The Subsidized Student Loan Scam


The Senate is currently deadlocked on taking action to prevent the interest on new Stafford guaranteed student loans from rising on July 1 from 3.4% to 6.8%, with Democrats saying they want to “pay for” keeping the current “lower” 3.4% rate by closing a loophole that allows some wealthy people to avoid paying Social Security and Medicare taxes, while Republicans want to “pay for” keeping the lower rate by eliminating a fund for preventative health care in the 2010 health care reform law.

But what is all this nonsense about “paying for” a supposedly “lower” interest rate of 3.4%?

There are actually two kinds of Stafford loans: subsidized and unsubsidized. The unsubsidized loans, and Stafford loans taken out by graduate students, already carry a whopping — some might say usurious — 6.8% interest rate. It’s only the so-called “subsidized” loans that carry a 3.4% rate, and it’s only those loans that would see their rate rise if the two parties cannot come to an agreement to extend the “subsidy.”

But what subsidy are they talking about, anyhow?

Inflation, according to the government’s own statistics, is running at 2.7%. In other words, the government, which is the lender in the case of Stafford Loans, is already making 0.7% on its “subsidized” loans to undergraduates. And the inflation rate has been considerably lower in prior years, so the government has actually been making
out like a bandit longer term. If it were to start earning 6.8% on these loans, the Treasury would be raking in huge profits on a loan program which is supposed to be helping make college affordable for lower income and middle-income students.

Some deal!

Remember, unless the government secretly suspects that the Occupy Student Loans movement is going to succeed in convincing millions of students to simply refuse to make payments on the $1 trillion in outstanding student loans, these loans are about the safest  financial instruments known to man. Thanks to years and years of legislative actions to chip away the rights of student borrowers, student loans have become more like indentures than simple acts of borrowing money. Student borrowers are not protected by state usury laws, they are not allowed to declare bankruptcy if they cannot pay, the federal government, and any private collection firms that take over defaulted student loans are allowed to garnish not only a borrower’s wages without even having to go to court, but can also claim income tax refunds and even Social Security payments, raising the prospect that former students who cannot repay their student loans could be driven into the street in their old age as their retirement checks are stolen from them. Of course the government can also ruin a borrower’s credit and can prevent a graduate from getting a professional license. The government is even, as I wrote earlier here, pressing colleges to withhold official transcripts from graduates who fall behind in their repayments, making it impossible for them to apply for jobs or for higher degrees (that’s a wretched policy that Obama, currently portraying himself as the friend of college-aged voters, could put an end to with a simple order to his Education Secretary Arne Duncan).

Given such ruthless and draconian ability on the part of the government to compel repayment of these loans, there is absolutely no economic justification for having the interest rate set higher than it is for a 15-year home mortgage (currently about 3%).  Indeed, these loans should, by rights, be offered at rates close to the average CPI, since they cost almost nothing to administer, and are certain to be repaid.

The truth is that both political parties, and particularly the Republicans, want to make money off of student borrowers, while pretending to be helping them to go to college.

Instead of fighting over whether to set the rate at its current rip-off level of 3.4% or to raise it to a truly extortionate 6.8%, Congress and the White House should be declaring a moratorium on student loan payments, to continue until the unemployment rate among recent graduates and among the general working population falls back below 5%.

Given that tertiary educational institutions have been using the availability of student loans as a free pass to just keep jacking up their tuition and fees charged to struggling students (in 2010, for instance, the average public college tuition rate rose by 7.9%, or more than five times the 2010 inflation rate of 1.5%!), Congress and the White House might also consider the idea of withholding loan funds and grants in aid or other forms of federal support from all colleges and universities that raise their tuition and fees in excess of the annual inflation rate.

The current standoff in Congress between Republicans and Democrats and between President Obama and Congress over the Stafford subsidized loan rate is a shameless charade aimed at winning points before the November election. Current and future college students, and the millions of people, many now in middle age or even nearing retirement, who have been struggling with repaying massive student debt, should not be fooled, and should instead be uniting and taking to the streets to demand real action to reduce their debt burden and to make college truly affordable.

The US government should not be in the business of making money off of college students and graduates.

If America’s future depends upon having an educated workforce, then national policy should be geared towards making college affordable and towards educating the maximum number of people, not towards creating a nation of indentured servants.

Dave Lindorff is a founder of This Can’t Be Happening and a contributor to Hopeless: Barack Obama and the Politics of Illusion, published by AK Press. Hopeless is also available in a Kindle edition. He lives in Philadelphia. 

Dave Lindorff is a founding member of ThisCantBeHappening!, an online newspaper collective, and is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press).

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