Blog: The Educated Reporter

White House Touts Student Loan Bill That Charges More Later

Update: The president signed the bill into law (8/9/13)

Update: The Senate passed the below bill after two proposals from progressive members of the Democratic caucus that would have reduced rates on future loans and, separately, put limits on the compromise bill were shot down by the chamber. Read more about it here (7/25/13)

The White House has launched a campaign to pressure Congress into passing a student loan compromise the president supports. But the talking points the administration is using gloss over one of proposal’s less savory details for future  borrowers: While loan costs may be cheaper in the short term under the Senate compromise, students who take out loans several years down the line are projected to pay significantly more.

Under the terms of the proposal a bipartisan group of senators hashed out over the past month, the interest rates of Stafford and PLUS loans issued after July 1 of this year will be pegged to the rates of the 10-year Treasury note. Depending on the type of loan, student borrowers will pay an additional few percentage points on top of Treasury-note rate with a cap on how high that rate can rise.

Because borrowing costs for the Treasury are presently near a historic low, student borrowers will end up with lower interest rates on new loans than they would under current rules. But the Congressional Budget Office calculated in February that starting in 2015 the 10-year note’s rate will rise to 4.5 percent and then to 5.2 percent by 2019, meaning the cost of taking out a loan for a student also will rise over the years.

The administration, however, is hesitant to look that far into the future.

“Future interest rate projections are uncertain; they should be taken with a grain of salt,” said James Kvaal, a deputy assistant to the president on domestic affairs.

“If you’re worried about fairness of student loan interest rates, this year, the federal government is borrowing at close to 2 percent [on the 10-year bond] and is lending out at close to 7 percent,” he continued. “So if you’re concerned about whether the question of whether students are paying a fair rate on student loans, this is the year where students need [the most urgency].”

Kvaal’s point regarding the reliability of interest rate projections is worth noting.  In 2005, the CBO projected the 10-year note rate in 2013 would be 5.2 percent.

Right now, that 10-year note rate is at roughly 2.5 percent, and the government charges loan rates of 6.8 and 7.9 percent depending on the loan. The difference between the current borrowing and lending rate is larger than the difference projected by CBO for loans generated sometime after 2015.

In the Senate legislation touted by the White House, interest rates on Stafford loans taken out since July 1, 2013 for undergraduates would incur a 2.05 percent bump with a cap of 8.25 percent. Graduate students would owe 3.6 percent on top of the Treasury rate, with a cap of 9.5 percent. PLUS loans, generally taken out by parents and graduate students, would come with a 4.6 percent bump and a rate cap of 10.5 percent.

Adding up the math, a borrower in 2016 taking out a PLUS loan would be charged an additional interest point over what he would incur now, as rates on PLUS loans today are at 7.9 percent.

The White House has taken potshots from its own caucus on student loans. Sen. Bernie Sanders today (I-Vt) inveighed against the government for profiting off of loans, pointing to a recent CBO study that projected the government will take in roughly $148 billion over 10 years off what students pay to borrow.

“It’s actually neither accurate nor fair to characterize the student loan program as making profit,” said Secretary of Education Arne Duncan today during a call with reporters. “When people think of the word ‘profit,’ they normally think of what a company made last year…[the CBO report] is a projection.” 

He added: “Congress sets the borrowing rate and only Congress can change that.”

The compromise Senate bill is similar in scope to what President Obama’s budget called for in the spring but differs from a student-loan fix the House passed in several iterations. The Senate bill locks in rates and puts a cap on interest, while the House version would place a cap but rely variable rates.

 Photo credit: Flickr/ DUCKofD3ATH