Senate back at student loans as pressure and rates mount, but deal elusive

“If they push this off to the Higher Education Act reauthorization, then this issue will again dominate the conversation, and there are many other issues lawmakers need to tackle,” says Jason Delisle, director of the Federal Education Budget Project for the New America Foundation, who hopes Congress will come up with a long-term solution for government-issued education loans.

“We’re not going to come up with anything different in the next year. We know what’s out there,” he says. If it gets put off another year, Mr. Delisle adds, “we’re going to spend another year debating the exact same options on the table” that are there now.

Current options facing Congress include:

• The proposal already passed by House Republicans, which would tie interest rates to the 10-year US Treasury borrowing rate plus 2.5 percent for all Stafford loans and 4.5 percent for all PLUS loans. Rates would vary with the market, but Stafford interest rates would be capped at 8.5 percent, and PLUS loan rates would be capped at 10.5 percent.

• The bipartisan Senate proposal, which would peg loan rates to the 10-year Treasury rate plus 1.85 percent for Stafford undergraduate loans, 3.4 percent for Stafford graduate loans, and 4.4 percent for PLUS loans. The rates would be locked in for the life of the loan. While there would be no cap, the consolidation rate for loans would be 8.25 percent.

• The proposal favored by Reid, Sen. Tom Harkin of Iowa, and most other prominent Senate Democrats, which would extend the current (until it expired) 3.4 percent rate on subsidized Stafford loans one more year, and would not change the interest rates for unsubsidized Stafford loans or PLUS loans.

Reid, Senator Harkin, and other Democrats have criticized both plans to peg the rates to treasuries, saying they would rather see the current rates double than endorse a solution they suspect will be worse for students in the long term, and they seem unlikely to budge. They’ve criticized the bipartisan plan for not having caps, and they say it could leave future students vulnerable to high rates if borrowing rates go up significantly.

But talk of no caps on interest rates, says Delisle of New America, is somewhat disingenuous given that students will still be able to consolidate loans at 8.25 percent – one way to bring loans down – and will also have the option to cap payments on the basis of income.

“Which would you rather have, an interest rate cap or a payment cap?” Delisle asks. “The payment cap is better, and that already exists.”

Meanwhile, despite the heated debate and party schisms that the student loan interest rate is causing, higher education experts note that it’s really a side show to the bigger issues contributing to college affordability problems – most of which get little attention.

“We’re letting the students take a bigger and bigger piece of [college costs], and are allowing states to disproportionately cut higher education, and we’re floundering around, looking desperately at small answers to big problems,” says Pat Callan, president of the Higher Education Policy Institute in San Jose, Calif.

Mr. Callan isn’t optimistic that Congress will be able to address those issues on its own, even if it tries, noting that it will take some combination of the federal government working with states to find answers.

“The ideas are so small, and the magnitude of the problem is so huge that it really threatens American competitiveness of the workforce and the opportunities of the next generation, but I don’t see any willingness to have the bigger discussion,” says Callan.

“So yes, we should put a band-aid on [student loan interest rates going up], and yes, it’s important. But if we think we’ve solved any serious long-term problem about the financing of higher education in this country once we’ve done that is to be pretty deluded.”

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