Déjà Vu: Lawmakers Again Debate Future of Student Loan Rates

By Dervarics, Charles | Diverse Issues in Higher Education, April 11, 2013 | Go to article overview

Déjà Vu: Lawmakers Again Debate Future of Student Loan Rates


Dervarics, Charles, Diverse Issues in Higher Education


So far, 2013 is shaping up much like 2012 on one key higher education issue: the uncertain future of student loan interest rates.

With rates on new loans set to double to 6.8 percent on July 1, policymakers and education advocates are again mired in debate over key aspects of federal policy. These issues include whether loans generate a profit for the government and whether rates should be set by Congress - thereby bringing politics into the equation - or by market forces, no matter the consequences.

Last year after a lengthy and often bitter debate, Congress and the White House put off the issue for a year, extending a low 3.4 percent interest rate on new subsidized loans until July 2013. But with the topic now before Congress again, some lawmakers and experts are beginning to call for major changes in federal rates and approach.

Loans: Generating profit?

In eliminating banks from the subsidized loan program in 2010 - and reallocating bank subsidies to need-based grants - Congress placed the federal governments Direct Loan program front and center. Since the same government that prints money also makes Direct Loans to students, the potential for profit in the student loan business would seem real. In fact, according to the Congressional Budget Office, the government likely will make $37 billion in profit on student loans in fiscal year 2013.

Still, experts say it all depends on the accounting system used for these loans.

The federal government uses a different accounting framework than the private sector uses for student loans, says Andrew Gillen, research director at Education Sector in Washington, D.C. In effect, federal accounting downplays the administrative costs of loans, some of which are reflected elsewhere in the federal budget. It also ignores some elements of risk such as late payments and the costs of defaults.

To a certain extent, the idea of profit in student loans is "an accounting mirage," he says.

The bank subsidies eliminated in 2010 did produce substantial savings, which were redirected to need-based grants, Gillen says. But, he cautions, "All that profit has essentially already been spent."

Deborah Lucas, professor of finance at Massachusetts Institute of Technology, calls the current system "incomplete accounting" and favors a new approach that considers risks, including defaults. "That change would eliminate the artificial appearance that the student loan programs are highly profitable for the government," she told Congress this month.

The issue of profit and loss is a factor in the current rate debate. For example, continuing the low 3.4 percent loan interest rate - and not allowing it to rise to 6.8 percent - "costs" the federal government about $6 billion. …

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