Student Loan Rates Double; What Are Long-Term Solutions for High College Debt?
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GWEN IFILL: Beginning today, the interest rates on federally subsidized Stafford loans is doubling from 3.4 percent to 6.8 percent. For the lower-to-moderate income students who borrow that money, the hike could cost them from $1,000 to as much as $4,500 over the life of the loan.
The student loan debate briefly became an issue during last year’s presidential campaign until Congress agreed to freeze the rates for a year. But that deal runs out today.
We look at this issue and the broader problem of student debt with two people who watch it closely.
Kevin Carey of the New America Foundation and Anne Johnson of the Center for American Progress.
Let’s start at the beginning.
How is it that these rates got so low in the first place? Because they were higher and then they were cut.
Can You Still Work Your Way Through College?
ANNE JOHNSON, Center for American Progress: Yes. There’s a couple different loan programs that the federal government has.
The Stafford loan program has two kinds of loans, a subsidized loan for low and moderate income families and an unsubsidized loan basically for everyone else. The subsidized loan has been at 3.4 percent for the last few years. Last year, it was set to double. Student advocates and organizers were able to keep that rate low, but this year, today, the rates are set to double again.
And there will be about 7.5 million students who will see their interest rates double.
GWEN IFILL: Kevin Carey, most people think about interest rates going up slowly. How do you go — how does it double? How did that happen?
KEVIN CAREY. New America Foundation: Well, this all goes back to the last time Congress set the interest rates for federal student loans in law.
The interest rate currently isn’t based on anything other than whatever Congress wants it to be. And back around 2006, they set it at 6.8 percent, which seemed like a pretty good number at the time because interest rates were higher then.
Over time, interest rates have gone down. There’s been a lot of attention given to the cause of student debt. And so Congress decided to temporarily cut it in half. And that cost money, about $6 billion a year, to lower interest rates.
And so they gave it an expiration date. The expiration date originally was a year ago. They extend it for one year. And now it’s going back to the permanent rate in law, which is currently 6.8 percent.
GWEN IFILL: So, Anne Johnson, in the year since it — the can was kicked down the road, what happened? Wasn’t there supposed to be a deal of some kind?
ANNE JOHNSON: Yes.
I think there are a couple of things that have been going on. One is that, broadly, people are starting to talk more about student debt and the impact of student debt on the economy as a whole. I mean, if you look at there’s 37 million Americans who have student debt. And it’s really interesting when you look at the age breakdown of the people who hold the $1.1 trillion of debt that exists.
Over half the people who have student debt are actually over the age of 30. And 15 percent of people who have student debt are over the age of 50. And so this isn’t just an issue that is impacting, you know, 18-to-22-year-olds. It’s really an issue that is having broad economic consequences for millions and millions of Americans.
As we got into the debate this year, there was much more attention paid to what are some long-term solutions that we can look at to address student loan interest rates in the long term and really get a handle on student debt?
GWEN IFILL: I do want to talk about the long-term solutions.
But I want to ask you, Kevin Carey, what happens if you have a chunk of this debt, if you’re one of those 20-to-50-year-olds who still owe money on your college loans, on their student loans? Does your interest rate go up on the outstanding amount?
KEVIN CAREY: No, this will only affect new loans that are made as of this year.
GWEN IFILL: OK. So, what are some of the solutions that people have been proposing for this?
KEVIN CAREY: Well, there are a number of solutions.
President Obama proposed a solution in his budget this year. And there have been solutions proposed both — in both the House of Representatives and the Senate. Some people say let’s just keep it at 3.4 for longer.
Others, including the president, have proposed tying interest rates to market rates.
So the president proposed that your rate would be essentially the 10-year federal borrowing rate, which is about 0.8 percent right now, plus another
— actually, it’s about 1.8 percent, plus some more to cover the federal cost of borrowing.
That would actually bring the rate down to 2.7 percent, because the federal government’s interest rates are very low right now. Your rate wouldn’t vary. Whatever the rate is when you borrow the money would be the rate for the life of the loan, but if interest rates were to rise over time, then the statutory rate would rise along with them.
GWEN IFILL: Is there any discussion about letting them rise, but then capping them?
ANNE JOHNSON: Yes, that is actually the center of the debate is whether or not and how — or to have a cap on interest rates in the future.
But interest rates are really low right now. So, borrowers who would be taking out loans this year or next year would get a pretty good deal.
But if we look into the five, 10 years from now, interest rates are projected to go up. And those borrowers could be facing interest rates of 8 or 10 percent. And so we really think it’s important that there is a cap on that rate.
And that’s been the center of a lot of the conversation.
GWEN IFILL: As we’re having these conversations, theoretically, assuming these conversations are happening, is there any discussion or any agreement about where — how much debt an individual should carry?
KEVIN CAREY: Well, the amount of money you can borrow from — through this subsidized Stafford loan program is already limited, so you can’t borrow than…
GWEN IFILL: But more broadly than just the Stafford loan program?
KEVIN CAREY: No, not really.
And the underlying cause of this whole debate, this reason that this has become such a high-profile issue that it was part of the presidential campaign last year is because the price of higher education has gone up so much faster than the ability of students and families to pay for college. And so they have to borrow to make up the difference. That’s why we have a trillion dollars in outstanding debt.
And as important as it is to keep loan payments affordable and keep interest rates that at a reasonable level, that’s just the interest on the debt. The real problem is the debt itself and the fact that people have to borrow to go to college. And really this debate one way or the other isn’t going to change that.
GWEN IFILL: What do you think about that, Anne?
ANNE JOHNSON: I agree on principle. We have to address the existing $1.1 trillion and figure out ways to help borrowers and keep interest rates down in the future.
But I also think that what is really at the heart of this is the cost of higher education and making sure that Americans have an opportunity to get a degree to pursue a four-year school or a trade school or a community college degree to be able to help them get a good job. And if cost is prohibited, that’s a problem.
GWEN IFILL: College affordability sounds like a really big nut to crack, whereas this seems like that Congress can do something about more or less immediately. Is that debate frozen as well?
KEVIN CAREY: Well, Congress doesn’t control what colleges charge. Congress sets this rate. And so that’s — it can do what it can do. And right now it’s debating what it has control over.
College tuition is largely in hands of state governments that have been cutting funding to public universities. And that’s one of the big reasons that public universities have been raising tuition — or a lot of students go to colleges that are private nonprofit or for profit. And they charge more or less whatever they like.
And so Congress can’t regulate or as has chosen not to regulate college prices. It can only regulate the price of the money that people borrow to pay that tuition.
GWEN IFILL: So, assuming that it’s not up to Congress to fix that, are colleges having that debate, that discussion?
ANNE JOHNSON: Well, I think that they’re — I think that the people who want to attend those colleges are going to eventually force people to have that conversation.
The cost is becoming, you know, so high. In the last 30 years, tuition has gone up over 1,000 percent. The funding levels at the state and local level have contributed to students paying more through tuition. And I think that it is going to be up to young people and their families to really sort of push that conversation. What can we do to actually keep costs down in the first place?
GWEN IFILL: So, the conversation doesn’t begin with — it doesn’t end with interest rates. It just goes on from there.
ANNE JOHNSON: That’s right.
GWEN IFILL: OK. Anne Johnson of the Center for American Progress and Kevin Carey of the New America Foundation, thank you both.
ANNE JOHNSON: Thank you.
KEVIN CAREY: Thank you.
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