Consumer Federation of California

There were several sticking points that bogged down the U.S. Senate from quickly passing legislation that would provide a long-term solution to the problem of interest rates on federal Stafford student loans. Among these was whether the government should be able to charge a rate that would allow it to make a profit.

Proponents of that idea say the profit will be used to pay down the national debt, but Senator Elizabeth Warren of Massachusetts believes it’s wrong to saddle young borrowers with higher interest just because the government hasn’t been able to maintain its books properly.

“The federal government will make $51 billion in profits off student loans,” said Warren at Generation Progress’s Make Progress National Summit earlier this week, referring to Congressional Budget Office estimates of how much additional money the loans will be able to pull in. “That’s more than wrong. It’s obscene.”

The debate over student loans comes at a time when the economy is only growing in fits and starts but college tuition continues to rise. Over the last 30 years, the cost of a college education has risen tenfold, far outpacing inflation. Thus, students have had to increasingly turn to loans to make up the difference.

The result, thanks in no small part to the investor-fueled for-profit college boom of the last decade, is that Americans now owe more than $1 trillion in student loans. Warren and others worry that any further attempts to make education more expensive will have long-lasting impact on the U.S. economy.

“Instead of helping our students, the government is making a profit on student loans,” said the Senator, who recently introduced legislation of her own to temporarily make the Stafford loan interest rate the same as what large banks pay when they borrow money from the Federal Reserve, around .75%, more than three percentage points below what the latest proposed compromise would charge students.

“We should make the same kind of investment in our young people who are trying to get an education,” Warren explained when introducing the bill. “Lend them the money and make them pay it back, but give our kids a break on the interest they pay.”

Speaking of Stafford loan legislation, the latest news from the Senate floor is that a deal is near approval. According to Bloomberg, it would peg the interest rates for subsidized undergraduate Stafford loans at 2.05 percentage points above the yield rate for the 10-year Treasury Note. Like earlier proposals, it would use the yield from the auction closest to (but not after) June 1 of each year. So, if approved, students taking out their first Stafford loan this fall would see interest rates of 3.86%.