Posted on June 4, 2013
WASHINGTON — THIS summer, more than nine million undergraduates will take out an average of $6,700 each in federal loans to pay for college next year. They will borrow, on average, $24,803 to earn their degrees. While this continues to be one of the smartest investments they will ever make, Congress should take one step toward making it an even smarter one.
We have introduced a proposal that would get rid of the confusing and arbitrary way interest rates are determined on federal student loans, and instead allow rates to be set by the market. We commend President Obama for introducing a similar proposal in his budget, and the House of Representatives for recently passing similar legislation, on a bipartisan basis, that offers a long-term, market-based solution.
But we are worried that Senate Democrats, who could vote on the issue as early as this week, will oppose a permanent solution for 100 percent of loans and instead will merely extend the existing, arbitrary rate for a minority of loans, and for just two years — a politically easy move that will only hurt students in the long run.
Over the past four years, the Federal Reserve has kept interest rates at record-low levels, allowing banks to borrow money from the federal government at nearly zero percent interest and, in turn, offer low rates to individuals borrowing money for the purchase of a home or a car or to start a business.
But if you’re a college student who has taken out a federal loan during that time, you’ve seen no benefit at all from the dirt-cheap borrowing costs. Instead, your interest rate was set by Congress, which temporarily set some rates at 3.4 percent for low-income students but left most rates at either 6.8 percent or 7.9 percent.
In other words, you could borrow money to buy a used car to drive yourself to college and pay about 3 percent interest over five years, while at the same time you could be paying nearly 7 or 8 percent interest on the cost of your education.
That is, except on your federally subsidized Stafford loans. Last year Congress extended a temporary provision, first passed in 2007, to lower the 6.8 percent interest rate on newly issued Stafford loans for low-income undergraduate borrowers to 3.4 percent, for one year. The government pays the interest for these loans while the borrower is in school.
Congress extended the interest rates for a year not because it was good policy, or because 3.4 percent is some ideal rate for loans, but largely because student debt had become a political issue in the presidential campaign. In the end, the one-year extension cost taxpayers nearly $6 billion, but saved a mere $9 a month in future repayments for the 40 percent of student borrowers who receive subsidized Stafford loans.
Congress is now approaching the end of that temporary “fix.” On July 1, those rates will return to 6.8 percent — which is why it is important for the Senate to make the right fix, right now.
Student debt shouldn’t be grist for the political mill. Congress must provide certainty and stability to student borrowers.
Our legislation would tie all federal student-loan interest rates to the 10-year Treasury rate (currently 1.75 percent), plus 3 percentage points to cover the costs of collections, defaults and other risk factors. That would benefit students and families by cutting rates on almost all federal student loans to a little under 5 percent for the coming school year.
Under our proposal, interest rates will remain the same over the lifetime of a loan, but the rate on a loan taken out in 2013 might differ from one taken out in 2014, because market rates vary.
One big advantage of our proposal is consistency: the confusion over differing rates on Stafford loans and unsubsidized federal PLUS loans would end, since one rate formula would be used for all federal education loans.
Our plan would also protect students by using the existing income-based repayment program, which allows borrowers to reduce their monthly payments based on a capped percentage of their discretionary income and ultimately have those loans forgiven after a period of time. This is a better solution than capping future increases in interest rates, and one that the president’s own budget proposal endorses.
Taxpayers would be protected, too. When the economy recovers and interest rates return to historical norms, taxpayers will no longer be subsidizing artificially low interest rates.
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.
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.