If you have been following the news out of Washington, DC over the last week or two, one thing really stands out: legislators had until today, July 1st, to reach an agreement on extending federal subsidized student loan interest rates or see them double to 6.8 percent. That deadline has come and gone (Congress left town for an early start to the Fourth of July holiday) but what does that actually mean? NTUF analysts have already written about how student loans are funded by the federal government or what the different types of loans there are. Below I’ve listed some myths that I kept hearing repeated by politicians, advocates, and everyday Americans.
Myth: The interest rate increase was a surprise.
Not True. If you recall, last year, Americans faced the same scenario (with much the same rhetoric of impending doom for life as we know it). President Obama and Members of Congress enacted a short stopgap measure before ultimately passing legislation to continue the funding for the lower rates until today. Everyone involved knew this day would come and had (or rather, continue to have) time to address the situation, though solutions can take different forms.
Myth: Doubling the interest rate will mean double the repayments.
Absolutely Not True. I have unfortunately heard this mostly come from alarmist Members of Congress. According to many sources, including the Brookings Institution and the Congressional Budget Office (CBO), an increase of interest rates for subsidized loans will mean a higher per month payment requirement once those students graduate. How much? The Joint Economic Committee reported that college students will have to pay an average $2,600 more over the course of the life of the loan. Spanning over years, that could be $20 or $50 but CBO found that it averaged out to be a $38 increase per month (assuming the loan is repaid over ten years). Though I would not welcome such an increase in repayment costs, it is a marginal change nonetheless.
Myth: Extending the lower interest rate is no cost to taxpayers.
No & It Gets Worse. CBO scored a basic two-year extension of just the subsidized student loan interest rates as an $8.3 billion cost spread out over four years. Currently, the income from interest and loan repayments is projected to net the government $6 billion in FY 2013 BUT the spending will soon outweigh the income. As explained in The Taxpayer’s Tab, administrators borrow money by issuing U.S. Treasury securities and use the new money as loan capital and subsidies. This system works as long as loan interest is higher than securities interest. However, by 2018, the interest on new debt will be quite close to set interest rates (and when you account for administrative costs ($15 billion over ten years, you’re no longer in the black). Simply put, if the government keeps borrowing at this rate, student loans will quickly become a liability for taxpayers, who would be footing the bill for a bailout if it comes to that.
Myth: There is nothing anyone can do now.
All Is Not Lost. With the deadline passing only today, legislators could come back from their break and pass legislation that could do a number of things for student loans, including:
- Simply Extend Lower Interest Rates, an $8.3 billion new cost.
- Extend Lower Interest Rates With Conditions, some legislation is calling for revenue increases while others seek spending offsets to make the extension revenue neutral.
- Find Other Sources of Funding, one bill would require the Federal Reserve to expand its ledger and take on new student loans, CBO has not released an estimate for Rep Tierney’s and Senator Warren’s bill.
- Peg All Loans at Changing Interest Rates, Senator Coburn’s measure would lock rates in at securities interest plus three percent for administrative costs, a $32 billion new cost (but ultimately a net $15.6 billion savings over ten years).
- Make Rates Change with the Economy, House Republicans passed a bill to peg rates according to economic conditions, a $330 million new cost (but an eventual $3.7 billion savings in ten years).
There are resources on the web for students to consider their options, like this one by Brookings. However, students need to understand the market conditions they live in and how their borrowing affects the economy. I encourage all students to do their best to get scholarships and get the grades they need to better their initial standing in higher institutions. But if going to college is too expensive, other options exist that are just as viable. Tech and certificate programs, community college, and simply working now to go to school later are considerations highlighted by not only CBO but parents who are likely expected to shoulder some of the cost of their child getting a higher education. They also need to understand the financial committment of possibly failing in their academic venture. Don't believe me? A third of student loan borrowers never earned a degree.
Here's to hoping that students are more skeptical when hearing these myths, especially when their financial futures are on the line.