Here's How Expensive Student Loans Could Be Under Obama's New Plan

By Jordan Weissmann

President Obama's budget gave student advocates a jolt today with a proposal that would kill the cap on student loan interest rates, which are currently fixed by Congress.

The White House plan would do two key things, according to the New York Times. First, it would expand income based repayment so no federal borrowers would have to hand over more than 10 percent of their monthly paycheck. Student groups, of course, love that bit. But, it would also tie interest rates on new loans to the government's borrowing costs. And that's got the advocates concerned.  

Student groups don't necessarily mind the idea of market-based rates, so long as they're low like today. But they worry that without some sort of ceiling on interest, the policy would end up costing the undergrads of tomorrow when Treasury rates inevitably rise. 

So how much higher could they go compared to today? Currently, the government charges 3.4 percent interest on subsidized Stafford loans for low-income students, 6.8 percent interest on normal Stafford loans, and 7.9 percent interest on PLUS loans for grad students and parents. Now here's the NYT's number filled description of Obama's new system

Under the president's budget, interest rates would be pegged to 10-year Treasury notes, plus an extra 0.93 percent for subsidized Stafford loans, an extra 2.93 percent for unsubsidized Stafford loans, and an extra 3.93 percent for loans to parents and graduate students.

Now here's what that might look like in a picture. This graph shows what interest on each loan type would have been dating back to 1990.* The blue line tracks the treasury rate; the three shades of red are different loan types. As you can see, there were points in the not-to-distant past where many students would have been looking at 10 or 11 percent interest on their federal loans. 

Obama_Student_Loans_Hypothetical_3.JPG

Is that fair? There's a decent argument either way. On the one hand, income-based repayment and debt forgiveness have made paying back loans less of a burden for those who can navigate the system correctly (which is much easier said than done). The government also has an interest keeping the student loan program close to budget neutral. But at a time when many students are struggling with even low-interest debt, there is something a little worrisome about  exposing future generations to the full brunt of the market.

______________________

*Technically, Unsubsidized Stafford Loans didn't exist then, but what the heck, this is all a hypothetical anyway. 

This article available online at:

http://www.theatlantic.com/business/archive/2013/04/heres-how-expensive-student-loans-could-be-under-obamas-new-plan/274879/