans for the coming school year also can help more people go into school and to be educated.