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Elizabeth Warren's Proposal on Student Loans - and What's In It for You

Aug 14, 2013 Jennifer Williamson, Distance Education.org Columnist | 2 Comments

Last year, Congress passed a temporary measure extending a 3.4% interest rate on federal subsidized Stafford loans for another year. This year, on July 1, lawmakers failed to come to a similar compromise—and interest rates for this type of loan have already risen to 6.8%. Still, some lawmakers haven’t given up on trying to come to a better solution for students.

Senator Elizabeth Warren is one of those. A Democrat from Massachusetts, she has proposed a measure that would tie student loan interest rates to the rates offered by the Federal Reserve to financial institutions: currently at 0.75%. This would result in thousands of dollars in savings for the average college student working to pay back loans. Compared to other proposals, Senator Warren’s could save students thousands of dollars per year in interest payments.

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Over 1,000 college professors from more than 568 traditional and accredited online colleges have signed a letter in support of Senator Warren’s proposal. And it’s not just Democrats who support it. According to a Public Policy Polling survey administered nationwide, people who identify as both Republican and Democrat support this bill. It’s also attracted widespread support by numerous academic organizations, such as the American Association of University Professors and the United States Student Organization; and progressive activist groups such as Credo Action and MoveOn.org.

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Widespread support does not, unfortunately, translate to immediate action by Congress. The unfortunate truth is that both Republicans and President Obama support measures that would tie student loan interest rates to a far more volatile and expensive number—the performance of the ten-year T-note, a unit of investment in the federal government. The interest rate investors get back for investing in the T-note is tied to economic performance.

Under President Obama’s version of this plan, interest rates are fixed at the time they’re originated; under the Republican version, the interest rate is variable and adjusts with the economy every year.  But if either of these plans went into effect today, students would have to pay slightly more in interest than the original number—approximately 4.75% instead of 3.4%. This is an improvement over 6.8%, true. But it doesn’t get students a better deal than the original interest rate.

In addition, these interest rates have the potential to rise much higher than federal interest rates do today. For example, in 2007, loans originated under this plan would have interest rates of around 8%. So how expensive this measure turns out to be for you would depend on the year you graduate—and the growth of the economy that year. That’s hard to predict—and increases the difficulties students and parents face in trying to judge whether they can afford a loan in the first place.

While market-based interest rates may save money in the short term for students who would otherwise have to pay a 6.8% interest rate, they don’t keep costs down in the long term—and they have the potential to be very expensive once the economy improves. They increase the amount of money brought in by federal loans—but they don’t do more to help students than simply lowering the interest rate back to 3.4%.

In general, the market-based plans make federal loans more expensive for students—and make interest rates less predictable as well. Elizabeth Warren’s plan, however, has the potential to reduce student debt by thousands of dollars per year. It also has broad bipartisan support throughout the country. If it can generate that kind of support in Congress, there’s a chance it could make a difference in the lives of students everywhere.

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Comments:

Cap Lee Over a year ago

My dept for my daughters university is $60,000 which means $100,000 when paid off. Lost my house, lost over $1000 a month in pension, aaargh. I'll pay it eventually but probably w/ my life insurance after my demise

Ben Pfeiffer Over a year ago

So sorry to hear that Cap Lee. I have believed for a long time college
tuition is a scam. The tuition rates for many campus schools has
increased 300% times the normal inflation rate.

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