Student Debtors Slide Deeper into Peonage

Malcolm Harris:

On May 7, the federal government conducted its regularly scheduled auction of new Treasury bills, a monthly ritual in which investors compete to lend the state money. This, however, was no ordinary auction. Last year, after much debate, Congress tied federal student loan interest rates to the 10-year Treasury note’s each year’s pre-June rate at auction, finally linking student and government borrowing costs.

The results of May’s auction have serious and possibly lifelong consequences for the students on the other end of this year’s 20 million government higher education loans. When all the paddles were down, the Treasury sold $24 billion in 10-year notes at a yield of 2.61 percent — good news for bond traders, bad news for student borrowers.

Last year, an unusually low Treasury yield of 1.81 percent pushed down student loan interest rates — which Congress retroactively included in the 2013 deal — to their lowest levels, but this year’s 0.8 percentage point increase directly affects the linked loans, pushing them back up. This 0.8 percentage point represents a 20 percent increase in the rate charged to undergraduate borrowers, boosting it from 3.9 to 4.7 percent. Six years after the government nationalized the student loan industry, when so many Americans are rightly worried about the escalating costs of higher education, why is the government raising the cost of borrowing money to go to college?

There were three main issues at play in the 2013 Bipartisan Student Loan Certainty Act: How to anchor the interest rates, how much add-on for each category (undergraduate, graduate and parent loans) and where (or if) to cap the rates. After a long game of chicken with other people’s children, Congress ended up attaching the interest rates to the 10-year Treasury notes, with 2.05, 3.60 and 4.60 percentage point markups and 8.25, 9.5 and 10.5 percent caps, respectively. The bill looked most like the proposals from Rep. John Kline, R-Texas, and Sens. Richard Burr, R-N.C., and Tom Coburn, R-Okla., whose ideas weren’t that far off from President Barack Obama’s plan. Kline’s proposal (attached to 10-year rates, with 2.5, 2.5 and 4.5 point markups and 8.5, 8.5 and 10.5 percent caps) was found by the Congressional Budget Office (CBO) to generate more new revenue on the backs of students: $3.7 billion. That the final bill’s interest schedule was even harsher than Kline’s proposal points to how little daylight there is between the major parties on this issue.