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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.

Student loan interest rates are pegged to the 10-year Treasury note but capped at 8.25 percent.
Source: Congressional Budget Office

The Consumer Financial Protection Bureau ran the numbers on what the rate increases will mean for students, and found that, for loans issued in the 2014–15 school year, monthly payments would rise about $3 a month for every $5,000 in loan balance. That figure may sound trivial, but the average student taking out loans in 2012 carried $29,400 in debt after graduation.

If it took a graduate 20 years to pay off that amount, the higher interest rates would cost an extra $4,320 overall. And that burden is scheduled to grow heavier, with further rate increases expected in 2015 and beyond.

The biggest beneficiary of the higher interest rates for student loans will be the federal government, which administers the program and aggressively collects from debtors. The CBO estimated that the Department of Education will reap $127 billion over the next decade from lending to students. That figure would be enough to qualify the Department of Education as one of the more profitable private corporations in the country.

Officials don’t like to describe this money as profit, and allies argue that the accounting for student loans is flawed because it does not properly reflect the risk of default that the government absorbs. But some counter that the government doesn’t face such risks, because of its vast collection powers. And other critics go even further. Chris Hicks, of the Debt-Free Future campaign at Jobs With Justice, told the Huffington Post, “The student loan program isn't about helping students or borrowers — it's about making profits for the federal government.”

Last year, Education Secretary Arne Duncan argued that a bigger challenge than student loan interest rates “is the amount of debt itself.” Indeed, the rate hikes come at an inauspicious time for students. One in five households now carries student debt, and the Federal Reserve calculates that the total amount owed by Americans who’ve borrowed to pay for education has doubled since 2007, to over $1.2 trillion. Analysts believe this debt burden has a negative impact on the economy: Young college graduates weighed down by debt delay purchases for big-ticket items such as homes and automobiles, studies show, reducing the economic activity measured in the GDP.

Student debtors’ woes do not end with rising interest rates. Student loans, for the most part, cannot be refinanced, nor can they be discharged in bankruptcy. The government can garnish wages and even collect from Social Security checks to recover student loan payments. Flexible repayment plans offered by the White House have not caught on.

Democrats, led by Sen. Kirsten Gillibrand, have proposed legislation to allow students with higher interest rates to refinance, but the Education Department has warned that such an option would raise budget deficits.

When the government in 2010 eliminated financial industry middlemen and took over administration of the federal student loan program, officials pitched the move as a way to make college more affordable, which Obama has said is essential to maintaining U.S. competitiveness in a global economy. But the cost of college is rising, as is the cost of borrowing to finance a college education. “Don’t Double My Rate” may have been a campaign-trail slogan in 2012, but an effective doubling of rates — per bipartisan consensus — is precisely what’s expected within the next three years.

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