House of Representatives Democratic leader Nancy Pelosi hailed the Aug. 9 enactment of a new law regulating student loan interest rates as standing “in stark contrast to the House Republicans’ plan to saddle families with billions more in student debt.”
Pelosi’s statement is deceptive. It is true that the Republican plan would burden students with billions of dollars in debt, but the Democrats’ bill will lead to hundreds of millions in additional debt: $715 million to be exact. That is not progress.
The new law, called the “Bipartisan Student Loan Certainty Act”, was passed a month after interest rates on loans for higher education doubled as a result of lawmakers’ failure to update expiring legislation. It returns undergraduate loan interest rates to 3.4 percent, while cutting graduate school and parent loan rates to 5.4 and 6.4 percent.
Although this provides some immediate relief, relative to where things stood a month ago, the new law will in fact accelerate the pace at which bankers and CEOs line their pockets at the expense of poor and working-class youth struggling to get an education.
The student loan act claims to address the student debt crisis, which has been extremely profitable for bank lenders and caused serious hardship for millions of young people and their families. Most important to the capitalist economists, however, is that the student debt crisis has created serious vulnerabilities to the structure of the economy as a whole. It limits the consumer spending of young college graduates. In financial terms student loans have been organized similar to mortgage loans, the collapse of which initiated the 2008 financial crisis.
Costs of higher education
The cost of a higher education is spiraling out of control: The average cost of attending a 4-year public school has increased by 54 percent over the last 10 years.
In order to exercise their right to an education, students and their families have taken on enormous loans, which collectively amount to over $1 trillion. This debt recently surpassed credit cards as the largest source of private debt in the country. Average indebtedness at graduation is about $25,000 and worse for young people who face national oppression. Black students are twice as likely as white students to graduate with over $30,000 in debt.
Tying student loans to Treasury notes
The Democratic Party is hoping to score points with its base by appearing to act in favor of accessible education. But the new law is just a backdoor way to increase interest rates in the long run.
The three types of student loans (undergraduate, graduate and parent) will now be variable, tied to the yield rate of 10-year U.S. Treasury notes, and loan interest will be capped at 8.25, 9.25 and 10.5 percent respectively.
How Treasury notes work
A 10-year Treasury note is basically a loan to the government. The purchaser pays a lump sum at the beginning of the 10 years to buy the Treasury note and is gradually paid back the face value of the note plus interest. Such Treasury “securities” are considered to be the safest possible investment because it is only possible to lose money if the U.S. government goes entirely bankrupt. Treasury notes are much more popular among finance capitalists in periods of economic crisis, when private investments are considered risky and will not guarantee high returns. That has been the case for several years now.
Because the finance capitalists’ demand for such Treasury notes is higher now, the government can issue the notes with a lower return (interest rate). The rate is currently at a historic low. When these big capitalists move their money back into private investments, the return rate on Treasury notes increases.
By pegging students’ interest rates to that of Treasury notes, this ultimately ties their loans, to an even greater degree, on the whims of Wall Street speculators. As the rate on Treasury notes increases so will the rates on student loans.
Even higher interest rates down the road
Based on current economic projections, by 2017 the yields on Treasury notes will increase to the point that student loan interest rates for undergraduates will exceed where they were before the new law was passed. This will come even sooner for parents (2016) and graduate students (2015).
The government is expecting $184 billion in pure profit from student loans over the next 10 years. If Treasury notes’ yield rates increase as projected, the government will actually profit an additional $715 million off of student and parent borrowers.
Supporters of the new student loan scheme use what seems like simple logic to defend it: if the rates on Treasury notes increase, it will be because the economy has improved. Students and parents will be able to pay more since they will be in a better economic position.
But this logic is faulty. What the banks consider a “healthy” or “good” economy is not necessarily what workers consider a good economy. There is no guarantee that a return to high profit rates in the stock market will translate into more stability for poor and working people.
For example, corporate profits have increased by 20 percent since the end of 2008, largely recovering from the crisis as the stock market returned to record highs. But the so-called “recovery” has been virtually non-existent for workers. Disposable income has remained basically flat, increasing by only 1.4 percent over the same period. Corporate profits now constitute a higher percentage of GDP than at any time since 1950, while wages as a percentage of GDP is at its lowest point since 1966.
The Bipartisan Student Loan Certainty Act is a classic case of bait-and-switch. The new regulation means that students and families will pay less for loans taken out over the next few years, but will pay far more as the capitalists return to greater levels of profitability. This is a recipe for new levels of hardship down the road— and will hit particularly hard those who are unable to find jobs to meet their educational level, along with those who face systematic discrimination in the job market.
Wall Street’s loyal servants in Washington want to haggle over percentages, Treasury yields and other obscure financial variables. But the solution is not complex. It is clear: respect the basic right to a free, quality education by canceling all student debt, and dramatically expanding public education access to all.
