Should Student Loan Rates Be Allowed to Double at the End of the Month?
At the end of the month, interest rates on federal student loans are scheduled to double from 3.4 percent to 6 .8 percent. A 2007 law gradually reduced the rates on subsidized Stafford loans, but it was set to expire in 2012. Last year, Congress extended the law for an extra year, leading to the current debate over where the rate should be henceforth.
While a doubling of the rate would not affect students who already have loans, it would mean thousands of dollars more in payments for new undergraduates. "Now is not the time to make school more expensive for our young people," said the Obama administration as part of a campaign to once again extend the lower rate.
There are several proposals in Congress for how to address the rate change. (This table from Inside Higher Ed lays them out side by side.) A bill sponsored by House Republicans that has already passed the lower chamber would peg the rate for student loans to the 10-year Treasury rate, plus 2.5 percentage points; Obama's plan would use the same peg, plus 0.93 percentage points. In the Senate, Sens. Jack Reed, D-R.I., and Dick Durbin, D-Ill., would use the "91-day Treasury rate plus a percentage determined by the Education Secretary to cover administrative costs," while Sen. Elizabeth Warren, D-Mass., would use the discount rate that the Federal Reserve charges banks.
Student loan debt in the U.S., according to some estimates, currently tops $1 trillion. According to the Federal Reserve Bank of New York, that debt load is damaging the economy by crowding out other forms of consumer borrowing – such as that for auto loans and homes – that are more important for driving economic growth. According to the Department of Education, more than 13 percent of borrowers default on their student loans within three years.
So should student loan rates be allowed to double at the end of the month? Here is the Debate Club's take: