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Why Americans’ trillion-dollar college debt burden is still rising

Analysis: Formula crafted by Obama and GOP will see interest rates almost double by 2017

Americans needing federally subsidized student loans for undergraduate or graduate programs at colleges and universities will pay a higher interest rate in the coming academic year, according to new projections from the Congressional Budget Office (CBO). And the cost of borrowing money to finance a college education will continue to rise in the coming years as a result of a bipartisan deal on Capitol Hill — despite President Barack Obama’s 2012 pledge to fight against raising the debt burden on graduates.

The cost of college loans emerged as an election issue in 2012, because that was the year when the 3.4 percent interest rate for federally subsidized Stafford loans — fixed by the 2007 College Cost Reduction and Access Act — was due to expire and double to 6.8 percent. Courting the youth vote, the Obama administration created a campaign called “Don’t Double My Rate,” and the president barnstormed the country urging that rates be kept low. He even slow-jammed the news with Jimmy Fallon in support of the idea.

“Now is not the time to make school more expensive for our young people,” Obama said, and he got his wish. After some initial resistance, Republicans backed down and agreed to a one-year extension of the 3.4 percent rate.

That simply deferred the problem until July 2013, when the rates threatened to double again. The White House reran the “Don’t Double My Rate” campaign, but this time in support of a different idea. The administration’s federal budget proposal that year endorsed a “long-term solution,” whereby the interest rates on newly issued loans would vary from year to year, linked to the rate on the 10-year Treasury bond. Republicans agreed to a similar proposal, and the White House–GOP consensus made it impossible for Congressional Democrats to argue for another extension. Eventually, Congress passed the variable-rate plan, which Obama signed into law.

The deal set interest rates for 2013–14 undergraduate student loans at 3.86 percent (which would remain fixed over the life of the loan). But that rate was calculated on 10-year Treasury bond rates that had fallen close to historic lows. As the economy recovered, the Federal Reserve began to reverse policies that had kept down long-term interest rates. The rise in 10-year Treasury bond rates, predictable under even the mildest economic recovery, therefore means that as the economy improves, so will the debt burden on college graduates who’ve had to borrow to pay for their education.            

The CBO estimates that for the 2014–15 school year, rates on the same undergraduate loans will rise to 5.09 percent, and by 2017 they will hit 6.82 percent — more than the doubling that Obama had, in 2012, vowed to resist.

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College, Debt, Finance

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