Knoxville News Sentinel: Op-ed by U.S. Sen. Lamar Alexander: Student loan bill will make cost of borrowing easier and cheaper

Posted on August 24, 2013

A new law I worked to help enact lowers interest rates for every new federal student loan this year, making it easier for 11 million borrowers — including 200,000 Tennessee students — to pay for college.

Undergraduates will pay 3.86 percent interest instead of 6.8 percent under previous law, graduate students with Stafford loans will pay 5.41 percent instead of 6.8 percent, and parents and graduates with PLUS loans will pay 6.41 percent instead of 7.9 percent.

So, every single new loan will have a lower interest rate. This will save tens of millions of dollars in college costs for Tennessee students alone.

In a refreshing development, Congress and President Barack Obama agreed on this good result. The president proposed the idea, the House of Representatives voted 392-31 for the law, and in the Senate, it gathered the support of 45 of 46 Republicans.

Not only does this law make student loans cheaper, it also makes them simpler and more certain, because this solution is permanent and market-based.

Before 2006, student loan rates were tied to the market. But in 2006, Congress decided to play politics with students’ futures and set student loan interest rates arbitrarily — at 6.8 percent and 7.9 percent. The game continued when Congress temporarily cut rates in half for just 40 percent of loans, relief that ended on July 1 of this year.

Our new law ties rates to the government’s borrowing costs, which means students get the benefit of low interest rates, while tax dollars are loaned at a logical rate. This law makes our student loan program fairer to students and fairer to taxpayers.

The Congressional Budget Office tells us this law has virtually no cost over the next decade, just $715 million in savings to taxpayers over 10 years — a fraction of the expected $1.4 trillion in loans taxpayers will make to students over that same time frame.

While some senators proposed tying student loans to the discount rate — the rate the Federal Reserve charges banks on overnight loans — this proposal was illogical and very unfair to taxpayers. The discount rate is for emergency loans to banks that will be repaid within several hours, while the student loan program involves loans repaid over decades. Also, banks must have collateral for those emergency loans, while any student is allowed to borrow without providing collateral or having a credit check. To make such a proposal is to continue playing political games, failing to offer a real solution.

Our goal was to make the federal student loan program as rational and simple as possible. For example, all undergraduate students will now pay the same rate on all of their federal student loans. If Congress had merely extended its temporary rate cut for another year, we would have made just the subsidized loans cheaper, while charging many of the same borrowers twice as much on their unsubsidized undergraduate loans.

That was typical Washington logic. That meant many undergraduate borrowers were subsidizing themselves, since roughly 80 percent of undergraduate students have a combination of both subsidized and unsubsidized loans.

Our goal was also to make college as accessible to as many students as possible. All students are protected by caps on how high their interest rates can rise. Eligible borrowers can also limit their payments to no more than 10 or 15 percent of their income through the existing income-based repayment program.

Tennessee students are fortunate in other ways. Because of sound policies and state support, the cost for in-state tuition and fees at the University of Tennessee for a new student this year is $11,194. The average Pell Grant recipient at UT receives $3,950. The HOPE Scholarship provides up to $6,000. Federal student loans are available to address remaining costs.

With this new law, Tennessee’s students should know that the cost of borrowing to fund their education will be cheaper, simpler and more certain.