Student loan rates still lowered

Congress passed a bill on July 31 that will keep student loan rates down for the upcoming year.

After failing to pass legislation before the July 1 cutoff, both Congress and President Obama have approved a bill that will retroactively lower federal Stafford loan rates from 6.8 to 3.9 percent.

This was done by tying loan rates to the 10-year treasury note, an indication of the government’s cost of borrowing money.

Leslie Lenkowsky, professor of practice for IU’s School of Public and Environmental Affairs, said there are beneifts to the loan fix. If congress does not pass new legislation each year, Lenkowsky said he believes loan rates will be kept at a lower rate for longer.

If Congress had not acted, student loan rates would have doubled, Lenkowsky said.

“There is an upper cap on rates, an 8.25-percent maximum they can reach,” he said. “Plus, since they are tied to the 10-year treasury notes, they will fluctuate but they won’t be subject to a political battle. In the short term, students will have lower rates. In the long term, rates won’t be dependent on Congressional action.”

However, this is not a perfect solution, Lenkowsky said.
“If you get in now when rates are low, you’re in good shape. But the future is uncertain,” he said. “Most students take annual loan rates. This year’s students shouldn’t be affected. They’re subject to this year’s loan rates. But once the new system comes into place, new rates might be more.”

Student loan rates are now tied to the unstable United States economy, Lenkowsky said. The 10-year treasury note is a fairly stable market indicator, but it’s not perfect.

“If we go through a period of rampant inflation, rates will change,” Lenkowsky said.

Willard Witte, associate professor emeritus of macroeconomics at IU, said interest rates are sure to rise over time.

“Tying interest rates to the federal borrowing rate almost certainly implies rates will rise, because interest rates eventually rise,” Witte said.

Lenkowsky said our complex economy changes due to many factors.

“It’s a variable rate, and everyone borrowing is affected by the uncertain economy,” Lenkowsky said. “This is all tied to larger budget issues.”

While attaching rates to the 10-year notes removes the decision from Congress for a time, student loans are still a debated political issue. The bill passed the Senate 81-18. Seventeen of the opposed were Democrats. Still, President Obama’s administration showed support for the bill, and he signed it into law Aug. 9.

Despite political differences, Lenkowsky said it is an achievement that the bipartisan bill was passed.

“We hear a lot about gridlock in Congress, how they can’t get anything done, but the bill is proof that it can work,” he said.

The bill was passed shortly before Congress stopped for an annual month-long recess.

Not everyone believes these lower rates are a smart choice.

“My own opinion is that these low rates are a mixed blessing,” Witte said. “It makes borrowing more attractive, which is a trap. It entices people into something that isn’t
ultimately a good idea.”

Witte said he believes these low rates make it easier for colleges to raise tuition and fees, making college less affordable.

“The faculty reaps the rewards,” he said. “Today, faculty are the upper-middle class, the 1 percent.”

Witte said he believes someday, given these loan rates, traditional college might not be the best option for everyone.

“These tuition increases are unsubsustainable,” he said. “And I think government rates will rise significantly in the next few years.”