Good news for students…for now? Not so fast…

Awaiting President Obama’s signature is a bill that will reduce the costs of borrowing for millions of students.

Student Loan-AmericanDreamDon’t get completely happy about it; the bipartisan legislation links student loan interest rates to the financial markets. This means that at current market rates, students obtain lower rates now but, once the economy improves, rates will tick upwards and in synch with market conditions. Talk about a double-edge sword; most want the economy to improve but, with any improvement, students will pay the price in the form of a costlier means of financing their education.

Interest rates under the new legislation would not top 8.25 percent for undergraduates. Graduate students would not pay rates higher than 9.5 percent, and the rates that parents pay would reach a maximum level of 10.5 percent. Last month, Senator Elizabeth Warren (D-MA) argued on the Senate floor that it is unjustifiable to allow banking institutions, which borrow federal funds at a virtually interest-free rate (the Fed discount window rate at that times was 0.75%), to charge students 7% on student loans. Unfortunately, Senator Warren’s suggested version of the legislation is not what congress ended up with.

Student loan debt is approximately $986 billion and will only get worse in the face of markedly increasing tuition rates. And, while the economy is getting better in some respects, job outlooks for new graduates isn’t where it needs to be to wipe out the staggering levels of debt.  With this deal, students will eventually end up pay more to finance their education than if Congress did nothing; on July 1st the rates on subsidised Stafford loans doubled to 6.8 percent because Congress was behaving as they almost always do — they couldn’t come to an agreement on a way to keep the rate at 3.4 percent. As things take place when the legislation is signed into law, low rates will be replaced with rates that are even higher than the 6.8 percent rate that Congress is trying to avoid.

That’s congressional efficiency at work, folks.

 

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