Student debtors slide deeper into peonage

On May 7, the federal government conducted its regularly scheduled auction of new Treasury bills, a monthly ritual in which investors compete to lend the state money. This, however, was no ordinary auction. Last year, after much debate, Congress tied federal student loan interest rates to the 10-year Treasury note’s each year’s pre-June rate at auction, finally linking student and government borrowing costs.

The results of May’s auction have serious and possibly lifelong consequences for the students on the other end of this year’s 20 million government higher education loans. When all the paddles were down, the Treasury sold $24 billion in 10-year notes at a yield of 2.61 percent — good news for bond traders, bad news for student borrowers.

Last year, an unusually low Treasury yield of 1.81 percent pushed down student loan interest rates — which Congress retroactively included in the 2013 deal — to their lowest levels, but this year’s 0.8 percentage point increase directly affects the linked loans, pushing them back up. This 0.8 percentage point represents a 20 percent increase in the rate charged to undergraduate borrowers, boosting it from 3.9 to 4.7 percent. Six years after the government nationalized the student loan industry, when so many Americans are rightly worried about the escalating costs of higher education, why is the government raising the cost of borrowing money to go to college?

There were three main issues at play in the 2013 Bipartisan Student Loan Certainty Act: How to anchor the interest rates, how much add-on for each category (undergraduate, graduate and parent loans) and where (or if) to cap the rates. After a long game of chicken with other people’s children, Congress ended up attaching the interest rates to the 10-year Treasury notes, with 2.05, 3.60 and 4.60 percentage point markups and 8.25, 9.5 and 10.5 percent caps, respectively. The bill looked most like the proposals from Rep. John Kline, R-Texas, and Sens. Richard Burr, R-N.C., and Tom Coburn, R-Okla., whose ideas weren’t that far off from President Barack Obama’s plan. Kline’s proposal (attached to 10-year rates, with 2.5, 2.5 and 4.5 point markups and 8.5, 8.5 and 10.5 percent caps) was found by the Congressional Budget Office (CBO) to generate more new revenue on the backs of students: $3.7 billion. That the final bill’s interest schedule was even harsher than Kline’s proposal points to how little daylight there is between the major parties on this issue.

One of the reasons Congress decided to link loan rates to Treasuries is the unexpected overflow of embarrassing lending profits. After the Department of Education took over 85 percent of student lending in the midst of quantitative easing, the spread between basement-low government borrowing costs and fixed higher-ed interest rates meant tens of billions a year — nearly $30 billion in 2009 — in negative subsidies for the department. Sen. Elizabeth Warren, D-Mass., has made student loan profits a national issue, introducing ill-fated protest bills to lower the higher-ed interest rate to 0.75 percent for one year and allow past borrowers to refinance if today’s rates are lower. 

“It’s time to end the practice of profiting from young people who are trying to get an education and refinance existing loans,” Warren said in a February statement. Though she’s right to draw attention to a particularly egregious symptom, a January report from the Government Accountability Office (GAO) highlights how deep the problems with the student lending structure go.

Her hope has been that the government could set borrower interest rates in advance to precisely and consistently balance federal revenues and costs. This was a hope the GAO quickly dashed, in its report “Borrower Interest Rates Cannot Be Set in Advance to Precisely and Consistently Balance Federal Revenues and Costs.” The report, commissioned as part of the 2013 bill, found that there was too much uncertainty in student loan repayment and government borrowing rates to consistently break even. The best hope for reducing profits, the GAO found, was waiting for the economy to improve, Treasury rates to bounce back and the profitable spread to heal.

If and when the Treasury rates increase and perch at a sustainable postcrisis level, profits should decrease, and the government is sure that’s just around the corner. So sure that the CBO has projected the 10-year Treasury rate will stabilize in five years — for the past six years. In 2008 it estimated it would halt at 5.4 percent starting in 2013; in 2009 it was 5.3 in 2014; in 2010 it was 5.8 in 2015. The latest projections have Treasuries hitting 5.2 percent by the end of 2017 and staying there for the foreseeable future. In six years, we’ve moved one year closer to stabilization.

But all this fancy accounting can’t disguise one simple fact: It makes no difference to a student borrower’s bottom line whether the Department of Education makes money or not. What matters to student borrowers are the same two things that matter to all borrowers: principal and interest. If Treasury rates stabilize at 5 percent, that means undergraduate borrowers are stuck with an interest rate over 7 percent. The Obama administration bargained for a pay-as-you-earn option in the 2013 bill, but the cost of this program ($3.6 billion) was more than offset by the increased rates — remember that the GOP’s more-or-less successful interest schedule proposal was estimated to generate a convenient $3.7 billion.

So far, then, the only solution to the student loans crisis from Washington is cosmetic. The Obama administration gets a repayment option it could trumpet but pays for it with higher interest rates. Government lending profits are going to go away but only because everyone’s going to pay more to borrow. Meanwhile, the Project on Student Debt has tracked an ongoing 6 percent annual increase in average graduate debt burden, and unlike the CBO’s, its projections have been accurate. A 6 percent annual increase might not sound like much, but that means the amount will double every 12 years or so. It also means the average college grad born today will enter the workforce $100,000 in debt.

According to the College Board, the cost of attendance has increased 24 percent at four-year private universities over the past decade and 42 percent at public four-year schools. The engine that’s driving student debt is the increase in college costs, and there has been no indication that anyone in Washington, not even student-debt champion Elizabeth Warren, is committed to addressing that. Unless Americans refuse to be distracted by politicians playing reformer dress-up, the disastrous future of student debt is already written.