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

Millions of young people may have a much harder time paying for an education.

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Indeed, a recent Wall Street Journal article reported, “After paying the companies that actually collect the loans and other costs, the U.S. Department of Education expects to recover 85 percent of defaulted federal loan dollars based on current value.” That's an extraordinary number, the Journal noted—banks often retrieve less than 10 percent of the value of overdue credit cards, for example.

The government might actually benefit from students who go into default. Mark Kantrowitz of told the Journal that the government would make a full $6,522 more in interest on a $10,000 loan that goes into default if it had been paid back in full in 10 years, and $2,010.44 more than if it had been paid back in 20. There's little need, then, for the government to make a chunk of interest in order to be protected from students who might go into default. Alan Collinge of Student Loan Justice told the Journal that there's a "perverted incentive" for the government to let loans default.

Williams pointed out to AlterNet that the federal government didn't get into the student lending business to make a profit, but rather to promote education as a social good for all. “In the Civil Rights era, America decided that making sure every student had access to a quality education regardless of financial barriers, they decided it was worth federal government investment,” he said. And when the Obama administration decided to stop subsidizing big banks and big lenders like Sallie Mae and NelNet and start lending money directly to students, it was in part to protect them from the predatory practices of those big lenders, as well as to save money, an estimated $61 billion over 10 years that won't be captured by banks.

It's worth noting, as well, that many of the big banks that make a killing on private student loans and still have billions of government-subsidized student debt on their books, are able to borrow money from the government through the Federal Reserve's discount window at nearly no interest at all. Why, then, are young people, who aren't guilty of trashing the economy but remain the victims of a rate of unemployment nearly twice that of the rest of the population, expected to pay more?

Obama has called for a one-year extension of the 3.4 percent interest rate for students, which he claims will save 7.4 million student loan borrowers an average of $1000, but members of Congress are going further. The House and Senate have introduced legislation that would keep the rate fixed at 3.4 percent and doesn't include an expiration date.

Sen. Bernie Sanders, I-Vermont, one of the cosponsors of the Senate bill, said, “At a time of rising college costs and unsustainable student debt, it is essential that we do all we can to make college affordable for students and working families. The productivity and strength of our economy depends upon a well-educated work force. It is a great waste of intellectual capital when an increasing number of high school graduates are not able to afford a higher education. Further, our nation suffers, as do millions of families, when students graduate college deeply in debt."

Of course, even if Congress does pass an extension, temporary or not, of the lowered interest rate, all that will do is keep the student debt bubble, which is now over $1 trillion, slightly smaller. It will do nothing to reduce the size of the debt students are already carrying, as it only applies to new loans, and it does nothing to reduce the cost of tuition or help those indebted students find work after school so they can pay down their debt. Student debt remains at a crisis point, and any step the federal government can take to help keep it low, while not a solution, will have a real impact on millions of young people, and through them, the U.S. economy.

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