Congress moves to cut college loan costs

It's a proposal that could save college graduates thousands of dollars: reducing the interest rates on some student loans from 6.8 percent to 3.4 percent.

Halving those rates played a big part in congressional campaign promises this fall, and is a part of the high-profile first 100 hours for the new Democratic majority.

But the bill, unveiled by House Democrats on Friday and scheduled for a vote Wednesday, is scaled back from the initial promises – affecting only the subsidized Stafford loans designed for middle- and lower-class students and phasing the cuts in over five years. Already the proposal is under fire, not just from Republicans, but from some student-aid experts as well.

"It's a great sound bite – cutting rates in half," says Mark Kantrowitz, the publisher of FinAid.org, which gives information about ways to pay for college. "But it's an incredibly expensive proposal with very little student aid benefit."

The benefit, Mr. Kantrowitz notes, comes after students have graduated, which makes it unlikely to get more low-income students to enroll in college, especially since they tend to fear debt more.

Even though the lower interest rates could add up to more than $4,000 over the lifetime of a typical graduate's loan, that would mean monthly payments only dropped by about $30.

Congress "would be better off spending [the money] on something else, like increasing the Pell Grant" offered to the neediest students as aid that graduates don't need to pay back, Kantrowitz says. The limit that each student may receive from the Pell Grants program has been frozen for five years now.

Students and their advocates, however, have been pushing hard for loan cuts, holding rallies last week and lobbying Congress for the lower rates.

In the past five years, tuition and fees for in-state students at public colleges have risen 35 percent after being adjusted for inflation, according to the annual College Board survey of costs. And student debt – now carried by about two-thirds of students – has more than doubled between 1993 and 2004, according to the US Public Interest Research Group (US PIRG).

Cutting the interest rates "is a good first step and shows that this Congress is interested in working to make college more affordable," says Luke Swarthout, a higher education advocate with US PIRG. He expects that more will follow – including raising the maximum Pell Grant from $4,050 to $5,100. "The fact that this is one of the top proposals Congress is talking about is very meaningful for America's students and families."

The Democrats' bill comes with a hefty price tag. According to those backing it, the bill will cost the government $6 billion over five years. Critics say it could be three or four times that over the life of the loans.

Democrats have said they'll make up for the cuts by reducing government subsidies to lenders. But others still say it's an expensive and inefficient way to go about tackling college affordability – and could even exacerbate the problem.

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