The following post first appeared on FactCheck.org.
Republican presidential candidate Carly Fiorina gave a misleading description of the options available for college students who need loans to pay for their education. She said the government had “nationalized” the industry, when, in fact, private and federal student loans are available now, just as they were in the past.
She also said the government was charging 6.5 percent interest, when only graduate students pay nearly that much. Undergraduate Stafford loan rates are now at 4.66 percent.
Fiorina made these claims in a town hall event on Periscope on May 4, the same day she announced she would run for president. The former CEO of Hewlett-Packard took questions via Twitter and Periscope, a live video app.
Fiorina: The government in the last several years under the Obama administration has nationalized the student loan industry. … What the federal government has done is basically take over the student loan industry and that means there are no choices. But worse than that, the federal government decides on the interest rate. … Right now, the federal government is charging 6-and-a-half and 7-and-a-half percent. That’s kind of high.
As we’ve written before, legislation that was rolled into the reconciliation bill, which was passed as part of the Affordable Care Act in 2010, made changes to the federal student loan program. The federal government’s foray into student loans began with passage of the Higher Education Act in 1965. It first offered loans that originated with private banks but were guaranteed against default or in cases of death by the federal government. In 1993, a direct loan program was created in which the government both lends the money and guarantees the loans. By 2010, CBO estimated that 55 percent of federal student loans originated with banks, with the rest originating with the government.
The reconciliation legislation changed that so that all federal student loans would originate with the government, a move that the Congressional Budget Office said would save taxpayers $61 billion over 10 years, mainly because the government had paid the banks more than the cost of the direct loans. More than half of that savings would go to the Pell Grant program for low-income students.
Fiorina said that there are now “no choices” on student loans, but students weren’t making choices before as to whether a bank or the government originated their federal loans. Instead, it was up to colleges and universities to choose which program they’d like to use, and students would get information on applying for a loan through college financial aid offices.
Beth Akers, a fellow in the Brookings Institution’s Brown Center on Education Policy, told us in October when we last explored this issue that for the most part students “didn’t even recognize there were these two different programs working in tandem.” The difference was who sent a check to the school, and who sent students a bill once they graduated. But even loans that originated with the government could still be serviced by private banks — and, in fact, still are. So the bills can still come from banks.
As we said when now-Sen. Tom Cotton of Arkansas made similar claims on the campaign trail, Fiorina may disagree with the changes, but it’s misleading to say the government “nationalized” a student loan program that was a federal program in the first place.
Private banks continue to offer private student education loans, just as they did before the ACA. So students still have that choice. As this chart from PNC bank shows, students can borrow higher amounts from a private bank, but they’ll have to go through a credit check and likely have a co-signer. But students don’t need either of those to secure a federal loan, specifically a Stafford loan.
Fiorina said that the government is charging a “kind of high” interest rate of 6.5 percent and 7.5 percent. But those rates only pertain to graduate student loans (at 6.21 percent) and Direct PLUS loans, for parents and graduate students (at 7.21 percent). Federal Stafford loans for undergraduates, both subsidized and unsubsidized, are at 4.66 percent. With subsidized Stafford loans, available based on income, the government covers the interest on the loan while a student is still in school and during any hardship deferment periods.
Those are fixed interest rates, and some students could obtain a private loan at a lower variable rate. PNC Bank says its lowest variable rate is now 3.4 percent. (Its lowest fixed rate is at 6.49 percent.)
But those are rates for private loans, and such loans are still a choice for students. Before 2010, all federal Stafford loan interest rates were set by statute. The government set the maximum interest rate for both direct loans and guaranteed loans (those originating with banks). Banks could have gone below that rate. The Congressional Research Service said in a July 7, 2013, report: “The statutory rates are generally the rates charged to borrowers, although when loans were being made through the FFEL [guaranteed loan] program some lenders may have voluntarily made loans with lower interest rates.”
Akers, with Brookings, told us some lenders offered discounts for students enrolled in automatic payment plans. In fact, students can get a 0.25 percent interest rate discount on direct Stafford loans from the government for repaying their loans through automatic payments from their bank accounts.
Those 4.66 percent Stafford loan rates, and graduate and parent federal student loan rates, could change in July. Rates are based on the 10-year Treasury note, and the auction for that is set for this month.