Originally posted in Inside Higher Ed. 

WASHINGTON — At this time last year, rising anxiety about student debt, an intensifying presidential election and the looming prospect of more expensive student loans in the midst of campaign season combined to produce a one-year delay in a long-scheduled interest rate increase for federally subsidized student loans.

What a difference a year makes. Now the 12-month reprieve is almost over, and the interest rate for subsidized Stafford loans — which don’t accumulate interest while borrowers are students — is again scheduled to double to 6.8 percent on July 1. This year, in their campaign to keep interest rates on subsidized loans at historic lows, student advocates may be standing alone.

When the White House releases its budget request for the 2014 fiscal year this morning, the plan is expected to include a new method for determining the interest rate for federal loans based on market rates, rather than rates that only Congress can adjust. The proposal has bipartisan support but is strongly opposed by the same student groups that were Obama’s allies on the interest rate issue a year ago (as they have been on many other higher education issues).

Details on the proposal aren’t yet available. But it is widely said to be constructed along the same lines as a bill introduced Tuesday by Republican Senators Tom Coburn of Oklahoma, Lamar Alexander of Tennessee, and Richard Burr of North Carolina, and first proposed by Jason Delisle, director of the New America Foundation’s Federal Education Budget Project.

Under that legislation, the interest rates for all new student loans would be set annually at the yield for 10-year treasury notes — the federal government’s cost to borrow money — plus 3 percent. Rates would vary from year to year as new loans are issued, but would remain fixed over the life of any particular loan.

In the short term, that would increase interest rates for subsidized Stafford loans, but lower them for all other types of loans, most of which have interest rates of at least 6.8 percent already. A loan made today based on 10-year Treasury notes plus 3 percent would have an interest rate of 4.75 percent. But a loan made under the new proposal in 2007 would have had an interest rate of almost 8 percent, higher than either subsidized or unsubsidized undergraduate loans available today.

While this year’s July 1 deadline has been foreseen for a year, last year’s scheduled increase in interest rates wasn’t a surprise either. When Congress passed a law gradually lowering interest rates beginning in 2007, bottoming out at a historic low of 3.4 percent in 2011, they were always scheduled to rebound in 2012.

But as the July 1 deadline approached, student advocates clamored to stop it. The general election campaign was heating up, and in a series of speeches on higher education at swing-state public universities, Obama embraced the cause: “Stopping this from happening should be a no-brainer,” the president said at the University of North Carolina at Chapel Hill last April. “Helping more of our young people afford college, that should be at the forefront of America’s agenda. It shouldn’t be a Republican or a Democratic issue.”

Republican challenger Mitt Romney soon got on board too, and as part of a spending bill in late June, Congress included a provision to keep the interest rate on subsidized loans at 3.4 percent for another year. The extension cost about $6 billion.

The one-year fix wasn’t particularly unusual — long-term solutions to anything have been scarce in Congress lately. But Obama’s embrace of a change back to market-based rates means this year could prove the exception. Congressional Republicans have already called for a broader look at interest rates, writing in Marchthat “it is time for us to work together on a sustainable solution to ensure students have the certainty they need to plan for the cost of attending college” and saying they would support a market-based interest rate.

Even though the annual presidential budget request has been more of a wish list than a road map since Republicans took control of the House of Representatives in January 2011, the inclusion of the interest rate proposal demonstrates how much the debate on the issue has shifted since last summer. And some student advocates and others are pushing back on the proposal, arguing that a market-based rate means student loan interest rates could soar into double digits if the U.S. experiences inflation.

In a policy brief — titled “Don’t Double Our Rates” — released Tuesday, Young Invincibles, an organization advocating for Americans under 35, and the U.S. Public Interest Research Group argued that the government is “squeezing” student borrowers to profit off student loans and urging at least a short-term agreement. The group cited Congressional Budget Office figures that say the government makes 12.5 cents for every dollar of subsidized Stafford loans, and 33 cents for every unsubsidized Stafford loan.

The interest rate on federal student loans is below the rates for private loans, but interest rates still far exceed the government’s cost of borrowing — meaning it makes a profit on student loans, particularly under current accounting rules. (Some policy analysts, and Congressional Republicans, have called for a switch toanother scoring system that takes the risk of lending at below-market rates more fully into account. Under those rules, the government still makes a profit on student loans, but by a smaller margin.)

Raising the rates would create additional revenue on subsidized student loans, and perhaps on other federal student loans should interest rates increase in the future — and thus more profit for the government. Young Invincibles and U.S. PIRG oppose the market-based interest rate proposal mostly because it doesn’t include an interest rate cap. A cap could make student loans more expensive for the government should overall interest rates increase. Delisle and others argue that a cap isn’t necessary because of the expanded income-based loan repayment and forgiveness program, which means that the amount borrowers repay often bears little relation to their actual balance.

Loans are forgiven after 20 years; if borrowers are in public service — a broadly defined term that includes government and nonprofit jobs — they’re forgiven after 10.

“The debate to me is very, very abstract in what the framework is for determining the rate,” Delisle said last month. “We’ve already got a program in place for struggling borrowers and then some. We’ve already set rates below market. What is left to do?”

An alternate proposal circulating on Capitol Hill comes from Barmak Nassirian, the former associate executive director of the American Association of Collegiate Registrars and Admissions Officers. Nassirian’s proposal calls for a variable interest rate, adjusted every year over the life of the loan, based on long-term borrowing rates for similar instruments and with differing amounts added for loan servicing based on whether borrowers are still enrolled in classes or have begun repayment. The plan would include a cap on how much the rate could change from one year to the next, as well as a maximum interest rate.

“The minute you lock the rate, it becomes arbitrary because a year after, a decade later, a different number may have been right,” Nassirian said. He argued that the high interest rates on student loans now should be a “national embarrassment,” and adjusting the rate from year to year would avoid locking in either historically low or historically high rates for borrowers.

Unlike Delisle, he doesn’t see income-based repayment as the ultimate solution. “Most people feel very comfortable with a traditional amortization model of loan repayment,” he said. “Upfront rates are so high that we’re unnecessarily creating problems for people — the rates are three times what they ought to be.”

If Obama has indeed thrown his support behind a proposal like that of the three Republican senators, a market-based rate fixed over the life of the loan seems most likely to win out. But plenty of questions remain, chief among them whether any additional revenue for the federal government will be directed toward deficit reduction or toward additional student aid.