Student loan rates doubled on Monday. This is not a disaster, despite what you've heard.
President Obama made the expiration of a 3.4 percent student loan rate a big campaign issue last year, warning of dire financial consequences for struggling students. Congress extended the rate for a year. Now that extension has expired, and each side is bashing the other for allowing that 3.4 percent rate to adjust upward (though Republicans are yelling the loudest). "The divisions among the president and his own party," House Speaker John Boehner proclaimed on Monday, "are directly responsible for the current impasse that will now result in higher borrowing costs for students already coping with skyrocketing tuition bills." But there's a lot that the politicians usually leave out. First, the rate in question is not on all federal student loans but on one class of them: subsidized Stafford loans. Second, the government isn't hiking the rate on any existing loans - only on new ones. Any loans issued before Monday keep the rate they originally came with. Third, even at 6.8 percent, students are getting a great deal. They are risky borrowers, and no private lender would front them money at anything like the rates the government is offering - not to mention the terms.
Oh, yes, the terms. The interest rate is only one thing that determines how much student borrowers end up paying after graduation. Much more important are the repayment options the government extends to needy debtors. Under an income-based repayment program Obama championed, student borrowers are never required to pay more than 10 percent of their disposable income in debt service. And the government will forgive any remaining loan balance after 20 years, as long as those borrowers qualify. It makes much more sense to target financial relief toward graduates who end up needing it rather than offering lower rates up front to a lot of students, many of whom might go on to make loads of money after college.
Instead of unwarranted political hysterics, Washington should try taking the politics out of setting student loan rates. A funny thing about the fight is that both Obama and House Republicans want to do that, and they even agree - very broadly - on the way to do it: linking student loan rates to the rate at which the government borrows, instead of having Congress fix the rate based on whatever lawmakers feel like. Students' rates would float with everyone else's, reflecting economic reality. The New America Foundation's Jason Delisle points out that this is also fairer across generations of students, as the amount of help each would get from the government wouldn't fluctuate with interest rates, as it does now.
The problem has been that Obama and Republicans haven't agreed on some of the specifics, and Democrats such as Sen. Elizabeth Warren, D-Mass., insist on continuing to set interest rates by congressional decree.
Despite Warren, there should be room for a bipartisan deal. And if an agreement doesn't materialize, once you consider the broader context, 6.8 percent just isn't so bad.