UPDATE: The U.S. House of Representatives voted 221 to 198 in favor of a Republican plan to avert a scheduled doubling of student loan interest rates. The bill now goes to the Senate which is unlikely to take it up anytime soon because of ongoing work on the farm bill for now and immigration next month. Good.
Even though Congress needs to act by July 1 or student loan interest rates will jump from 3.4 percent to 6.8 percent, the bill passed Thursday by the House is a terrible solution. It would set a temporary low interest rate on students loans but the problem is future interest rates would be attached to 10-year Treasury notes. That sets in motion interest rates that would vary with the markets. Hundreds of thousands of student borrowers would be saddled with higher, rather than lower, debt.
A better option, offered by U.S. Rep Suzan DelBene, D-Washington, was blocked by Republican leadership from even coming up for a vote. DelBene’s bill would have kept current low student loan interest rates for two years while Congress worked on a long-term solution. The Senate has a bill similar to the one offered by DelBene.
A nation that already owes more than $1 trillion in student loans must do something to rein in student loan interest rates. But the GOP plan harms students more than it helps them. The Congressional Budget Office projects the legislative plan would translate to a 5 percent interest rate on Stafford loans in 2014. Sounds okay, right? But that rate would soar to 7.7 percent in 2023. Moreover, Stafford loan rates would be capped at 8.5 percent, while loans for parents and graduate students would have a 10.5 percent ceiling under the GOP proposal. This Congressional Research Office analysis does the math.
GOP sponsors of the bill are trying to sell it as a facsimile of a proposal by the Obama administration. Not quite. Yes, President Obama supports tying student loan interest rates to an economic indicator – many Democratic lawmakers do. But the details of the president’s plan matter. The president included in his Fiscal Year 2014 budget proposal a plan to annually set student loan rates to the Treasury’s cost of borrowing. That rate would be fixed for the life of the loan, giving the student borrower certainty about rates. President Obama’s proposal would also expand the “Pay as You Earn” repayment option so no borrower ends up paying more than 10 percent of his or her discretionary income for student loans.
If Congress does not act by July, at a time when market interest rates are at historic lows higher rates would hit more than 7 million students nationwide. This Times editorial urged Congress to extend the lower interest rate for at least two more years. The move would be meaningful to Washington college students. Last year, 45 percent of the freshmen enrolled in this state’s public higher-education system borrowed for college. College graduates are emerging from institutions in this state with an average debt of $22,244, according to the Project on Student Debt.
Despite the many problems with the Congressional Republicans’ bill, it is expected to be approved by the full House. It should be dead on arrival in the Senate, where a companion to DelBene’s bill offers the better alternative. If the Republican bill somehow makes it out of Congress, President Obama should carry out his promise to veto it.