The Student Loan Dilemma

By Edward Graham

When the United States Senate finally passed a bipartisan bill after months of relentless bickering to keep the interest rates of federally subsidized Stafford Loans for undergraduates from doubling to 6.8 percent, many college hopefuls probably breathed a long sigh of relief. Lost amongst the incredulousness of a congressional compromise were the dire warnings of a handful of senators who cautioned that the measure was indicative of a larger and more pressing dilemma—the increasing amount of financially crippling loans that students are taking out to cover the skyrocketing costs of higher education.

“College is already too expensive. It is shortsighted to do anything that would put at risk the ability of students to start or continue their higher education,” Senator Ben Cardin (D-MD), a member of the Senate Finance Committee, said in a statement released after voting against the bill.

Senator Cardin, whose home state of Maryland saw almost 55 percent of its graduates from the Class of 2011 take out education loans, was concerned that the bill provided short-term relief at the expense of long-term affordability.

Instead of the 6.8 percent interest rate that took effect when Congress did not act by a pre-set July 1st deadline, the bill locks up interest rates for undergraduates at 3.86 percent for this year, retroactive to July 1st, but it leaves open the possibility for interest rates to rise even higher above the 6.8 percent threshold.

The bill would tie the interest rate of subsidized Stafford Loans to the rate on 10-year Treasury bonds, meaning that the interest rate would be affected by fluctuations in the market. To put it another way: A steadily improving economy would lead to a corresponding rise in the interest rate for Stafford Loans.

Thankfully, the bill did include caps on how high the interest rate can rise. On undergraduate loans, interest can only reach 8.25 percent. Graduate loans have a ceiling of 9.5 percent, and PLUS loans for parents cannot go above 10.5 percent. So while the bill does provide some temporary relief for the estimated 7.4 million students who already rely on subsidized Stafford Loans, future students could be looking at interest rates that exceed the 6.8 percent figure that the bill was seeking to address.

An analysis of the student loan compromise by the Congressional Budget Office estimated that the increased interest rates would net the government roughly $184 billion over the next decade. According to Senator Elizabeth Warren (D-Mass.), an early and vocal critic of the government’s interest rates for Stafford Loans, the ability to make a profit off the backs of hard- working students is unacceptable.

“This is obscene,” Senator Warren said in a speech on the Student Loan Amendment before her Senate colleagues. “Students should not be used to generate profits for the government. We should be doing every thing we can to invest in students and to offer them the best deal we can on student loans—not find more
ways to make money off them.”

NEA Student Program Chair David Tjaden discusses college affordability with U.S. Senator Elizabeth Warren.

For an increasing number of post-secondary learners, the litany of expenses—tuition, books, food and housing—is already too much to handle before they begin worrying how rising rates will affect their lives after school. David Tjaden, chairperson of the NEA Student Program, and a recent graduate of the University of Iowa, says that any increase in student interest rates is especially concerning to the more than 60,000 future educators he represents.

“Our student members are very passionate about this,” Tjaden says. “They see that family incomes are falling. They see that college costs are rising. As college costs are rising, at least don’t penalize us for taking out massive loans to get that education.”

There is no need to describe the financial burden of student debt to those who continue to make loan pay- ments years after graduating from college or graduate school. Just ask Mary Pyron from Texas, who accrued more than $150,000 in loans to pay for her undergraduate, graduate and doctorate studies—three times what she makes in a year today. Or talk to Emily Campanell, a high school teacher and mother in Kentucky who, combined with her husband’s loans, owes $130,000 in student loans. With more than 60 percent of higher education students now relying on loans to make it through their studies, it doesn’t take much effort to find someone whose quest for knowledge has emptied their wallet.

As more students than ever before are forced to take out loans for their education, the prospect of higher interest rates—money that the government will accrue by the billions—only adds fuel to the proverbial financial fire. And as the cost of receiving a diploma continues to rise, many educators are concerned about how ballooning tuition costs and growing interest rates will affect the higher education opportunities available for all future students.

“The high cost of college is harmful to our students, harmful to parents and harmful to the economy,” says NEA President Dennis Van Roekel. “It is disappointing that pursuing a higher education will continue to become even more difficult for our nation’s students. Not only is student loan debt a burden on college grad- uates, but the rising cost of college dissuades younger students from applying to college in the first place.”