Congress divided on how to avoid doubling of student loan interest rates

August 23, 2013
  • AACRAO Connect
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As the July 1 deadline nears for the scheduled doubling of student loan interest rates, the 7.4 million students and families who have federal Stafford loans have good reason to start nail-biting. Congress and the White House have made distinct proposals to address the issue, but each plan has different short- and long-term effects on how much students will eventually have to pay. 

On May 23, 2013 the House passed H.R 1911, “The Smarter Solutions for Students Act,” which, if enacted, would fend off the scheduled doubling of student loan interest rates on July 1, 2013 by adopting a market-based approach. Student loan interest rates would be tied to 10-year Treasury rates, plus 2.5% for both subsidized and unsubsidized federal Stafford loans. The current Treasury rate as of publication is 2.01%, but the rate would be reset annually until reaching a cap of 8.5%. The bill passed 221-198 along party lines; only four Democrats voted for the measure. The American Council on Education (ACE) released a statement, which AACRAO endorsed, that is broadly supportive of the bill, but expresses some trepidation over the amount that graduate student borrowers may eventually pay. 

The White House has threatened to veto the bill, even though it shares some similarities with a provision included in President Barack Obama’s 2014 budget. According to Obama’s plan, students with subsidized Stafford loans would be charged a rate equal to the 10-year Treasury note, as in the House-passed bill. However, the rate would be locked for the entire life of the loan instead of annually resetting, and the tacked-on percentage would be .93%, not 2.5%. 

The Senate has introduced bill S. 953, or the “Student Loan Affordability Act of 2013,” in an effort to keep the interest rates locked at the current 3.4% rate for another year. If passed, Congress would then assess the issue while considering the reauthorization of the Higher Education Act. The bill proposes financing the extension by using the additional tax revenue generated from “closing three egregious tax loopholes,” according to a press release from Senator Tom Harkin (D-IA), Chairman of the Senate Health, Education, Labor, and Pensions (HELP) Committee. ACE released a separate statement in support of this bill which AACRAO also endorses. S. 953 is praised for maintaining current borrower benefits without added cost burdens on the government, and for setting the decision in the context of the Higher Education Act reauthorization rather than as a stand-alone bill. 

Senator Elizabeth Warren (D-MA) proposes a more radical plan wherein the subsidized loan rate would be .75%, the same discount rate that the Federal Reserve uses to loan banks money. In addition, these funds would be dispersed to the Department of Education by the Fed. Under Sen. Warren’s bill, this system would last one year while a longer-term solution is developed.

Keeping the costs of college within the reach of interested students, regardless of economic situation, is paramount. “All of us share responsibility for making college affordable and keeping the middle-class dream alive. There is no excuse if Congress fails to come to an agreement that prevents rates from rising suddenly in July,” said Secretary of Education Arne Duncan in a statement released May 22.    

By: AACRAO Connect

AACRAO Connect