The subsidized interest rate on Stafford student loans doubled Monday, following top Senate Democrats’ rejection of a bipartisan compromise supported by the president.
As the U.S. Senate debated comprehensive immigration reform for days last week, the student loan clock was quietly counting down. Now, with legislators on vacation for Independence Day week, the interest rate for undergraduate student borrowers has automatically increased from 3.4 percent to 6.8 percent.
Students may never have to pay the higher rate, however. Iowa Democratic Sen. Tom Harkin, who chairs the Senate education committee, wants Congress to change the interest rate retroactively, once the legislative session resumes. His fix would set interest rates at 3.4 percent for the next two years — a solution favored by Senate Majority Leader Harry Reid, a Nevada Democrat.
Other Democrats, such as Massachusetts Sen. Elizabeth Warren would go further, offering broader subsidies and aid to students.
President Obama, Senate Republicans, and moderate Democrats like West Virginia Sen. Sen. Joe Manchin, want to reform the way the interest rate on student loans is calculated by linking into the performance of Treasury bonds in the financial market. That deal would keep rates low for now, but would likely cause them to increase in the long term — something Reid and Harkin believe is unacceptable.
Supporters of low rates note that other borrowers are paying historically little interest. Indeed, this discrepancy has made student loans a lucrative business for the federal government, which raked in $120 billion over the last five years.
“It is outrageous for the federal government to charge students twice as much at a time when interest rates are at historic lows,” said Carmel Martin, executive vice president for policy at Center for American Progress, and a former assistant secretary in the Department of Education, in a statement.
Warren’s proposal is based on this logic. Her bill would force the Federal Reserve to subsidize student loans at the same interest rates as loans to big banks.
But other education and finance experts say student loans are a much riskier investment than loans made to banks and other institutions, since students default far more frequently.
Some argue the higher education sector is in need of a fix that goes beyond merely setting and resetting loan rates. Students have racked up a trillion dollars in collective loan debt, and graduates are struggling through a job market where most find themselves underemployed in jobs that do not require a four-year degree. And recently released data from the federal government’s College Affordability and Transparency Center shows the price of attending most U.S. public universities continuing to increase year after year.
Others have argued that subsidized student loans are partly to blame for increased tuition prices, because universities can easily raise the cost of admittance as long as the government finds ways to help students handle the immediate costs and worry about their debts later.