Is Congress Going to Double the Interest on Your Student Loan?

Unless Congress acts soon, millions of college students could see the interest rate on their federal student loans double this summer—adding $5,000 to the cost of an education for students who pay off their loans in 10 years, and around $11,000 over 20 years.

Yet Republicans are claiming that keeping those rates low costs too much and isn't the federal government's job. Rep. Virginia Foxx, chair of the Higher Education Subcommittee, even argued that it's unnecessary for any student to borrow money to go to college in the first place.

Of course, that's entirely divorced from the reality students face today. “We've seen massive state divestment from education,” Rich Williams, higher education advocate at US Public Interest Research Group (US PIRG), an independent research and advocacy group, told AlterNet. “That's on top of a bad economy which has caused families to have fewer resources, and then of course the dialogue around Occupy Wall Street and the reality of student loan debt--it becomes clear to anyone paying attention, that in this economy we cannot double the interest rates on student loans."

Back in 2006, Democrats ran on a promise to cut interest rates on student loans in half during the midterm election—a midterm that swept them back into power in Congress. They kept the promise—sort of. But deficit hawks whining about the cost of the measure kept them from cutting those rates on all federal loans, or making those cuts permanent. What they actually did was enact a plan, the College Cost Reduction and Access Act, in 2007 that sliced the interest students pay on the subsidized Stafford loans, from the 6.8 percent it had been fixed at a few years earlier, down to 5.6 percent in 2009-2010, 4.5 percent in 2010-2011, and now to 3.4 percent. But the cut expires this summer, so next year's borrowers would once again face interest rates of 6.8 percent.

Students with families making under $40,000 a year—those who can least afford to see their interest rates jump--are the primary beneficiaries of the subsidized Stafford loan, which is awarded based on need and lent directly from the government. Stafford loans make up almost half of all federal student loans, and help families who are often not eligible for the Pell grants that help the neediest students.

Meanwhile, the government, which now lends money directly to students rather than subsidizing banks and student lenders like Sallie Mae to do so, is able to borrow at a significantly lower rate than 6.8 percent or even 3.4 percent. So, as Libby Nelson at Inside Higher Ed explained -- and contrary to what Republicans on the Congressional Education and the Workforce Committee say--the government is actually making money by lending to students.

[T]he government now keeps the difference, channeling some of the profits into financial aid programs and most of the rest toward deficit reduction (with some even flowing to administration priorities like early childhood education, as in the 2009 healthcare law). Once more direct and bank-based loans are consolidated, and when the student loan interest rate increases to 6.8 percent next year (when a several-year effort to halve the rate ends), federal student loans will become even more lucrative for the government.

The justification for charging higher interest on these loans is that it covers the risk of default by the borrower. But there is almost no way for borrowers to escape paying back their loan – thanks to the bankruptcy bill of 2005, student loans are not dischargeable in bankruptcy cases. The government can garnish wages, and even Social Security payments. There's almost no way for the government not to collect on a student loan, yet even supposedly forward-thinking outlets like the New America Foundation fall victim to the argument that the government needs protection from defaulting borrowers, and that rates should return to higher levels.