|

Editorial: Don't raise loan rates

BY DI EDITORIAL BOARD | JUNE 18, 2013 5:00 AM

SocialTwist Tell-a-Friend

The federal government stands to make more than $50 billion in profits on student-loan debt in fiscal 2013, according to a projection released by the Congressional Budget Office in May.

This projection is based on current student-loan law, under which the interest rate for federally subsidized student loans is scheduled to jump from 3.4 percent to 6.8 percent on July 1, barring any last minute legislative action in Congress.

This impending rate hike must be avoided, lest the already massive burden of student debt become even more difficult to bear. But any change to the current federal student-loan program must also ensure its long-term financial viability.

According to a recent study from the Consumer Financial Protection Bureau, more than 38 million Americans have student-loan debt. Collectively, that group holds more than $1.1 trillion in student-loan debt alone.

This massive block of debt has caused an epidemic of personal finance problems and, for many, undermined the opportunity created by higher education.

Between 2007 and 2010, as most types of consumer debt declined, the average student-loan burden per household rose by 15 percent. At the same time, the number of college graduates living with their parents increased from 4.7 million in 2007 to more than 6 million by 2011. 

Many broader economic trends can be attributed, at least in part, to crippling student-loan debt. A study from the Federal Reserve Bank of Cleveland found that the rate of household formation among young people is down dramatically, which could be because of financial problems caused by debt.

Additionally, homeownership and entrepreneurship among recent college graduates are down. It is difficult to qualify for loans necessary to buy a home or start a business with a great deal of student-loan debt.

A July 1 rate hike would only exacerbate these problems.

But as the rate hike looms, there are some questions about how best to move forward.

As it stands, the interest rates on federal loans are set by law, which means that these loans are less expensive than those with interest rates established by the market. The government is essentially cutting back its revenue potential by offering discounted rates.

However, if the government’s loan program is currently turning a profit, there’s clearly some room for rates to come down. The central tension of the current debate is how to balance the demand for lower interest rates and the need to reduce the nation’s student debt with the need to keep the cost of the student-loan program in check.

The government must find a way to make the program generous, but sustainable, to minimize the risk of these students being turned over to the private market where interest rates for risky student loans are very high.

There are a number of prominent plans to address these interest rates. One plan, offered by Sen. Elizabeth Warren, D-Mass., would slash interest rates for all federal student loans to 0.75 percent, the rate at which banks are able to borrow from the Federal Reserve. Such a plan would certainly reduce the nation’s student debt burden, but at a substantial cost to the government.

Two less radical plans from President Obama and the Senate Republicans, respectively, would tie interest rate on federally subsidized loans to the performance of 10-year Treasury bonds. Such an approach would keep student loans’ interest rates relatively low without compromising the program’s financial future.

In any case, it is imperative that Congress act to prevent interest rates from doubling on July 1. If it fails, the economic drag of student-loan debt will only worsen.


In today's issue:





 
Privacy Policy (8/15/07) | Terms of Use (4/28/08) | Content Submission Agreement (8/23/07) | Copyright Compliance Policy (8/25/07) | RSS Terms of Use

Copyright © The Daily Iowan, All Rights Reserved.