Editorial: Keep college loan rates low
The last thing indebted students in an uncertain economy need is a higher interest rate on their college loans. But that's what's in store for low- and middle-income students if Congress does nothing to stop it.
The interest on subsidized Stafford loans -- those taken out by undergraduates with financial need -- is currently 3.4 percent. It's set to double to 6.8 percent for loans initiated after July. Congress shouldn't let that happen. Surely the revenue it would have to forgo in interest can be made up without wringing it out of striving families. Unfortunately, elected representatives in Washington have proved all too adept at doing nothing.
Undergraduate students are borrowing $27,000, on average, to pay for a four-year education. As a result, student debt has surpassed credit card debt at a time when a highly educated workforce is critical to the nation's economic future.
In 2007, when Congress voted to ratchet down the interest rate on Stafford loans annually until it reached 3.4 percent for the 2011-12 academic year, commercial banks were issuing most of the loans. But the loans were subsidized by the federal government, which paid the interest until a student borrower started repaying. And if a student defaulted, the federal government was on the hook for 95 percent of the balance.
That unconscionably sweet deal for banks ended in 2009 when Congress dropped the subsidies and opted to loan more money directly. Billions of tax dollars that had been going to banks now go to students instead.
Keeping the interest rate at 3.4 percent would save millions of borrowers more than $1,000, on average, over the life of the loans. But it would mean forgoing $5 billion to $6 billion a year in interest that would otherwise be paid to the federal government. With budget deficits topping $1 trillion a year, Congress has to find a way to make up that lost revenue.
But the priority should be making sure a college education remains affordable.