The interest rates on student loans guaranteed by the federal government are set to go up on July 1 from 3.4 percent to 6.8 percent unless senators and representatives can carve out a consensus to prevent the increase.
President Barack Obama, flanked by college students at the White House yesterday, told them the increase would mean “that the average student with those loans will rack up an additional $1,000 in debt. That’s like a $1,000 tax hike,” the New York Times reported.
Democrats in the Senate hope to pass a plan that would simply extend the 3.4-percent rate for another two years, while House Republicans last week passed one that makes the rate variable based on market trends.
House Speaker John A Boehner, Republican of Ohio, characterized the House’s bill as “a responsible way to deal honestly with the issue of student loans,” but he noted Democrats could easily politicize the issue. The House bill includes the following provisions:
- Variable interest rates reset each year
- Rate = 10-year Treasury rate + 2.5% for Stafford loans
- 8.5% cap on Stafford loans
- 10.5% cap on guaranteed loans to parents and graduate students
Tying interest rates to market trends is likely to cut the federal deficit by about $3.7 billion over 10 years, a small number compared to our nation’s debt but important in the politics of Washington, as our annual spending deficit may be decreasing more quickly than the Congressional Budget Office initially projected, the Christian Science Monitor reports.
“The differences between the House plan and the president’s are small, and there’s no reason they cannot be overcome quickly,” the Times quoted Mr Boehner as saying in a statement. “But today, rather than working to resolve the issue, the president resorted to a campaign stunt to try to score political points.”
What that stunt was is unclear, but the president chimed a brief reference to it by saying he didn’t want the deficit resolved on the backs of college graduates. He insisted that the House plan could mean freshmen who enter college in the fall would pay more for their education than they would if the government had simply allowed the interest rate to increase to 6.8 percent next month.
He might be right. The CBO estimates that under the Republican plan, the interest rate on Stafford loans will increase to 5 percent next year and to 7.7 percent by 2018. The president also noted that the Republican plan eliminates safeguards designed to protect low-income families.
But with all this political rhetoric flying back and forth, one would think the two plans—the one from the president and the one passed last week in the House—were miles apart. That is not the case, however, as the president’s plan would also tie rates to the Treasury interest rate. Unlike the Republican plan, though, the president’s would fix the rate over the life of the loan, rather than adjusting it every year.
Of course, if the economy tanks again, the Republican plan is clearly better. If the economy continues on a path of slow recovery, the president’s plan is clearly better for students. It’s just a matter of whether you’re a pessimist or an optimist when it comes to the nation’s economic recovery.
An excellent op-ed piece in the New York Times this morning deals with this very issue. The article was written by Sens Lamar Alexander, Tom Coburn, and Richard Burr, Republicans from Tennessee, Oklahoma, and North Carolina, respectively. They explain the differences between the plans much better than I did, and they also say Congress should just take care of this and avoid the politics and delay-inducing rhetoric:
“Our proposal has some differences from the president’s plan and the House-passed bill — for example, the president proposes three different interest rates for different types of loans, while ours has just one interest rate for all direct federal student loans, and the House bill applies a variable interest rate that resets each year, while our interest rate remains the same for the life of the loan,” they write.
“But all of us embrace the same idea: we should stop playing politics with student loan debt and move to a simpler and fairer system, one that will immediately lower borrowing costs for all students while protecting taxpayers and providing certainty for the future. We hope Senate Democrats will agree.”
I definitely agree, especially given their point that having Congress set the rates will force graduates to pay higher rates for their education than they are for the loans on their cars used to drive them to work. That’s the situation if the very slow recovery continues. If the economy improves and market rates go up, as they are expected to do, the student loan rates will be higher but probably more affordable for more highly employed graduates, especially since the Republican Senate plan comes with safeguards for low-income families that President Obama said were not included in the bill passed in the House.