MinnPost on May 22, 2013
By Devin Henry
WASHINGTON — When it comes to student loan reform, the White House and House GOP agree on this much: now’s the time to overhaul the system.
The question is whether they can hash out the details — and get congressional Democrats on board — before a hard July 1 deadline.
The U.S. House will vote on a John Kline-introduced bill this week to tie student-loan interest rates to the rate of U.S. borrowing. The plan is similar — but different in important ways — to one pitched by President Obama in his 2014 budget request, both aiming to take the power to set the rates out of lawmakers’ hands.
If Congress doesn’t act by July 1, interest rates on subsidized federal student loans will double from 3.4 percent to 6.8 percent, repeating a political drama that played out last year, when lawmakers, faced with the rate hike, punted and instituted a one-year fix.
“We think that’s a terrible way to set interest rates,” Kline said. “We think the market ought to determine the interest rates because it has a better reflection of what the true value of capital is.”
The problem is, congressional Democrats oppose the plan, arguing it would lead to higher borrowing costs for students. All but two Democrats voted against Kline’s bill during a committee meeting last week, and Senate Democrats prefer to freeze interest rates for two years so Congress can pass a permanent rate change along with a long-term higher education policy bill in 2015.
And there are still differences to iron out between the White House and Kline’s committee. Despite agreeing to the underlying principle of a market-based interest rate, White House spokeswoman Joanna Rosholm called Kline’s bill “an approach that both fails to guarantee low rates for students on July 1 and asks too many of them to bear the burden of deficit reduction through unaffordable rates.”
“We look forward to working with members of both parties in the House and Senate to reach a solution that will prevent the doubling of rates and will keep college affordable for students and families now and in the future,” she said.
Obama, Kline plans differ on rates
Student loan interest rates have been fixed since 2006, when a law kicked in giving Congress the power to set the rates and removing the market from the equation.
Kline’s bill would replace the current fixed interest rate system with rates based on the yield of the 10-year Treasury Note, which was 1.97 percent as of Monday. Kline’s bill would tack on:
- 2.5 percent for subsidized and unsubsidized Stafford Loans, with a cap at 8.5 percent (current rates are 3.4 percent and 6.8 percent respectively);
- And 4.5 percent for graduate and Parent PLUS loans, capped at 10.5 percent (the current rate is 7.9 percent).
The rate borrowers pay would vary year to year, but students would have the option of consolidating their loans and locking in a fixed rate after graduation.
Obama’s plan would also use the 10-year Treasury Note, but the rates would be, at least at the onset, much lower, adding anywhere from 0.93 percent (for subsidized loans) up to 3.93 percent (for graduate and parent loans). His plan has no cap, and the rates change annually just for new loans — rates on those already taken out are fixed.
Kline said he worked with the Department of Education and Secretary Arne Duncan to craft the market-based plan, even though there are some rather significant differences when it comes to the appropriate rate levels. Kline said a market-based plan provides stability for borrowers because the market, not politicians, are setting the rates.
“The president brought this proposal forward, we picked up on that, we though it was a great chance to have some bipartisan cooperation here and fix what is clearly a broken system,” he said.
Aside from the overall rates, the White House and the GOP have yet to work out what to do with the savings their plans would create. Republicans, for now, plan to turn $3.7 billion in 10-year savings into deficit reduction; Obama wants to expand another financial aid program, and after 10 years would save some $6.7 billion.
“We think this is a good deal for students,” Kline said. “We provide protections if interest rates go up, and we keep it budget-neutral so it’s not an impact for taxpayers.”
Democrats push back
But it’s controversial for some financial aid advocates, who say student loan interest shouldn’t operate as new revenue for the federal government.
“If money is being generated form a federal student loan program, it should go back into federal student aid,” Education Trust legislative affairs director Kate Tromble said.
Democrats seized on the cost as well, but from a different angle: That new revenue has to come from somewhere, and in this case, it’s student borrowers.
House Democrats have slammed Kline’s bill for increasing student loan payments. According to government projections, a student who borrows the maximum amount of subsidized Stafford loans over five years would pay $4,174 in interest under the current rate, but more than $10,000 under the GOP bill.
Senate Democrats have introduced a bill to lock in the current rates for two years, pushing off a final interest rate fix until 2015, when federal higher education policy is due up for renewal.
“Unlike some proposals that would extract billions more from students by charging them higher interest rates or make them vulnerable to sky-high interest rates in the future,” Iowa Sen. Tom Harkin said last week, “this legislation will help ensure that college remains within reach for students who rely on federal loans to pay for their education.”
Further complicating things: Last year’s interest rate fix cost $6 billion annually, which means Congress would have a huge budget hole to plug if it extended the current rates. Harkin’s bill looks to do that by closing tax loopholes, something Republicans have long rejected.
Advocacy groups: Hold off
Still, advocacy groups tend to prefer some version of that plan: Unless the GOP and the White House can hash out their differences on rates and revenue, they say, push the deadline back two years and address interest rates at the same time as overall federal education policy.
“I don’t think there’s much agreement about how best to comprehensively reform the student loan program,” said Chris Lindstrom, the higher education program director at the United States Public Interest Research Group. “It seems politically impossible, in seven weeks, to get to where we need to be to agree to the best plan.”
While there is some debate in the higher ed advocacy community over whether the rates should be market-based at all (U.S. PIRG, for one, says no), there is consensus on trying to find a way to keep the cost of higher education down. To that end, advocates say they have one major grievance with both the White House and GOP plans: The interest rate caps (if there are any at all) are still too high.
“Our take is: We’ve advocated throughout for a long-term solution,” said Rory O’Sullivan, the policy and research director of the Young Invincibles, an advocacy group for 18-34-year-olds. “We’ve got to have a cap and affordable rates in the long-term.”
Education Trusts’ Tromble said the same.
“We don’t have a problem moving to the market-based rate, we have a problem with it being completely variable,” she said. No cap — or too high of a cap — makes it harder for borrowers to know exactly how much they’ll end up paying, she said.
Kline said between the hard rate caps and the ability to consolidate loans, his bill has enough built into it to ward off sudden interest rate hikes.
“I think that we put in the kind of protections we need, for students, for parents, for families, and gotten us out of the business of trying to have a big political fight and make the interest rate subject to election-year politics all the time,” he said.
As to whether lawmakers on the hill and in the White House can agree on a fix before July 1, Kline said the odds are “reasonably good.”
“Only because the administration wants a long-term fix, we want a long-term fix, Senate Republicans want a long-term fix. It’s a matter of working the rates” he said. “The White House needs to weigh in a bit more with some of the Democrats who are trying to kick the can for two years.”
Devin Henry can be reached at dhenry@minnpost.com. Follow him on Twitter: @dhenry