A potential doubling of the student loan interest rate, from ~3.4% to ~6.8%, has become a hot topic.
Can the friendly Kos folks help me understand how this interest rate is set? As university education is ostensibly a public good, it's not clear to me why the student loan interest rate would exceed the government's cost of capital (plus a kicker to account for defaults.) Since these loans are government-backed, why does it seem that it's being managed for profit?
Thanks in advance for your help!
EDIT:
Just to add a few important facts about the case:
1) As of July 2010, colleges and universities no longer go through private banks to originate student loans... loans are now federal direct, cutting out the banks as middlemen.
2) Student loans cannot be discharged in bankruptcy. And if you don't pay your student loan, your paycheck can be garnished.
3) The default rate has risen from about 6.7% in 2007 nearing 10% today, presumably the result of difficulty for graduates in finding a job. My assumption is that, since student loans cannot be discharged, the "true" default rate over the course of the loan's lifetime must be much lower, since the government doesn't write these off their books... and they will eventually collect on the debt.
Again, all your insights are appreciated!