In the news

MASSPIRG
|
Daily Item of Lynn
By
Deirdre Cummings

Just a few years ago, banks and mortgage brokers helped crash the economy, in part by using initially low “teaser” rates to get homeowners into loans they couldn’t afford.

Now, in a troubling move, over the objections of our two Senators Warren and Markey and a majority of our representatives including Representative Tierney, Congress took a page from the banks’ playbook to create a new loan deal for students.

In negotiating the recent compromise on federal student loans, Congress sold the plan to the public by highlighting the low interest rates that students would get on loans taken out during the first two years of the plan.

They conveniently failed to point out the fact that, after two years, the interest rates on new loans would be tied to the market and would rapidly rise to unprecedentedly high levels.

This sort of deceptive marketing is the sort of thing we expect from a shady mortgage company in 2007, not from Congress.

The debate on student loan policy kicked off because, on July 1, the interest rate for subsidized Stafford student loans doubled from 3.4 percent to 6.8 percent. For the seven million students expected to take out these loans this year — two-thirds of whom come from families with incomes below $50,000 — this new high interest rate will drive up the cost of their loan by $1,000. In Massachusetts, 160,000 borrowers will be affected.

Despite the burden this extra debt poses for student borrowers, Congress beat back attempts by student groups and their allies to reinstate the old 3.4 percent interest rate.

Instead, they crafted a compromise that is designed to look attractive by reversing the rate hike in the short term. Under the deal, interest rates will be set at 3.85 percent for this year and 4.62 percent for next year for undergraduate Stafford student loan borrowers.

However, that loan relief is temporary. After the first two years, interest rates will be tied to Treasury bond rates, causing them to rise dramatically. Within a few years, rates will be higher than the 6.8 percent rate that students face under the current law. The deal does set rate caps -8.25 percent for subsidized and unsubsidized undergraduate Stafford loans, 9.5 percent for graduate Stafford loans and 10.5 percent for PLUS loans — but these caps are so high that they open up students to dangerously steep interest.

In addition, the deal is designed to be “revenue neutral” over the next 10 years. That means that the low interest rates given to students now must be balanced by higher rates down the road. In essence, they’re forcing today’s 13-year-olds to take on extra debt when they go to college, all in order to pay for the cheap loans being offered for the next two years.

President Obama has indicated he will sign the bill into law, which means that five years from now an undergraduate who takes out the maximum in subsidized and unsubsidized Stafford loans will pay $4,700 more over the life of the loans than she would have last year — and $900 more than if Congress did nothing and the rate simply stayed at 6.8%.

The bottom line is that students will pay more under this proposed law than if Congress had done nothing at all, and the two years of “teaser” low rates will soon give way to rates even higher than the 6.8 percent that Congress claims to be trying to avoid.

The result: extra debt for students.

This summer’s debate largely ignored the deeper problems with the student loan system — including the fact that the program is expected to make more than $184 billion in profits for the federal government over the next 10 years. The government shouldn’t be profiting by sending students deeper into debt.

Instead, Congress should be doing everything they can to make college more affordable and accessible. This deal is a step in the wrong direction, making it harder and more expensive for America’s future students to get the education they need.

Department of Education Secretary Arne Duncan has said that college affordability is a priority. We’re counting on him and others in Congress to act before these teaser rates run out and pass real reform to keep college within reach for students and families.

Deirdre Cummings is a legislative director with MASSPIRG, Boston. Email her atdcummings@masspirg.org

DEFEND THE CFPB

Tell your representative to oppose the “Financial CHOICE Act,” which would gut Wall Street reforms and destroy the Consumer Financial Protection Bureau as we know it.

Support Us

Your donation supports MASSPIRG's work to stand up for consumers on the issues that matter, especially when powerful interests are blocking progress.

Consumer Alerts

Join our network and stay up to date on our campaigns, get important consumer updates and take action on critical issues.
Optional Member Code