Liberals Are Going to Hate the Senate's New Student-Loan Deal

Students will pay interest rates based on the government's own cost of borrowing while Washington keeps earning profits.

After lots of late-night wrangling, the Senate appears to have struck a bipartisan deal on student loan interest rates, some of which doubled earlier this month. What's more, Senate sources say it will likely pass the House as well. So what's in the bargain? Here's a quick rundown.

Much as they were before summer of 2006, the rate on new loans will now be based on the government's own cost of borrowing. According to Inside Higher Ed, undergraduates will pay interest equal to the yield on 10-year Treasury notes, plus 1.8 percent. For grad school loans, it will be the T-Bill plus 3.8 percent, and for parent loans the government will add 4.5 percent. Rates will be fixed for the life of the loans, and capped for 8.25 percent for undergraduates, and 9.25 percent for grad students. 

Based on the Congressional Budget Office's interest rate projections (table B-1), here's what that will look like.


So how does that compare to now? Until it doubled earlier this month, the rate on need-based subsidized Stafford loans was a fixed, 3.4 percent. For regular Staffords, student pay a fixed 6.8 percent. Meanwhile, parents and grad students currently pay the same 7.9 percent rate. So the second Treasury yileds rise above 5 percent, which theoretically should happen if the economy ever really gets healthy, pretty much all new borrowers will be paying more than students (or parents) today. Also, subsidized loans, which tend to go to poor and middle class students, will no longer carry a lower interest than unsubsidized loans, as they have for the past several years.

So that's the technical stuff. But how should we all feel about it? Well, if you've been angry about the profits the government currently earns off student loans, then by all means, continue grumbling. According to The New York Times, Democrats say they don't want the legislation to add or subtract form the deficit. In other words, the Department of Education will keep making the same exact returns on its lending as today.

If, on the other hand, you're a fiscal conservative who thought fixing interest rates by a vote of Congress was always a harebrained idea that would eventually add to the deficit when Treasury rates jumped, then you should be fairly pleased.

But, if you're like me or many of the higher ed policy folks I talk to, you should just be happy this issue might finally be behind us. Student loan interest rates impact borrowers around the edges of their finances, yes. But as Mark Kantrowitz of is fond of saying, the real problem facing borrowers is the amount of debt they take on, not the cost of debt. I would add that the dizzying variety of payment options and the lack of counseling many borrowers receive are also more important than interest rates, at least when it comes to delinquencies and defaults. Since this issue first emerged during the presidential campaign, it's been an utter distraction from those fundamental problems. Getting beyond the side-show might open up space for more productive conversations, finally.

UPDATE JULY 12: Thanks to a CBO analysis showing that the bill would have cost $22 billion, the Senate is renegotiating the deal. Sigh.