Deal on Student-Loan Interest Rates Will Hurt Future Borrowers, Critics Say

July 19, 2013

Advocacy groups for students and teachers are urging Congress to reject a hard-fought deal on student-loan interest rates, saying it would not do enough to protect future borrowers from rising rates, and would balance the federal budget on the backs of students.

In a letter to Senate leaders sent on Thursday, they argued that students "should not be seen as a cash cow," and urged lawmakers to return the rate on subsidized federal loans to 3.4 percent for a year, so members of Congress can continue to negotiate a long-term fix.

Interest rates on the loans doubled, to 6.8 percent, on July 1, after lawmakers reached an impasse on efforts to avert the increase.

Under the compromise, which senators reached on Wednesday night, interest rates on federal loans would be pegged to the federal government's borrowing costs, with caps ranging from 8.25 percent to 10.5 percent. In the short term, the proposal would lower interest rates on all federal student loans, including unsubsidized and PLUS loans, for which borrowers now pay 6.8 percent and 7.9 percent, respectively.

But the student groups say interest rates would quickly exceed current levels, with loans to graduate students topping 6.8 percent as early as 2015.

"This deal locks in long-term changes that provide short-term benefits for current students by increasing long-term costs for future students," said Lauren Asher, president of the Institute for College Access and Success, in a written statement.

But groups representing colleges and student-aid administrators welcomed the deal, saying it would provide predictability for students and would ensure that borrowing costs reflected broader economic conditions. Molly Corbett Broad, president of the American Council on Education, called the compromise "good news for students and families."

The Senate is expected to vote on the bill next week.