Student Loan Rates: Let's Let the Market Decide, Not Politicians

BySteven Cruz

Bipartisanship is a rare find in D.C. these days, but there's still some opportunities for cooperation in our government. Currently, the most obvious is the Smart Solutions for Students Act. In case you're unaware, this act ties student loan rates to the market, instead of allowing politicians to set those interest rates artificially.

The legislation, which was just approved by the House and is as close as a compromise to what the president called for in his budget proposal as will happen, will accomplish the following:

1. Reset student loan interest rates once a year, allowing rates to move with the free market. Rates are pegged to the 10-year Treasury note rate plus 2.5% for Stafford loans (subsidized and unsubsidized) and 4.5% for PLUS loans (graduate and parent).

2. Protect borrowers during periods of high interest rates, rates for subsidized loans would be capped at 8.5%, while unsubsidized and Parent PLUS loans would be capped at 10.5%.

3. Save the federal government $990 million over five years and $3.7 billion over 10 years according to the Congressional Budget Office (CBO).

Aside from the very obvious benefits of the legislation, there is one more thing that we should be aware of while deciding whether we agree with this act as it moves through the process of being enacted.

Under the current law, the government has been profiting from student loan borrowers. This year, the government is expected to make a record of $51 billion in profits, as reported by the Congressional Budget Office. 

To put this in perspective, consider that Exxon Mobil Corp., the nation's most profitable company, reported $44.9 billion in net income last year and Apple Inc. recorded a $41.7 billion profit in 2012.

One thing becomes extremely clear in the light of these revelations. Politicians should not be in the business of setting student loan interest rates that should be left up to the market, for the simple reason that when politicians are in charge we leave interest rates vulnerable to campaign promises and political bargains. As a student myself, and one that has engaged in some costly education being financed by loans, I much prefer the certainty that comes from the market rate which reflects the real cost of borrowing.

The good news is that the growing consensus as proved by the House of Representatives last week is to push this swiftly through Congress and to the president's desk. There is no more room to politicize the issue. We need a long-term solution that prevents uncertainty for college students. We need a solution that provides them an accurate portrait of the cost of education helping them make a more informed decision on whether and how much to invest on their education.  

I call upon the Senate to get on board with the House and President Obama to get this done. Students deserve an opportunity to make decisions based on the best information available, and in a time when each American family owes almost 150K of the national debt, we should be welcoming any legislation that saves money.