Bank on Student Loan Fairness Act Offers Best Solution to Interest Rate Problem

By Prof. Jorge L. Díaz-Herrera, Ph.D., President, Keuka College

July 11, 2013

KEUKA PARK, N.Y. — While pleased that Senate bipartisan negotiators reached a tentative deal on student loan interest rates, Keuka College President Dr. Jorge L. Díaz-Herrera believes there was a better deal to be struck.

Under the tentative agreement, student loan interest rates would be tied to the variable rates of the 10-year Treasury bond. Undergraduate students would be charged 3.6 percent and graduate students 5.21 percent. The agreement also would cap interest rates at 8.25 percent for undergraduates and 9.25 percent for graduate students.

This agreement came after the interest rate climbed to 6.8 percent when Congress failed to rewrite the student loan interest rate or keep it at 3.4 percent by the July 1 deadline.

“It is clear that these rates were tied to market rates in order to be budget neutral.” said Díaz-Herrera. “However, even a minimal interest rate hike would be problematic because, as we’ve seen, as income inequality among Americans has widened so, too, has the education gap. Students from wealthy families are seven times as likely to have earned a bachelor’s degree by age 24 than those from poor families.”

It is data such as this that led Keuka College to join the Yes We Must Coalition, a non-profit organization of 32 small, private, non-profit colleges and universities that work to help low-income, first generation, and minority students receive a higher education.

Access to higher education isn’t the only thing that will suffer if students are forced to pay higher rates, said the president.

“For example, if the student loan rate increased to 6.8 percent, a student who took out a $23,000 loan can expect to pay an additional $3,000 over 10 years,” he said. “Student loan debt already exceeds $1 trillion, which is greater that the total American credit card debt. More debt poses a risk to household spending, especially among the middle class, and threatens our economic recovery.

Díaz-Herrera endorsed the Bank on Student Loan Fairness Act, introduced in Congress by Sen. Elizabeth Warren (D-Mass.) and U.S. Rep John Tierney (D-Mass.). It allows students to borrow funds at the same low rate (.75 percent) that banks borrow from the Federal Reserve for a year. Proponents of the proposal said it would also provide a window for Congress to find a fair, long-term solution on student loan interest rates.

“I am not convinced the tentative agreement is fair,” said Díaz-Herrera, “given the variability of the Treasury bond rates and the high cap rates.”