Student Loans: Give Lawmakers an 'F' for Letting Rates Double

Student Loans: Give Lawmakers an 'F' for Letting  Rates DoubleCongress this week couldn’t even agree on a simple one-year extension of the low rate on the subsidized Stafford loans for qualifying college students. Their inaction will allow the federal Stafford rate to double to 6.8 percent on July 1.
U.S. senators headed home for a Fourth of July recess without passing any bill that would prevent interest rates from doubling or create a new system for pegging rates to U.S. Treasuries with some sort of limit.
What they did accomplish was more political finger-pointing. The irony of the situation is that President Obama himself proposed taking the decision on student loan rates out of the hands of politicians and basing them on market indicators, such as the Treasury 10-year note.
The president’s budget proposal on a market-based rate plan was not that far off from a plan approved by the House last month.
Senate Democrats and many progressive groups would rather let interest rates double than follow the House solution, which is to let the rates ride alongside the unpredictable Treasuries market, which have sent yields higher in recent days and spurred a big surge in mortgage rates.
Such a plan for college loans, they say, would eventually raise interest rates anyway, likely past 6.8 percent. By doing so, these Democrats are at odds — to an extent — with Obama’s idea of using market indicators.
There was some hope earlier this week when word got out of a Senate compromise plan.
Much like the House legislation, a Senate bill sponsored by Joe Manchin, D-West Virginia, and Richard Burr, R-North Carolina, which has the support of Republicans and some conservative Democrats, would link student loans to financial markets.
Under the plan, interest rates on undergraduate Stafford loans for all students would be set to the current Treasury rate, plus 1.85 percent. Manchin and Burr have the backing of Senate Minority Leader Mitch McConnell and John Kline, R-Minnesota, the chairman of the House Education & the Workforce Committee.
A deal-killer for some Senate Democrats is that some of the market-based proposals would bring in hundreds of millions in new revenue at the expense of lower and middle-class students. The House Republican plan would generate an estimated $4.7 billion over 10 years.
The so-called compromise Senate proposal has pitted Democrats against each other.
At one press conference Thursday, Sen. Tom Harkin, D-Iowa, chairman of the Senate Health, Education, Labor and Pensions Committee, criticized the compromise plan, singling out one of its Democratic co-sponsors, Manchin, of West Virginia.
“This is classic bait and switch. One or two years of low interest rates, then they sock it to you,” Harkin said.
Justin Draeger, president of the National Association of Student Financial Aid Administrators, told the Daily Beast that the July 1 increase is just one part of a larger problem with student loan rate plans.
“That’s why we think it’s so important to have a long-term, comprehensive solution as opposed to focusing in on one subset of loans (subsidized Stafford loans),” Draeger said. “If we don’t get something resolved now, we’re going to lose momentum.”
Draeger also said that even students who won’t be affected by Monday’s doubling fo the rate are still borrowing at high interest rates.
Eighty percent of students who take out Stafford loans subsidized by the government — the  subset of borrowers whose rates will change on July 1 — also have unsubsidized Stafford loans with interest rates of 6.8 percent.

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