This battle is not new. The student loan program has been the object of contention since the 1950s. Today, the debate centers on whether student loans should have fixed interest rates to offer students predictability or variable rates to reflect the market.
Student loans had fixed rates for the first three decades, then
variable rates from 1992 to 2006. Democrats at that time promised to cut
student loan rates in half, passing a temporary reduction until July
2012. In the heated election year, that was extended for another year.
So we're back to a July 1 sunset, when rates will revert to the 6.8 percent of 2006.
House Republicans have passed a bill (H.R. 1911) with variable rates and a cap of 8.5 percent. Here's the problem: While market interest rates today are at historic lows, economists predict that they will rise over time as the economy improves. The way Republicans have set the variable rates, students would do worse under H.R. 1911 than under the doubled 6.8 percent rate.
The Congressional Research Service has laid this out in a chart. Assume a financially needy student borrowing the maximum $19,000 for college, starting in 2013-14. Under the current 3.4 percent rate, that student would pay $3,450 in interest; under the 6.8 percent rate, $7,284. But under H.R. 1911's variable rate, the student would pay $8,331 in interest.
Doing nothing, letting the rate double to 6.8 percent, would be better than H.R. 1911.
Senate Democrats also support a variable rate, but different from the House Republican version. They want a two-year extension of the 3.4 percent rate; after that, rates would be variable, tied to the interest on a 10-year Treasury note plus a percentage to cover program costs. Interest would be capped at 6.8 percent.
For his part, the president set out a middle position. He would lock in the 3.4 percent rate for another year, then have interest rates vary from year to year for new loans — but fix the rate for the life of the loan, like a traditional home mortgage. He would have no cap.
Rhetorically, the parties are miles apart, but not in the details of their proposals. With a good- faith effort, they should be able to reach agreement before July 1.
They need to settle on a couple of principles. Interest rates should not be set higher than needed to break even on the program. Set a reasonable cap so students have some predictability. Beyond that, all parties should remember the aim of the federal student loan program is to assure that students of all incomes have access to a college education.
People expect to borrow to pay for a car or house. Borrowing for a college education should be affordable enough to be a sound investment.
So we're back to a July 1 sunset, when rates will revert to the 6.8 percent of 2006.
House Republicans have passed a bill (H.R. 1911) with variable rates and a cap of 8.5 percent. Here's the problem: While market interest rates today are at historic lows, economists predict that they will rise over time as the economy improves. The way Republicans have set the variable rates, students would do worse under H.R. 1911 than under the doubled 6.8 percent rate.
The Congressional Research Service has laid this out in a chart. Assume a financially needy student borrowing the maximum $19,000 for college, starting in 2013-14. Under the current 3.4 percent rate, that student would pay $3,450 in interest; under the 6.8 percent rate, $7,284. But under H.R. 1911's variable rate, the student would pay $8,331 in interest.
Doing nothing, letting the rate double to 6.8 percent, would be better than H.R. 1911.
Senate Democrats also support a variable rate, but different from the House Republican version. They want a two-year extension of the 3.4 percent rate; after that, rates would be variable, tied to the interest on a 10-year Treasury note plus a percentage to cover program costs. Interest would be capped at 6.8 percent.
For his part, the president set out a middle position. He would lock in the 3.4 percent rate for another year, then have interest rates vary from year to year for new loans — but fix the rate for the life of the loan, like a traditional home mortgage. He would have no cap.
Rhetorically, the parties are miles apart, but not in the details of their proposals. With a good- faith effort, they should be able to reach agreement before July 1.
They need to settle on a couple of principles. Interest rates should not be set higher than needed to break even on the program. Set a reasonable cap so students have some predictability. Beyond that, all parties should remember the aim of the federal student loan program is to assure that students of all incomes have access to a college education.
People expect to borrow to pay for a car or house. Borrowing for a college education should be affordable enough to be a sound investment.
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