Once again, students who qualify for subsidized federal loans to continue their education are caught by the inability of Congress to agree on a reasonable, long-term interest rate for the loans. On June 30, a one-year extension of legislation that temporarily reduced interest rates on subsidized Stafford loans expired. With it, the interest rate on loans issued July 1 and thereafter doubled, from 3.4 percent to 6.8 percent, a change that would add about $800 in repayment costs for every year of the loan.
Granted, the rate change does not affect unsubsidized federal loans or private student loans. But the federally guaranteed loans in question are directed at students with high financial needs at a time when tuition and fees for post-secondary education have risen steeply beyond the savings capacity of average households.
A low interest rate is especially important as a majority of students now finance their education with some type of loan. Student-loan debt has exceeded $1 trillion. In a still-sluggish economy with persistently high unemployment, the burden of debt young adults are bearing depresses household finances as well as the national economy.
For all the partisan disagreements in Congress, there seems to be broad agreement on key aspects of this student-loan debate. One is that the economic future will be bleak if the nation does not remain competitive in the percentage of its population with advanced skills beyond high school. Another is that the federal government must assist the neediest students with the cost of higher education. One avenue is direct federal loans with low interest rates. But Congress keeps stalling over how low a rate to charge the neediest borrowers.
The makings of a long-term solution are present in proposals that would tie student rates to the 10-year Treasury rate, with a markup, or to the 91-day Treasury bill rate. A cap could be set on student rates as the economy rebounds and interest rates rise. Students need the stability of a fixed and affordable long-term rate. Meanwhile, Congress should extend the 3.4 percent rate for another year. It is yet another opportunity to add substance to the rhetoric on higher education.