Student loans: Could GOP, White House strike a compromise on interest rates?

The interest rates set for student loans expire July 1 – one year after Congress took action. Now, there’s a growing desire to come up with a longer-term plan.

By , Staff writer

  • close
    Journalism graduates throw their caps during the 2013 University of Colorado Spring Commencement on Friday in Boulder, Colo.
    View Caption

It’s déjà vu time for college students who are wondering what the interest rates on their federal loans will be for the coming year. For many, there’s a good chance the rates will end up being lower, at least in the short term.

In 2012, Congress managed to stave off a scheduled doubling of the interest rate on subsidized Stafford loans, for one year. But that represented only a small portion of student loans. Now, as the July 1 deadline approaches again, there’s a growing desire – both in Washington and among college-access groups – to come up with a longer-term plan that takes loan rates out of the realm of yearly political wrangling in Washington.

The Obama administration, House Republicans, and Senate Republicans have all proposed tying student loans to the interest rate the government pays in the market through the 10-year treasury note. Currently, the loans have fixed rates.

Recommended: Student loans: 5 steps to pay down your debt

It could be a rare opportunity for compromise between the White House and Republicans on the Hill. Rep. John Kline (R) of Minnesota, chairman of the House Education and the Workforce Committee, touted his Smarter Solutions for Students Act Thursday as a plan based on the one the president incorporated into his budget proposal in April.

But the proposals have differences, and Senate Democrats have come up with some of their own ideas, leading to a complex landscape that may be tough to wade through in less than two months.

Here are some of the key elements up for debate:

  • How “variable” should the rates be? The Obama administration (which the Senate Republican bill closely resembles) would set the rate anew each year, but for the borrower that rate would then be fixed. Representative Kline’s proposal would vary the rate of the loan yearly for the life of the loan.
  • How many different loan types should there be? Currently, the three major programs are subsidized Stafford loans, at 3.4 percent; unsubsidized Stafford loans, at 6.8 percent; and PLUS loans for parents, at 7.9 percent. Under Kline’s proposal, the unsubsidized and subsidized programs would be combined at a rate of the 10-year treasury plus 2.5 percentage points; PLUS loans would tack on 4.5 percentage points to the treasury. President Obama’s plan would keep the three loans separate, tacking on 0.93 percentage points, 2.93, and 3.93, respectively. (For more comparison of the plans, see Inside Higher Ed.)
  • Should the rates have a cap? Kline’s bill would cap Stafford at 8.5 percent and PLUS at 10.5 percent. Mr. Obama’s proposal doesn’t include caps, because the administration argues that makes loans more expensive – and students have repayment options that cap their monthly payment in relation to their income and that eventually forgive remaining debt.

The move away from Congress “arbitrarily” setting student interest rates is welcome, but “both the House proposal and the administration’s proposal miss the mark,” says Pauline Abernathy, vice president of The Institute for College Access & Success (TICAS) in Washington.

Under the president’s proposal, for instance, rates on unsubsidized Stafford loans are projected to exceed the current 6.8 percent by 2016 and top 8 percent by 2018, she says. A student borrowing $20,000 and earning $30,000 in income (that rises 4 percent a year) would end up with $7,000 more in costs if he or she has an 8 percent interest rate instead of 6.8 percent, according to a TICAS analysis.

Another concern is that without the predictability of a fixed rate, students might believe private loans are better, thus forgoing the better consumer protections and repayment options built into the federal system, Ms. Abernathy says.

Democratic Sens. Jack Reed of Rhode Island and Richard Durbin of Illinois have proposed a variable rate tied to the 91-day treasury plus a percentage to be determined by the Education secretary, with a cap of 6.8 percent for subsidized Stafford and 8.25 percent for unsubsidized Stafford and PLUS.

Some congressional Democrats have jumped on the issue primarily to drive home their concern about college affordability and burdensome debt.

Rep. George Miller of California, the senior Democrat on the House Education and the Workforce Committee, called the Kline bill a “classic bait and switch scheme: lure you in with a short-term lower rate, but then charge you higher rates in the long-term,” in a statement.

Sen. Elizabeth Warren (D) of Massachusetts proposed allowing the Federal Reserve to offer students a 0.75 percent interest rate for at least the coming year, saying that students should get just as good a deal from the government as large banks do.

Given that Senator Warren’s proposal would cost billions of dollars, it’s not likely to figure into serious negotiations on the Hill, says Jason Delisle, director of the Federal Education Budget Project at the New America Foundation, a public-policy think tank in Washington.

The Kline proposal may be “as good a deal as we’re going to get,” because successful proposals these days generally avoid adding to the deficit, says Terry Hartle, a senior vice president for the American Council on Education, a higher-education association in Washington.

Kline’s proposal is roughly budget neutral, while Obama’s would cost about $24 billion in the first five years, Mr. Delisle says.

With so much focus on immigration reform in the Senate, Mr. Hartle says, it may be that the July 1 deadline will pass but that lawmakers will come up with an agreement on the loan rates before most students need to start taking out those loans in September.

In the end, the interest-rate debate may largely be much ado about nothing, suggests Delisle. Since income-based repayment options expanded to include all student borrowers in 2009, the degree to which the interest rates fluctuates isn’t so important to the overall goal of college affordability, he says. After all, dependent undergraduates can only borrow up to $31,000. Anything that lowers rates on all loans offers much larger benefits to graduate students, who can borrow up to the full cost of attendance, which can amount to hundreds of thousands of dollars.

Share this story:
 
 

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...