The Debt Celing and Student Loans

Michael Lux Blog, News, Student Loans 3 Comments

One week from today the United States is expected to reach its debt ceiling.  This is the limit, set by Congress, that dictates how much money the United States is allowed to borrow in order to pay its bills.  If Congress does not raise the debt ceiling, the only money that the government would have to pay bills would be the tax dollars that come in on any particular day.

Government Shutdown vs. Debt Ceiling

Presently, the government is shut down.  It is important to note that the government being shut down is a different issue than the debt ceiling.  The government shutdown is a result of Congress and the President not being able to agree on the budget.  The debt ceiling debate is about whether or not the US Treasury will be allowed to borrow the money necessary for the country to pay its bills.  Further explanation of the distinction between these two issues can be read here. If you are interested in how the government shutdown is affecting student loans, much has been written on that topic.

What does hitting the debt ceiling mean for student loans?

Hitting the debt ceiling would both directly, and indirectly, affect student loans.

Indirect consequences:  As we inch closer to the debt ceiling, the United States begins to appear less and less creditworthy.  Hitting the debt ceiling would mean that the United States is much more of a credit risk.  As anyone with student loans knows, the more of a credit risk you are, the higher your interest rates are.  Failure to address the debt ceiling in a timely manner could result in higher borrowing expenses for the government.  This would mean higher interest rates for college students who need student loans for next year.  Why next year?  When Congress passed its most recent student loan interest rate law, they tied rates to Treasury Bonds (the treasury bond rate is the cost at which the government can borrow money).  The student loan interest rates are already fixed for the 2013-2014 school year, but next year is a different story.  If treasury bond rates are up, the cost of a new student loan will be up.

Direct Consequences: Hitting the debt ceiling would mean that the government wont be able to pay all of its bills.  Some bills would have to go unpaid or at the very least, delayed.  The people paying the bills on behalf of our government would forced to make some very difficult decisions.  As one professor put it, “Americans tend to be sympathetic to students… But if we have to choose between cutting Social Security from Grandma and cutting student loans for Jonny, it’s obvious who’s going to win.”

The Bottom Line

If you plan on getting student loans in the future, you should be rooting for a quick end to the debt ceiling debate.  The longer it drags on, the worse things become for you.