Give college students a break on loan rates
TERRY SAVAGE firstname.lastname@example.org April 29, 2012 10:58PM
Student loan rates are involved in a congressional tug-of-war. | Kevork Djansezian~Getty Images
Updated: May 3, 2013 12:15PM
Once again Washington is playing politics with our future — both sides heating up an issue on which they basically agree but still want to play political games. This time it’s all about the interest rates on some federal student loans, which are scheduled to move back up to 6.8 percent in July.
But what no one is acknowledging is that even at 3.4 percent for a small segment of student loans — the subsidized Stafford loans — these rates are a horrible financial deal.
And for the vast majority who borrow at unsubsidized federal student loan rates of 6.8 percent, or parental PLUS loans that carry a fixed rate of 7.9 percent, or private student loans that may carry even higher rates, the student loan system is a huge rip-off!
It shouldn’t take a college degree to figure that out, but too many students become aware of it only after they get their degrees and have to start thinking about repayment.
Student loan borrowers are paying exorbitant rates, while savers get next to zero interest on their deposits because the Federal Reserve openly manipulates the interest rate market — and promises it will keep doing so.
The student loan deal
Student loans weren’t always a bad deal. In fact, until 2006 the repayment rates on student loans had some relationship to reality. Interest rates on loan repayments were changed every year — based on the 90-day Treasury bill auction rate, a market-based rate. Every July 1, the repayment rate was reset for the year based on current T-bill rates.
Back then, every student had a one-time chance to consolidate and permanently fix the rate on all their loans. As rates dropped, many students took advantage of this deal — locking in lower rates for a lifetime. But then this good deal was changed in 2006 — just in time to prevent students from taking advantage of the lowest interest rates in history. Repayment rates were fixed, giving us today’s 6.8 percent repayment rate on Stafford loans.
By comparison, the current rate on the 90-day Treasury bill is just 9 one hundredths of one percent (0.09%). If federal student loan repayment rates were calculated on the old basis, it would be practically an interest-free loan — and a very good deal.
Instead Congress is arguing over 3.4 percent vs. 6.8 percent.
Washington should be ashamed of burdening students with a 6.8 percent rate, or even 3.4 percent — a veritable ball and chain on students’ future lives as they graduate into a slow-growth economy.
Remember, there is no way to get out from under student loans. They are not discharged in bankruptcy. If you default, one day you could find a deduction from your Social Security check to repay long-forgotten student loans!
Meanwhile, there is a giant hullabaloo over the idea of keeping some student loan rates at “only” 3.4 percent. Who are they kidding?
Creating generation warfare
Politicians have turned a very critical issue into a political football. They’re arguing about what will be cut to pay for this “gift” of lower student-loan rates. Will it be women’s health programs? Will it be funding for seniors’ health?
Since when did Congress and the President start caring about how to pay for their spending?
They didn’t care when they were bailing out banks — and General Motors. They didn’t care when they were buying up junk cars. They didn’t care when they went to war in Iraq and Afghanistan and spent billions.
Washington is playing politics with our future. Educating our students is important to America’s future. Keeping Medicare’s promises to seniors is important to our way of life. Respecting women’s health care rights is a key agenda item for more than half our population: women.
Instead, the president and Congress are dividing Americans and turning them against each other for the sake of political power. They’re creating a rift that will divide our country along generational lines — potentially the greatest division since the Civil War.
Listen to the rhetoric in this election year — pitting young vs. old, students vs. seniors, savers vs. borrowers. It is sinful to manipulate interest rates to nearly zero percent, penalizing savers (typically older people) to subsidize the banks. It is equally sinful to pile debt upon today’s young workers — whether student loans at above-market rates or by adding to our national debt.
We can’t let Washington divide America during this election year, because those divisions will destroy our country long after the election is over, no matter which party wins. Go to ContactingtheCongress.org to write directly to your senators and representatives. Tell them to stop playing politics with our future.
We need all Americans to hold Washington — both parties — accountable to us. And that’s the Savage Truth.
Terry Savage is the Chicago Sun-Times’ nationally syndicated financial columnist, and a registered investment adviser. Post personal finance questions on her blog at TerrySavage.com and blogs.suntimes.com/savage.