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.
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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.Skip to next paragraph
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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.