Huffpost College
The Blog

Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors

Kati Haycock Headshot

We're Having the Wrong Debate About Student Loan Interest Rates

Posted: Updated:

Congress seems on its way to approving legislation that would prevent, at least for one year, a doubling of interest rates on college loans taken out by students from low- and moderate-income families. And that's a good thing. Combined with projected tuition increases this fall, the interest-rate jump, as scheduled (from 3.4 percent to 6.8 percent), would drive college costs up by 20 percent for these borrowers.

But only in the crazy world of federal budgetary politics can protecting a 3.4 percent interest rate feel like a victory. After all, the Federal Reserve lends money to commercial banks at a discount rate that currently stands at 0.75 percent. That's right: 0.75 percent. In what universe does it make sense to set interest rates for loans to help low- and moderate-income Americans attend college at more than quadruple the rate we expect the banking industry to pay?

Certainly, college students and their families should be required to pay the full cost of administering these direct loans, and an additional cushion to guard against default is reasonable. But that does not justify charging 6.8 percent in interest. Heck, home mortgage rates aren't even that high, and there is a lot of profit made on home loans.

In the same way that the loan policies of banks are set to generate revenue from hard-working people who aspire to own their piece of the American Dream, the federal government's student loan interest rates are set to generate revenue from hard-working college students struggling to learn their way to a better future and earn their way into the middle class. Surely, there are other budget sources to which we could turn if we prioritized opening college access and curtailing crippling student debt.

Yes, a low discount rate helps drive our economy to greater prosperity. But so, too, does expanding college opportunity far beyond the fortunate few. Indeed, researchers project that our workforce will need millions more people to be college educated than we are producing. And it's hard to see how a trillion dollars in student loan debt is anything other than an unsustainable drag on America's economic future.

Of course, the federal government does not bear sole responsibility for making a college education affordable. State governments and the institutions themselves have critical roles to play in controlling college costs and expanding opportunity. But as we approach the 40th anniversary of the Federal Pell Grant Program -- which was conceived as a powerful lever for opening college doors to millions of low-income students but has, since 1980, lost more than half of its buying power at four-year colleges -- the federal government needs to dramatically up its game. That means our students and our economy need policies far bolder than maintaining a 3.4 interest rate on federal student loans.