Subscribe to Money Morning get daily headlines subscribe now! Money Morning Private Briefing today's private briefing Access Your Profit Alerts

Student Loan Interest Rates Double While Congress Takes a Vacation

Today (Monday) federally subsidized Stafford student loan interest rates doubled from 3.4% to 6.8% after Congress failed to reach a deal to maintain lower rates by the July 1st deadline.

Monday also marks the beginning of the Independence Day congressional recess, sparking outrage among student advocates as Congress goes on recess without resolving this important issue.

Congress could retroactively "fix" the damage done by the soaring rate increase, but so far no deal is in sight.

The House has already passed a student loan proposal, but the Senate remains divided.

Particularly, Senate Democrats are divided amongst themselves over two different plans, and cannot yet present a strong front on the issue.

Sens. Kay Hagan (D-NC) and Jack Reed (D-RI) have a plan that would extend the 3.4% rate for another year, while also retroactively reducing the rate.

But a bipartisan group of Senators has a different, more long-term solution. They want to permanently tie student loan interest rates to the 10-year Treasury note borrowing rate.

The plan would reduce the deficit by $1 billion over 10 years, according to the Congressional Budget Office. It's being sponsored by Sens. Lamar Alexander (R-TN), Richard Burr, (R-NC), Tom Coburn, (R-OK), Joe Manchin, (D-WV), Angus King (I-ME), and Thomas Carper, (D-DE).

Many Democratic senators dislike the idea of trying to "balance the budget on the backs of students."

However, the primary source of dissention among the ranks to the latter plan is that it sets no cap on how high student loan interest rates can go.

If student loan interest rates are tied to the economy, and the economy picks up, the rates could become extraordinarily high.

The yield on the 10-year Treasury note has already jumped from 1.6% to 2.49% since May, amid Federal Reserve Chairman Ben Bernanke's indication that he may begin to slow down the Fed's bond buying program.

Student debt in this country has already surpassed separately the country's auto loans and consumer credit card debt.

Further increases in student debt loans spell disaster for the US economy; find out why the Student Loan Bubble is the Next Subprime here

Related Articles:

Join the conversation. Click here to jump to comments…

  1. Anita Clara | July 2, 2013

    ?This student loan doubling of interest debacle came about during Obama’s first term when
    the Democrats ruled both the Senate and the House. Leader Reid and Speaker Pelosi
    pushed this bill through. It was eagerly signed by Mr. “Hope and Change.” The effective
    date of July 1, 2013, was a political ploy to give Democrats an “election issue” they could
    rally ‘round just before the November 2013 House and Senate elections, thus encouraging
    student loan debtors to go to the polls and vote for Democrats. Unfortunately, many of
    these student loan debtors were indoctrinated by liberal professors instead of educated as
    to how economies thrive and nations survive. (Think Rome: “If it feels good do it.” Think
    America: “Those who cannot remember the past are condemned to repeat it.")

  2. Doug | July 2, 2013

    As is typical of Congress, no long term, or medium term solutions are proposed that make sense.
    The purpose of these loans, as I understand it, is to allow the borrowing of funds from taxpayers to pay for education that an individual would not otherwise be able to obtain. The assumption is that a better educated workforce results in a stronger, more vibrant economy. These loans then, become a mortgage on the benefits of a higher level of education that is repaid in the future.

    The question of how to structure repayment of these loans then depends on whether the interest rate risk, that is the change in rates based on say the 10 year Treasury, should be shouldered by the borrower, or the taxpayer, or both. An example would be to tie the borrowed rate to the 10 year Treasury rate and adjust it once a year. If the rate goes up, the payment amount goes up – borrower shoulders the rate risk. If the rate goes up and the repayment rate remains fixed – taxpayer shoulders the rate risk. Having maximum, or minimum rates for that matter, would share this risk between borrower and taxpayer, and may be a better solution.

    There are many things that can influence the rates of 10 year Treasuries over a repayment period of 10 years, what with government manipulation of rates and other factors. The solution is to find a plan that protects against wild swings in repayments, yet does not make the taxpayer shoulder all of the interest rate risk.

  3. Andy Schuck | July 3, 2013

    Maybe time to shy away from those high priced universities, ivy-league brain washing establishments where there is nary a common sense professor within 50 miles

Leave a Reply

Your email address will not be published. Required fields are marked *

Some HTML is OK