The Student Loan Debacle Just Got Even Messier

The fight over interest rates on Stafford loans is a sideshow. The rate was temporarily reduced to 3.4%, and Congress was looking to extend that rate and had to find alternative places to cut funding to offset the federal subsidy.

Never mind that banks themselves are making money hand over fist on student loans - both on origination fees and the interest they charge. The federal government set subsidy levels.

Now, as part of a one-year extension on those 3.4% rates, students looking to get loans on advanced degrees will find that they can no longer obtain Stafford loans and will have to see much more expensive private student loans.

Even as Congress moves to prevent undergraduate student loan rates from doubling, lawmakers have decided to eliminate two federal subsidies that will increase the cost of higher education.

One would hit the same college students who are benefiting from the interest rate freeze. Though their rates will be only 3.4 percent, they will be responsible for paying that interest as soon as they throw their graduation caps in the air — a change that is expected to cost them more than $2 billion.

Meanwhile, students hoping to earn the advanced degrees that have become mandatory for many white-collar jobs will no longer be eligible for federally subsidized loans. That means graduate students are facing an $18 billion increase in interest rate payments over the next decade, about three times the amount at stake in the debate over undergrad interest rates.

Both measures will take effect Sunday.

That means that the overall interest load for those students seeking advanced degrees will increase far more than the Stafford loan deal could potentially save.

It also highlights the failure of the entire student loan system.

The current interest rate being charged is vastly inflated regardless of whether you're talking about the Stafford loans or private loans. It's a profit center, and the banks don't want to do anything to change that. Neither does Congress, which has set in motion this mess.

The solution would be to free the student loans from the current system and let the rate float at a set number of points above the 10 year treasury note. So, if the banks want to charge 3 points above the 10 year bill, that would mean a rate of 4.66% based on the current trading level. Congress could set a cap, so as to limit any spike that would limit access to higher education, and any time the interest rate on the 10 year Treasury plus the points exceeded that level, Congress would step in with a subsidy, but the current setup is a mess.

Further exacerbating the mess is that students cannot refinance their student loans to take advantage of lower interest rates. Consolidation doesn't allow refinancing at a lower rate - only averaging the rates currently imposed across the student's loans. That too should change, allowing students to free up their debt burden by converting higher interest loans into lower cost loans that enable them to not only pay their student loans in a timely fashion, but frees up income to afford other expenses, including starting families, buying cars or homes, or starting up a business.