Earlier this month, Congress passed a bipartisan bill to reduce interest rates on student loans, and President Obama signed the bill into law this week. Under the new law, the interest rate on this year's undergraduate loans is set at 3.9 percent. For graduate loans, the rate is 5.4 percent. For loans taken out by parents, the new rate is locked in for this year at 6.4 percent.
Interest rates will rise if the interest rate on 10-year treasury notes goes up, which it is expected to do, but the maximum interest rate under the new law is capped at 8.25 percent for undergraduate loans. The cap for graduate student loans is set at 9.5 percent and parents' loans are capped at 10.5 percent.
The new law is good news, I suppose, and nullifies the 6.8 percent interest rate that undergraduates were paying before it was enacted. But make no mistake--the recent Congressional squabble about interest rates on student loans is just a side show.
Why? Because almost everyone participating in the congressional debate on student-loan interest rates assumed that the borrowers will pay back the money. As I noted in a previous blog, the New York Times and Senator Elizabeth Warren talked as if the government would make an unseemly profit if the interest rate on student loans wasn't lowered.
|Out of Control|
All this is nonsense. The student loan default rate is so high that the government is going to lose money no matter what interest rate it charges on student loans. How high is the default rate? No one knows for sure because the Department of Education hasn't released the data. But DOE itself estimates that 46 percent of students who borrow money to attend for-profit institutions will default on their loans at some point during the repayment period.
And, as everyone knows, DOE has been underestimating student-loan default rates. So if DOE says 46 percent of students who borrow to attend for-profit colleges are going to default, it is a safe bet that the real default rate for this group is well over 50 percent.
Furthermore, a lot of former students have gotten economic hardship deferments that temporarily excuse them from making loan payments; and these people aren't counted as defaulters. Nevertheless, a lot of these folks will never pay off their loans.
As Senator Harkin's Senate Committee report pointed out, people whose loans are in deferments are excused from making loan payments, but the interest on the loans continues to accrue for most borrowers, causing students' overall debt to grow larger with each passing month. Thus, economic hardship deferments are making it harder for debtors who obtain them to ultimately pay off their loans.
How many people have loans in deferment status? DOE hasn't released the number, but it could be millions. As the Harkin Report explained, for-profit colleges are aggressively encouraging their former students to apply for economic hardship deferments in order to keep their institutional default rates down. And these deferments are ridiculously easy to get. According to the Harkin Committee, sometimes it is just a matter of a phone call.
No--the federal student loan program is like an out-of-control express train that is headed straight for a cliff. Congress doesn't care--those guys and gals plan on getting off at the next station. No, it is students--especially students attending for-profit colleges--who are going over the cliff with the train.
Josh Lederman and Philip Elliott. Obama Signs Student Loan Deal. MSN Money, August 9, 2013. Accesible at: http://money.msn.com/business-news/article.aspx?feed=AP&date=20130809&id=16792937