Student Loan Act Could Mean Higher Federal Profits

Equal Justice Works

The Bipartisan Student Loan Certainty Act of 2013, which President Barack Obama officially signed Aug. 9, is touted mostly as a retroactive fix for the July 1 doubling of the interest rates on subsidized federal direct loans. But the truth is that Congress has simply kicked the can down the road.

The new law offers a moderate amount of help to current students at the expense of future ones. And it does nothing to address what the Student Loan Ranger sees as a fundamental problem in the student loan system - the huge profit the federal government is making at the expense of students.

The legislation moves student loan interest rates to a new market-based fixed rate based each academic year on the rate on the 10-year Treasury note, plus a set amount that varies depending on the loan.

[Explore ideas for doing away with student loans.]

The amount added to subsidized and unsubsidized direct loans for undergraduates is 2.05 percentage points. Unsubsidized direct loans for graduate and professional students have 3.6 percentage points added to the 10-year Treasury note rate and 4.6 percentage points are added to PLUS Loans for graduate and professional students.

By itself, this is not so bad. When interest rates are low, as they are now, students will by and large benefit.

This academic year, for example, undergraduate students will pay 3.86 percent, higher than the 3.4 percent they were paying for subsidized direct loans but lower than the 6.8 percent rate for unsubsidized direct loans. Graduate students will pay 5.41 percent interest for unsubsidized loans and 6.41 percent for PLUS loans, both of which are lower than current rates.

[Get more information about loans for graduate students.]

Unfortunately, the new law combines this market rate with different - and much higher - interest rate caps. Undergraduates can now pay a maximum interest rate of 8.25 percent - compared with the previous maximums of 6.8 and 3.4 percent for unsubsidized and subsidized direct loans.

The maximum rate for unsubsidized direct loans for graduate and professional students is now 9.5 percent and the rate for PLUS loans is a whopping 10.5 percent. Those are much higher than the previous rates of 6.8 percent for unsubsidized direct loans and 7.9 percent for PLUS loans. When interest rates go up - and they will in the near future - students will pay much higher rates.

Take a look at the Congressional Budget Office's estimate of the budgetary effects of the legislation to see how this may happen. Relative to a May 2013 baseline, the office projects increased costs to the government from 2013 through 2016. By 2017 though, the CBO projects interest rates will rise high enough so that the federal government will have increased profits that will last through 2023.

Overall, the office projects the new law will increase government profits on student loans through 2023 by $715 million.

It's true, as the New America Foundation points out, that $715 million over 11 years is not a lot. But this obscures the essential point that this is an additional $715 million over the baseline. And that baseline projects that the federal government will make about $174 billion in profits off student loans through 2023.

[Understand what to ask during student loan counseling.]

The CBO projections are not likely to be exact - the federal government may profit a bit less or a bit more off student loans over the next decade. But in kicking the can down the road, the Student Loan Ranger thinks Congress has ensured future students will be burdened by extremely high interest rates on what are likely to be large student loans. And, absent reform, it has ensured the federal government will make massive profits off of students for the foreseeable future.

Since Congress isn't helping, prospective students, current students or people repaying student loans should take a look at Equal Justice Works' free webinars and e-book "Take Control of Your Future," which offers advice on planning wisely and managing debt.

Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works's educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.