BuzzFeed’s lead story today is a post by Senator Richard Blumenthal (D-CT) on 11 Reasons Why Congress Needs to Fix Student Loan Rates Now. But the post, despite its extensive use of graphics and charts, gets some very basic facts about the student loan issue wrong. Perhaps the most glaring of these is his claim that “10 million students nationwide will lose $1,000 per year from the higher [loan] rates”. Some students do stand to lose about $1,000 – but over 10 years, not annually. That’s a big difference – a monthly increase of about $9 instead of $90.
Blumenthal’s post contains a few other major discrepancies. Like the fact that 7.4 million students receive Stafford Loans, rather than 10 million that he mentions. Here are the four big problems that we spotted:
1. On July 1, only SOME student loan interest rates doubled for SOME students.
According to the BuzzFeed post, “your student loan rates doubled” on July 1. True, rates did increase – but only on a small subset of loans. The rate change only affected Subsidized Stafford loans, which made up less than a third of Stafford loan volume issued last year. And though Blumenthal cites 10 million as the number of students affected, the White House says about 7.4 million students will receive Subsidized Stafford loans next year.
Source: New America Foundation, U.S. Department of Education
2. No, it's $1,000 over 10 years, not $1,000 annually.
Blumenthal wrote that students will lose $1,000 annually because rates on some loans doubled on July 1. But that isn’t accurate. The $1,000 figure refers to the additional cost to students over the life of a typical ten year loan. In other words, Blumenthal overstates the impact of the higher interest rate by a factor of ten.
Here’s how the math works. But first, a GIF to keep your attention:
The rate change, as we’ve said, only affects Subsidized Stafford loans. The limit on those loans is a maximum of $5,500 per year from a student’s third year of college on (in the first year it’s $3,500, and in the second, $4,500). And Subsidized Stafford loans don’t accrue interest while the student is in school.
That means the most a student could pay on his Subsidized Stafford loan under the new rate is about $2,000 in interest, compared to about $1,000 with the 3.4 percent rate. In other words, a student will pay about $1,000 more over the 10-year life of the loan. That’s about $9 more per month – to borrow an analogy from Allyson Klein at Education Week, less than the monthly cost of a Spotify Premium subscription.
Source: New America Foundation
Blumenthal isn’t the only one confused by this $1,000 number. We found countless other examples – from Center for American Progress, Youngist, StudentDebtCrisis.org, and Sen. Mary Landrieu (D-LA), among others – of confusion about the whether the $1,000 refers to a one-year or a 10-year number.
So to clarify one more time, we’re talking a maximum of about $1,000 per loan over the standard, 10-year repayment period for that loan. Not annually.
This confusion all probably stems from an AP report of comments made by President Obama. Obama said: “If Congress doesn’t act by July 1st, federal student loan rates are set to double. And that means that the average student with those loans will rack up an additional $1,000 in debt. That’s like a $1,000 tax hike. I assume most of you cannot afford that. Anybody here can afford that? No.” AP interpreted this to mean a $1,000 annual hike.
3. The government doesn’t profit off student loans.
Blumenthal says: “The government profits off these student loans, while you suffer.”
It’s a nice piece of rabblerousing, but it’s wrong. In fact, the government loses money on Subsidized Stafford loans – about a $12 loss for every $100 lent.
Looking at the cost estimates produced by the Congressional Budget Office, you might think otherwise. That’s because Congress requires CBO to use inaccurate accounting plans that even the CBO says are out of whack with the true costs of the program.
The accounting practices CBO uses, which are dictated by the Federal Credit Reform Act, calculate the costs of the program using the risk factor on Treasury bonds. They don’t account for the risks of the loan program – namely, the fact that borrowers are much more likely to default on their loans than the entire U.S. government is to default on its debt. The Department of Education is predicting a 23% default rate on Subsidized Stafford loans for the 2014 cohort.
Source: Dylan Matthews at Wonkblog
CBO (and President Obama’s fiscal commission, and economists at the Federal Reserve, and the Financial Economists Roundtable) recommends using fair value accounting instead, and even issues fair value estimates for the loan program. Under fair value accounting, the U.S. loses money on Subsidized Stafford loans most years.
4. The solution has nothing to do with banks
Blumenthal ends with a proposal he cosponsored with Sen. Elizabeth Warren (D-MA) – the Bank on Student Loans Fairness Act. It would set rates on Subsidized Stafford loans at 0.75% for one year’s worth of loans, the rate the Federal Reserve sets on emergency lending to banks and one that costs banks, which usually have access to much lower rates. But the plan is based on a fundamental misconception of how student loans work. And it’s not much of a deal for students if it only lowers rates for one year.
A better solution is being negotiated on Capitol Hill this week. A bipartisan group of senators, led by Sens. Joe Manchin (D-WV) and Angus King (I-ME), issued a proposal last week that is now being renegotiated to gain support in the Senate. The plan will tie interest rates to the 10-year Treasury note (1.81 percent for the 2013-14 school year), plus 1.8 percent for undergraduates, 3.4 percent on graduate Stafford loans, or 4.5 percent on PLUS loans. The rates will be capped at 8.25 percent for undergraduates and 9.25 percent for graduate students and PLUS loans. It’s a long-term solution that will end the annual bickering that has afflicted Congress each year, provide lower rates to all students next year (not just Subsidized Stafford borrowers), and cost taxpayers nothing.
Blumenthal’s not the only one getting some of the facts wrong – we have a long list of misreported details in the student loan interest rate debate that has dominated Congress over the last two months.
Turns out just because something is published on BuzzFeed doesn’t mean it's true.