Profits on Student Loans Ruin Long-Term Prospects

By Sen. Elizabeth Warren and Sen. Jack Reed, Reader Supported News

11 July 13

n July 1, the rate on subsidized student loans doubled to 6.8 percent, but there is still time to undo this added financial burden on America's working families.

Today, the U.S. Senate will vote on the Keep Student Loans Affordable Act of 2013, a plan we co-sponsored with Sen. Kay Hagan (D-N.C.) that offers a two-pronged approach to protecting students and reforming the system.

First, we must deal with the immediate problem by implementing a one-year patch to keep student loan rates at their previous level of 3.4 percent. This legislation is an investment in college students that keeps them from being hurt while Congress negotiates a long-term solution. The lower interest rate is fully paid for by closing a single tax loophole that provides inordinate benefits to the wealthiest.

Second, we will use the next year to reform our student loan system: eliminating profits from student loans, stemming the rising cost of college and alleviating the burden of student debt on existing borrowers through refinancing and better consumer protection.

This plan gets to the core of the college affordability problem, looking at all of its facets rather than focusing solely on interest rates for new loans.

Unfortunately, some senators are backing a bill that would cause interest rates on student loans to drop for a few years before they rise sharply, with no cap on interest rates, leaving students vulnerable to skyrocketing costs. They are asking students to focus on the low rates they'd possibly get in the first year or two and ignore the long-term consequences.

In the world of mortgages, this was called a teaser rate - and this is the kind of mortgage deal that nearly crashed our entire economy.

The student loan program already reaps big profits for the federal government. This year alone, student loans will bring in an estimated $51 billion in profits - money that comes straight from the pockets of college students and their parents.

If you're wondering why the federal government is generating mega-profits off of a program that is supposed to help our students, you're not alone. And yet that's exactly what this group of senators proposes: more of the same.

Their bill, the Bipartisan Student Loan Certainty Act, makes an additional $1 billion in profit from our college students. That's in addition to the $184 billion the new federal student loans already are set to bring in over the next 10 years.

At a time when borrowers are already carrying $1 trillion in student loan debt, this is bad economics. The Federal Reserve warned in March that student loan debt threatens America's economic recovery. And it's bad for our long-term prospects too: At a time when our economy's stability depends on having a highly skilled workforce, we should be investing in our students, not profiting from them.

It boils down to this: The Senate has two different plans on the table. One keeps making profits off outstanding student loans and boosts profits on new ones while enticing students with a couple of years of low interest - risking an economic calamity. The other puts us on a responsible path, keeping rates low on new loans and working to end the profits the government makes on outstanding loans.

Fortunately, our students are smart. They know the difference between a good deal and a bad one, and so do we. The choice is easy.