Latest federal student loan deal offers compromise at a cost

While the #dontdoublemyrate campaign helped to raise topic awareness with students, it fizzled out, and rates increased as quickly as July temperatures. Over the near three week period since then, a range of politicians have proposed different deals but none have been able to materialize into a solution, leaving many frustrated students and families to deal with yet another increased cost of college and a poor perception of the politicized process that is federal student loan policy determination.

With college bills quickly approaching their due dates, politicians are now feeling the heat from their own constituents that are searching for solutions through bi-partisan agreement. This latest plan press release is peppered with statements from Senators hailing from both major parties, putting their stamp of approval and authority over their work.

“When Democrats and Republicans work together and have a real debate on a real problem, we can come up with commonsense solutions that benefit all Americans,” said Senator Joe Manchin (D-WV), one of several sponsors of the “Bipartisan Student Loan Certainty Act” quoted in the latest press release from the senate.gov website.

So far that sounds good, but what will this bill offer if approved?

If passed, The Bipartisan Student Loan Certainty Act requires that, for each academic year…….

• All newly-issued student loans be set to the U.S. Treasury 10-year borrowing rate (specifically, the yield on the 10-year note as determined by the last auction held before June of each year—not the changing daily rate) plus add-ons to offset costs associated with defaults, collections, deferments, forgiveness, and delinquency.
• The resulting interest rates for loans taken out this year, after July 1, 2013, would be 3.86% for subsidized and unsubsidized loans for undergraduate students, 5.41% on unsubsidized loans for graduate students, and 6.41% on PLUS loans for parents and graduate students. These rates would apply retroactively to newly issued loans taken out after July 1, 2013.
• The interest rate would be fixed over the life of the loan to provide borrowers with certainty to plan for the future. Additionally, this bill protects against the threat of unforeseen circumstances by imposing a cap to ensure interest rates never exceed 8.25% for undergraduate students, 9.5% for graduate students, 10.5% for PLUS borrowers.
• Additionally, the Congressional Budget Office has determined this legislation would save taxpayers $715 million over ten years.

Ok, this sounds pretty good, but what is the catch?

In a recent NBC article, student loan expert Mark Kantrowitz says “It’s still going to be, effectively, an interest rate increase masquerading as a decrease,” explaining how this plan will provide lower market based rates today, but is subjected to increased rates in the future depending on market conditions.

Additionally this bill fails to address the greater issue of total debt incurred for many college students, and does not begin to approach the issue of containing ever spiraling college costs. With college costs increasing at an average estimate of 4% just in the last year, it has become a hotly debated topic in education circles.

A greater issue to address is federal student loan underwriting given the United States’ changing economic paradigm. Different schools offer different programs for a variety of different students hailing from all across this nation. With such variations in strengths and weaknesses depending on program viability, differing economic climates state-by-state, and rapidly changing job markets, there is real risk associated with choices made in human capital development (The fancy term for going to college). With the amount of debt necessary to cover a college education, financial experts have begun to asses “Degree ROI” or return on investment, to gain an understanding of the economic “value added” along with the degree. The long held belief that education is a priceless asset remains true, however the amount of debt used to finance such an education is a finite and determinable number that requires the student to make consistent payments using actual money. Preferably that money is earned by way of income resulting from work emanating from the original degree pursued, but the rough labor market has revealed many graduates as underemployed in positions unrelated to their original field of study. That is a degree-to-employment mismatch. If the former student finds themselves heavily in debt and earning only a fraction of the required income to pay it back, there is a debt-to-income mismatch.

This recent bill proposal is a relief from a potentially higher rate on federal student loans, but the major issue in need of a thoughtful debate will be in regards to improving the federal loan program to better serve students by preventing them from going too far into debt without a viable means for repaying the loans. The income based repayment and pay-as-you-earn repayment models have served recent graduates by reducing minimum monthly payments to 10%-15% of gross monthly income in cases of high debt and low income, but this is only achieved through extending the loan term from a normal 10 years, to 20+ years, requires additional tax payer subsidy, and may end up costing much more in interest to repay over the term. Extended federal loan repayment plans are essentially a personal financial “band-aid”, that has been able to help some former students tremendously by freeing up cash to cover normal living expenses. However, replicating this extended repayment plan over hundreds of thousands of graduated students in the coming decade could prove much more costly than originally budgeted for, highlighting the need to consider new options in federal student lending.