Is Congress to Blame for Student Loan Crisis?

April 25, 2013

With a trillion dollars outstanding for student loans and half of that debt not being currently serviced due to delinquency, deferment or default, it sure would be nice to have someone to blame for the crisis, wouldn’t it? In fact, it’s more than a bit difficult to find one faction to point a finger at for the student loan debacle, but both parties seem willing to try this approach. This may be good exercise for one of your ten digits, but does it help our economy or those struggling with debt?

A Look Back…

From the 1960s through the early 1990s, Congress set student loans at fixed rates that they adjusted periodically from a low of 6% to a high of 10% in the late 80s to early 90s. In 1992, Congress changed to variable rates tied to short-term US Treasury securities plus a markup with an initial cap of 9%. Over the next few years, Congress began changing the student loan landscape and moving away from the bank-based program that subsidized private lenders and to the Direct Loan program where the government made the loans directly.

But where the government envisioned a phase-out of bank-based lending, it wasn’t really happening that way. By 1998 the variable rate was changed to tie to long term T bonds, but banks started fussing that they would be getting too small a return and therefore wouldn’t continue to make federally-backed student loans. Congress backed down because of this high-handed play by banks because they didn’t want student loans to be less available.

A Disaster Takes an Unforeseen Toll…

This launched a year of formula generation, recalculation and negotiation in Congress. What resulted was a compromise that made the current interest rate formula permanent. In late 2001, Public Law 107-139 passed and was signed into law in early 2002. This set Subsidized and Unsubsidized Stafford interest rates at 6.8% for all loans made after July 1, 2006.

And if the market had gone the way that analysts predicted, this may still have been a good deal. But the market changed in ways that were not anticipated as a result of the terror attacks on September 11, 2001. The Federal Reserve cut interest rates again and then again trying to boost our economy in the years following the attack on the Twin Towers.

The Fed cuts made the 6.8% interest rate far higher by comparison than what seems fair. Given that the federal government now makes the bulk of student loans and can borrow funds at a much lower rate, this higher fixed interest rate means the government continues to profit off the backs of student borrowers!

Partisanship makes things worse…

In 2005, the House moved to use variable rates which would have been between 3.4% and 5.8% but the Senate prevailed and the far-too-high fixed rates stayed around. In campaign ads, Democrats blamed Republicans for the higher interest rates and promised to lower them for all borrowers including parents with PLUS loans. Once elected into the majority though, they did not keep this promise and instead halved the interest on only Subsidized Stafford loans to 3.4% and that was only temporary.

In the end, both of the major parties in Congress have made promises to cut student loan interest rates and both have pointed fingers at the other party. But the fact is there will be no workable solution unless it is a bipartisan solution. In the past, a more affordable solution was postponed because of pressure and threats from bank lobbyists – and we know how many of our nation’s financial ills they’re collectively responsible for…

We need a solution, not a stalemate…

Rather than blame Congress, we should blame partisanship in Congress because student loan borrowers come from Democratic and Republican families both and from families of different means and from all states in the union. Perhaps a better solution is that you contact your Senators and contact your Representative and tell them that you want student loan interest rates tied to market rates and allow borrowers to lock in their market rates for the life of their loans.

Tell them you want them to work with members of the other party as well as Libertarians and Independents because it’s an issue for all of us! Encourage them to divest themselves of the pettier side of politics and put an end to Game of Thrones style maneuvering for a better position on a higher profile committee. We might rather face whatever is lurking behind the great wall north of Winterfell than the fallout from the student loan bubble bursting…

Congress may not be to blame for the student loan crisis, but they certainly will be held accountable if it all comes crashing down. No matter whether you vote blue, red or are an independent – if you are juggling student loans try Tuition.io’s free student loan tool to view and manage all of your student loans. You can see prospective payoff dates, check out repayment plans and contact your lenders, all in one easy to use interface.

And if you’re concerned about the rising cost of student loans and the economic crisis it’s becoming, please enjoy these other related blogs on student loans and the government:

Sticker Shock: Student Loan Interest Rates Set to Double this Year!

Hey Congress! Reduce Student Loan Interest Rates to Stimulate Our Economy

Obama’s Student Loan Proposal – Pros and Cons

Education Discrimination: Minority Schools Hit Hard by PLUS Loan Denials

Obama Proposes Tax-Free Student Loan Forgiveness