A new Senate proposal would spare millions of college students from having to pay a significantly higher interest rate on the loans they take out this school year, but it would probably lead rates to rise in the years to come.
The following editorial appeared recently in the Los Angeles Times:
A new Senate proposal would spare millions of college students from having to pay a significantly higher interest rate on the loans they take out this school year, but it would probably lead rates to rise in the years to come. Nevertheless, the tentative deal is a good one for taxpayers and students alike. It's also a welcome reminder that lawmakers can reach bipartisan deals on politically polarized issues, and that they can resist the temptation to avoid hard choices by relying on expensive stopgap fixes.
At issue are the rates charged on loans issued directly by the government to students. Since mid-2006, many undergrads have paid 6.8 percent for "unsubsidized" Stafford loans — that is, loans with interest payments due from the day they're issued. Low- and moderate-income undergraduates who qualified for "subsidized" Stafford loans — with no interest due until they leave college — paid as little as 3.4 percent, but that rate jumped to 6.8 percent for loans issued after July 1.
As the Obama administration acknowledged in its budget proposal earlier this year, fixed-interest-rate loans are not sustainable over the long term. They eliminate the link between what borrowers pay and what it costs the government to offer the loans. As a result, Washington winds up either profiting from student borrowers or losing money on them, depending on the vagaries of the market for government bonds (and on graduates' ability to find jobs). That's a haphazard approach.
Congressional Democrats initially resisted GOP efforts to tie the interest rate on the loans issued each year to the government's current borrowing costs, arguing instead for another temporary extension. On Thursday, however, leaders of the two factions agreed on a proposal to set new interest rates annually for loans issued each year. This year's rates for low- and moderate-income borrowers would increase slightly above last year's level, while those for everyone else would drop. Over the longer term, the improving economy is expected to lead to higher rates that could very well exceed 6.8 percent. But the deal would set caps that hold the rates well below those likely to be charged by private lenders. Among other things, it would give students a much clearer idea about what their borrowing costs will be in the future.
The Democrats were right about one thing: Student loan interest rates are just one piece of the larger puzzle of college affordability. The rapid rise in tuition and fees has put higher education out of many Americans' reach, and the ballooning amount of student debt — much of it owed to taxpayers — poses a growing threat to the economy. So, while lawmakers should embrace the Senate proposal on interest rates, they have much more work to do.