Home > News > The Student Loan Fix That Wasn’t

Comments 0 Comments

“Going forward, the whims of Washington politicians won’t dictate student loan interest rates, meaning more certainty and more opportunities for students to take advantage of lower rates.”

So spoke House Speaker John Boehner after the passage of H.R. 1911, the Bipartisan Student Loan Certainty Act of 2013. But six months after enacting a measure that ties student loan interest rates to a market-driven financial instrument, is there indeed more certainty? How about opportunity? Or, could it be that the real beneficiaries were lawmakers who desperately wanted to drop-kick a miserably contentious issue into a less than certain future?

When H.R. 1911 was implemented, undergraduate student loan rates were reset to 3.86% — a nearly 3% improvement for unsubsidized borrowers and a 0.5% bump in rate for those who previously qualified for the subsidy. Loans for graduates and professionals were pegged at 5.41%, and 6.41% for parents.

All these rates were based upon a 10-year Treasury note that yielded an exceptionally low 1.81% at the time. Hence the worry that was voiced by those who called the reduced rates unsustainable “teasers” and voted against the bill.

Turns out, the worriers were right — six months later, 10-year Treasury yields have gone up, and are hovering around 3%.

So what does that mean for borrowers? Well, if the 3% rate were to hold through May 2014, $10,000 of new borrowing would result in monthly payments that are nearly 6% higher. Even more disconcerting, the total amount of interest that would be paid over the life of that loan would be 33% greater.

The Actual Cost

There’s also another matter that hasn’t been settled.

Each of these loan rates incorporates an administrative add-on — a fee that’s expressed in interest rate form. The upcharge for undergraduates is 2.05%, 3.6% for grad-school students and professionals, and 4.6% for parents. This translates into upfront fee equivalents of approximately 10%, 18% and 23%, respectively, and it’s in addition to the 1.072% application fee for Direct Loans, and the 4.288% fee that PLUS borrowers pay.

Why such huge administrative add-ons to the base interest rate? Your guess is as good as mine, especially when the nation’s largest student loan servicing company (Sallie Mae) ascribes a scant 0.9% (0.2% in interest rate format) to the cost of servicing the $1 billion of government-guaranteed loans it securitized just a few short months ago.

Which brings me to Section 4 of the act. It calls for a “study on the actual cost of administering the federal student loan programs” — an effort that was supposed to have been concluded by the comptroller general within 120 days from the date on which H.R. 1911 was signed into law. A quick check with some folks in D.C. and it seems that the CG’s report is MIA, at least until sometime this spring.

Review Time

With all that in mind, student borrowers should hold accountable those who pledged to revisit at a “later date” the action they took in July. In fact, that later date could come sooner than those who sought to quell the critics may have anticipated.

Congress is scheduled to take up the reauthorization of the Higher Education Act in a few months. By then, the value of the administrative add-on should have been fully vetted. Also by then, the inappropriateness of last summer’s loan-pricing scheme should have become apparent.

When that happens, Congress should scrap the 10-year Treasury note-link and replace it with the financial instrument the feds are actually utilizing to fund the various student loan programs. In other words, if the government is funding these loans with sales of, say, 12-month Treasury notes, the program’s rates should also be indexed to that same instrument.

As for the administrative add-on to the interest rate, this too should only reflect the actual costs that are incurred by the government to bill and collect loan payments, manage delinquencies and cure defaults—whether directly or through its many subcontractors—and not a penny more.

That is, unless Congress intended for this to be something other than a fair deal for the students who are undertaking these enormous debts and the taxpayers who’ll have to make good on the government’s guarantees when they end up defaulting.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its affiliates.

More on Student Loans:

Image: zimmytws

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team