Some thoughts on student loan interest rates


I've read a couple of stories today about Democratic senators, including New York's Kirsten Gillibrand and Massachusetts' Elizabeth Warren, who oppose a compromise student loan interest bill.

For what it's worth, they're right to oppose the bill.

The bipartisan compromise legislation that the White House backs would immediately set interest rates for federally subsidized undergraduate loans at 3.86 percent. That's better than the current 6.8 percent rate that kicked-in on July 1, after Congress failed to extend the previous 3.4 percent interest rate. Still, the 3.86 percent rate is probably higher than it should be. (By comparison, Chase bank offers a standard 60 month auto loan at a 3.14 percent interest rate. I don't think it's a stretch to argue that society's better off when someone goes to college than it is when someone buys a car.)

What troubles me, in part, is that the compromise leaves open the possibility of much higher subsidized student loan interest rates in the future. Interest rates for subsidized loans would be tied to market rates, and for undergrads the rates would be capped at 8.25 percent. It already costs way too much to go to college; that would only add to the price.

The proposed rates would be even higher for parents and grad students. The Boston Globe article I linked to earlier says grad students would have a 5.41 percent interest rate, with an ultimate cap of 9.5 percent. Parents would pay a 6.41 percent interest rate with a cap of 10.5 percent. 

And these figures only address subsidized loans. Fewer college students have access to these loans than they did in the past, and none of the articles I read offer much in the way of detail about what'll happen with unsubsidized loan rates.

But the articles also failed to address about another important student loan interest rate: loan consolidation rates. I graduated from St. John Fisher College in 2001, and in 2004, I consolidated approximately $16,000 worth of loans -- subsidized and unsubsidized -- at a 3.88 percent interest rate. The ability to consolidate the loans at that rate, though not as low as I liked, helped me even out my payments. And during the early years of my career, where money was tighter, that was a godsend.