The Student Loan Crisis: Rate Hike Looms on July 1

by Bruce Watson

If the looming student loan crisis were a movie, the title might be something like “Fiscal Cliff, part II: Summer Break Edition.” As a recap, here’s the basic story: On July 1, interest rates on federally subsidized Stafford student loans are set to double, going from 3.4 percent to 6.8 percent. This rate change would impact an estimated 7 million college students, making college educations more expensive at a time when student loan debt is already crippling the finances of millions of workers.

Much like the fiscal cliff crisis, this year’s march toward higher student loan interest rates has been slow and inexorable, a churning machine of bureaucratic incompetence that millions of Americans are dreading but feel powerless to stop. And, like the earlier fiscal cliff crisis, the justifications and soft-pedaling have already commenced. Sen. Tom Harkin (D-Iowa), chairman of the Senate House, Education, Labor and Pensions committee, one group that could conceivably head off this crisis, has suggested that we will probably go off the student loan cliff, noting that legislators “probably can’t get anything done this week.” Meanwhile, Tennessee Senator Lamar Alexander (R) has volunteered that it would be “pretty easy” to reset student loan interest rates after they go up.

Of course, as sequestration demonstrated, undoing an economic crisis is easier said than done.

It’s not as if there aren’t any plans on the table: Congress and the president have both proposed linking student loan interest rates to the interest rates on 10-year Treasury notes. Congress’ plan would place caps on rates, so that subsidized loans couldn’t go above 8.5 percent and unsubsidized loans couldn’t go above 10.5 percent. Unfortunately, the congressional plan would also allow rates to fluctuate, which means that a student’s interest payments would rise or fall, depending on the Treasury rate.

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