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, 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.

Soaring tuition, rising debt

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.

"This proposal does nothing to encourage colleges and universities to keep tuition costs under control," says Ed Patru, communications director for the House Republican Conference. "Instead it creates an incentive for them to raise tuition and fees."

The measure is likely to pass in the House. But, its chances in the Senate, where Democrats hold only a slim majority, is less certain.

A different Democratic plan

Sen. Ted Kennedy (D) of Massachusetts has supported the House bill, but also has his own, more comprehensive measure he'd like to push through.

Senator Kennedy's bill would halve interest rates on more than just the Stafford loans, raise the Pell Grant limit to $5,100, cap federal student loan payments at 15 percent of a borrower's discretionary income, forgive the debt for those who stay in public service careers, and encourage schools to use the government's less costly Direct Loan Program.

Some backers of the interest-rate cuts worry that tying so many other measures to it will make it harder to get anything passed, but others say that such a comprehensive plan would be far more meaningful for students, especially for the low-income students for whom college still seems an unaffordable goal.

"The positive thing about having the Miller bill on the table is that it does provide an opportunity to revisit some of these issues, including the grant programs," says Lois Dickson Rice, a guest scholar in the economic studies program at the Brookings Institution, referring to Rep. George Miller (D) of California, who is leading the charge on interest rates. "There's no question that [cutting interest rates] is some attempt to try and address this issue of college access and affordability, but this is sort of a baby step in that direction."

Ms. Rice would like to see the Pell Grant limit not only raised, but also have it retargeted at the neediest of students, and have other options – like expanding the repayment period on loans or making college tax credits refundable – put on the table.

Students themselves, meanwhile, are advocating fiercely for the Housebill, seeing it as a sign of a big change in how Congress – which a year ago took $12 billion from student loan programs to help pay for tax cuts – views their needs.

"College should be affordable for students, and for the future of our country, this is important," says Trevor Montgomery, a senior majoring in political science at the University of Illinois in Chicago, who will graduate with about $20,000 in student loans. If it passes, the bill won't affect him, since he's already graduating, but Mr. Montgomery says he can already see what a difference it would make if it does.

"I'm starting the job search process thinking about the $20,000, thinking about how much that's going to cost, and it's playing a huge part," he says. "Some of the jobs I want the most are paying salaries on the borderline of being able to survive on with that. It stinks to have to consider those things."

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