With just two working days left before the U.S. government doubles a student-loan interest rate, lawmakers are haggling over what to do about it.
The argument isn’t over whether to allow the rate on the most popular type of federal loan to rise above 3.4 percent, the level set by law until July 1. It’s about how much borrowing costs will increase.
“The likelihood of students keeping the interest rate they had for the last two years is diminishing by the hour,” said Terry Hartle, senior vice president at the American Council of Education, the largest lobbying group for colleges and universities. “The outcome will be students will pay more than 3.4 percent in the short term,” he said in a telephone interview.
Unless Congress acts, the interest rate for subsidized Stafford loans, available to undergraduates from low-income families, will increase to 6.8 percent from 3.4 percent. More than 7 million students use that direct-from-Washington loan program.
Instead of passing legislation to extend that rate or set a new flat rate, lawmakers have been negotiating ways to let the rate float by linking it to the yield on the 10-year Treasury note.
Getting an informal agreement on the concept of flexible rates was the easy part. The more challenging part of the negotiations, according to those involved, has been figuring out how much flexibility to build in, and how much profit the government should extract.
Senate Majority Leader Harry Reid contends that there should be no profit at all.
“The issue is this: Republicans want deficit reduction,” the Nevada Democrat said June 25. “We don’t think there should be deficit reduction based on the backs of these young men and women who are trying to go to college.”
Complicating the talks is the more than 50 percent increase in the yield of 10-year Treasury notes, to 2.5 percent, since May 1.
Under a House-passed plan, that would have meant a student loan rate of 4.3 percent, rising to as much as 8.5 percent.
“It’s very clear students would be worse off under that proposal than simply allowing interest rates to double” because rates “would be lower initially but rise as interest rates rise,” said Pauline Abernathy, vice president of the Institute for College Access & Success, a nonprofit research and advocacy group in Oakland, California.
Over the past decade, there has been an explosion of student loan debt. It now totals almost $1.2 trillion, with 85 percent consisting of government-backed loans taken out by students and their parents. The rest are made by private lenders like banks or Sallie Mae, the largest U.S. education-finance company.
The share of 25-year-old Americans with student debt increased to 43 percent last year from 25 percent in 2003, according to the Federal Reserve Bank of New York. During that nine-year period, the average education-loan balance of people in that age group increased 91 percent, to $20,326 from $10,649, according to the New York Fed.
With so much outstanding student debt, borrowers are having trouble contributing to the U.S. economy in other ways.
It has become harder for young people, especially those between 25 and 30, to secure other types of credit, including home mortgages, according to a February report on household debt and credit by the New York Fed.
Economists warn that what is owed in student loans may rival home-mortgage indebtedness as a drag on U.S. growth.
“The difficulties borrowers face when trying to manage cash flow may have a broader impact on the economy and society,” Rohit Chopra, student-loan ombudsman at the Consumer Financial Protection Bureau, told the Senate Banking Committee on June 25. “When young workers are putting large portions of their income toward student-loan-payment payments, they’re less able to stash away cash for that first down payment.”
Private borrowing for student loans grew after Congress overhauled bankruptcy laws and made such debts non-dischargable in personal bankruptcy.
That change meant that “there were very few reasons for banks not to make educational loans to anybody who wants them,” Hartle said. “Most students who get in trouble by borrowing huge amounts of money get there because they have borrowed from private lenders” without the knowledge of their college or institution, he said.
It’s common for students to have more than one kind of loan, taking out the maximum government loan and then supplementing with private loans.
The most popular government loan is the Stafford. Subsidized Stafford loans are limited to students with lower incomes, and the interest rate is 3.4 percent, set by Congress. The government pays the interest during school. The interest rate will increase to 6.8 percent on new originations if Congress doesn’t act by July 1.
Any undergraduate, regardless of income, can get an unsubsidized Stafford loan at a rate of 6.8 percent.
The federal loan limits for undergraduates are $5,500 the first year, $6,500 the second year and $7,500 in the last years. Graduate students no longer dependent on their parents also can take out Stafford loans.
Another type of direct federal loan, called PLUS, carries a rate of 7.9 percent for graduate students and parents of undergraduates.
While running for re-election, President Barack Obama pressured lawmakers to extend the fixed rates for a year. Republican challenger Mitt Romney joined the call, and Congress obliged both candidates, acting two days before the rate on subsidized Staffords would have doubled.
Since then, the president has continued public pressure on Congress to address a pressing problem for students.
“It’s a different year,” said John Kline, the Minnesota Republican who heads the House Education and the Workforce Committee. House Republicans aren’t open to a temporary change, Kline said -- “We’ve already been there.”
The talk about student loans this week hasn’t been limited to federal loans.
Private loans make up about 15 percent of outstanding educational debt. They are considered riskier because their interest rates are usually not fixed, and they don’t offer the same type of protections as federal loans, such as income-based repayment when borrowers get into trouble.
A Federal Reserve official told the Senate Banking Committee on June 25 that lenders of private student loans should reduce the risk of default by helping struggling borrowers come up with alternative payment plans.
One of the major lenders, Discover Financial Services, announced yesterday that its fixed interest rate on student loans was dropping to as low as 5.49 percent.
A doubling of the government’s interest rate “would be good news for Discover as its private loans will be more attractive when compared with subsidized federal loans,” analyst James Friedman of Susquehanna Financial Group LLC in New York said in an e-mail. Borrowers could bypass both subsidized and unsubsidized Staffords “and choose Discover’s student loans instead.”
On May 23, the Republican-run House passed Kline’s legislation, which would tie student loan interest rates to the 10-year Treasury note plus 2.5 percent. In the Senate, Reid tried to round up votes for a two-year extension of the current 3.4 percent rate and fell short of a required 60-vote supermajority.
Some Senate Democrats say they will try again for an extension -- this time going for just one year instead of two, as was sought in the unsuccessful bill, S. 953. Independent Senator Angus King of Maine questioned that approach. “What will we know in a year that we don’t know now?” he said today.
Obama has his own proposal to subject the Stafford loans to interest-rate fluctuations and save the government $3 billion over 10 years.
As July 1 draws closer, with Congress planning a break next week for the July 4 holiday, a bipartisan group of senators say they have come up with a possible breakthrough -- a floating rate for Staffords, the 10-year Treasury borrowing rate plus 1.85 percent.
That proposal still has the deficit-reduction element that Reid opposes; it would pare the government’s red ink by $1 billion over 10 years, according to a statement from King, Democratic Senator Joe Manchin of West Virginia and Republican Senators Tom Coburn of Oklahoma, Richard Burr of North Carolina and Lamar Alexander of Tennessee.
Both Senator Tom Harkin, the Iowa Democrat who is chairman of the Senate Health, Education, Labor and Pensions Committee, and the panel’s top Republican, Alexander, predicted that the Senate would go home for the week-long July 4 break without acting.
Alexander, a former U.S. education secretary, said that if lawmakers can reach a consensus this week, Congress can return July 8 and approve the change retroactively.
Neither party has been able to gain a political advantage over the other for inaction by Congress.
Unlike a year ago, “this issue has much less traction,” said political scientist Bruce Altschuler at the State University of New York at Oswego. “People don’t know who to blame. They know somebody is at fault. They are not sure who.”