Pain is temporary. Quitting lasts forever.
January 31 update: The house has successfully voted to pass this bill.
Pre January 31st update: Before speaking to this bill, let me be clear. HR 1911 as of 7/28/2013 is not law. It passed through the Senate and is awaiting a vote in the house. With the house vote complete, it will need to be signed by President Obama. The house is expected to vote on it before they recess. You can see the votes, follow the bill, or read the bill by clicking here.
Here we are. July 1st has come and gone. Student loan rates doubled while congress recessed. In a miraculous turn of events they returned and almost immediately had a compromise waiting in the wings. The very thought that in our current political climate a compromise could be produced so quickly should not only send a chill down a person’s spine, but also make them stop, say a few choice words, and realize they are about to be screwed.
In the student loan world, this happened. Before I say what has happened, let’s take a trip down memory lane. In 2012, a one year extension was put in place for federal subsidized student loans. As some of you may recall, “don’t double my rate” became a slogan that year for students who would see their interest rates increase from 3.4% to 6.8%. Congress acted and implemented a temporary solution. They extended the rates for another year while they attempted to find a more long term solution. The rates for federal subsidized loans remained at 3.4% and unsubsidized loans at 6.8%.
So fast forward to July 1 2013, the rate extension from the previous year is now expired. So, what did our congressional leaders do? Well though I really want to say nothing, it would be disingenuous to do so.
They did try to reach some sort of agreement so it appeared. The senate in this time brought forward numerous bills. The most popular was a bill by Senator Elizabeth Warren, the Bank on Students Loan Fairness Act, which sought to peg the interest rates of student’s loan to the same rate the large banks borrow from the Federal Reserve’s discount window. President Obama outlined a plan that would essentially peg the interest rate to the 10 year Treasury bond plus less than 1% additional interest with certain limitations on how high the interest rate could increase. Most notably, it will also cause students loans to become fixed interest rate loans when a person signed for the loan.
The house also passed a bill. It looked very similar to the proposal from the president; however, it didn’t include caps on the interest rate or cause the loan to become a fixed rate loan when a person took it out. Imagine having $27,000 in student loan debt, the national average I might add, and having your interest rates fluctuate in the market as your lender sees fit.
Each of these bills as you can imagine didn’t reach any particular point. The house passed their bill that failed in the senate. The senate bills did not come up for a vote because votes were not available. So the deadline passed and then the grand bargain arrived.
When I said at the beginning that a compromise has been produced, that compromise is the Bipartisan Student Loan Certainty Act of 2013. This bill does a few things.
1. It pegs the interest rate of the Federal Direct Stafford Loans and Federal Direct Unsubsidized Stafford Loans that are issued to undergrad students on or after July 1 2013 to the high yield of a 10-year Treasury note auctioned before June 1 plus 2.05% or 8.25%, whichever is smaller.
2. It pegs the interest rate for the Federal Direct Stafford Loans and Federal Direction Unsubsidized Stafford loans issued to professional or graduate students on or after July 1 2013 to the high yield of a 10-year Treasury note auctioned before June 1 plus 3.6% or 9.5%, whichever is smaller.
3. It pegs the interest rate for parent plus loans on or after July 1 2013 to the high yield of a 10-year Treasury note auctioned before June 1 plus 4.6% or 10.5%, whichever is smaller.
4. It pegs the interest rate to an annual rate of the unpaid principal for consolidated loans to a weighted average of the loans consolidated to the nearest 1/8th of one percent.
5. It directs the secretary of education to set the interest rates only after the secretary has consulted with the secretary of the department of treasury. The rates will then be published in the Federal Register.
6. It designates the interest rate is to be a fixed rate once a student takes out a loan.
7. It updates the PayGo scorecard for the house of represents and not for the senate.
8. Finally, it creates a study to understand costs associated with student loans and build estimates on future lender.
Each of these rates has the potential to become higher than the rates before this bill. Short term, it will certainly help students while interest rates are low; however, once the economy improves and interest rates rise students will begin paying much more for their loans. The CBO predicts that interest rates will increase from 5 percent in the academic year of 2014 – 2015 to 7 percent in academic year 2023 – 2024 for all subsidized and unsubsidized loans. It also predicts that parent plus loans will hit 9% cap by academic year 2023-2024. That said if you have a child or know someone who has a child who is 8 to 10 today, expect that by the time they begin college in 2023 or 2024, you will be responsible for a higher fixed interest rate on student loans assuming of course that CBO is correct.
In essence, spending reduction will be placed on the backs of our children, someone’s grandchild, and a group of people who are currently incapable of beginning to understand what decision is being made for them. This bill as I stated is a bad deal for students though short term it is a good deal. One can only hope that within the next 10 years; we can change this bill again and find a way to make college much more affordable.