President Obama's budget calls for
changing student loan interest rates from a fixed amount—currently 3.4 percent but slated to double to 6.8 percent on July 1—that can only be changed by Congress to a market-based approach. The proposal is drawing mixed reviews, since it would now mean a drop in the interest students owe, but some fear it could ultimately lead to higher interest rates.
Obama's plan also calls for making the rate on new federal student loans a market interest rate that would remain fixed for the life of the loan. The proposal calls for expanding repayment options so borrowers do not have to pay more than 10 percent of their discretionary income on student loan bills.
The concern is whether there would be a cap on the interest rate;
under similar legislation proposed by three Republican senators,
A loan made today based on 10-year Treasury notes plus 3 percent would have an interest rate of 4.75 percent. But a loan made under the new proposal in 2007 would have had an interest rate of almost 8 percent, higher than either subsidized or unsubsidized undergraduate loans available today.
The question is whether the income-based repayment system would keep loans affordable if interest rose along those lines. One thing that's clear, though, is that the system is currently unfair to students and their families. When Republicans talk about whether the government can afford to keep the interest rate at 3.4 percent, they make it sound as if the government loses money at 3.4 percent.
But in fact, according to an issue brief from the U.S. Public Interest Research Group,
... the federal government will make 12.5 cents on the dollar for each subsidized Stafford dollar loaned, 33.3 cents on each dollar loaned through the unsubsidized Stafford loan program, 54.8 cents on the dollar through the Graduate PLUS loan program, and 49 cents on the dollar for parent loans. Next year, over 19 million federal education loans will be made, totaling $108 billion. [...]
... students have already suffered from a variety of aid restrictions and limitations that have resulted in students contributing $4.6 billion to deficit reduction and knocked over 140,000 low income students out of the Pell grant program.
As we talk about whether the interest rate will go up to 6.8 percent, we have to understand this as a tax on college students whose families aren't wealthy enough to just write a check for tuition—on working- and middle-class college students and families, in other words. And we need to take student loan interest rates out of the realm of Republican hostage-taking, whatever the details of how that happens.