On July 1 the interest rate for new Stafford subsidized federal college loans will double. Rather than trying to maintain the current rate, Congress should take this opportunity to restructure student aid, directing more money toward those with the greatest need.
President Barack Obama initially proposed just that. He called for rates on subsidized loans, which are set by Congress and are currently 3.4 percent, to be equal to the cost of 10-year Treasury notes plus 0.93 percentage points: That would work out to a current rate of about 3 percent. For unsubsidized loans, the rate would be set to the 10-year Treasury note plus 2.93 percentage points. (Interest accrues during school for unsubsidized loans, while the government pays the interest on subsidized loans.) The Congressional Budget Office estimates the changes will save $6.7 billion over 10 years. Obama’s proposal would use those savings to help pay for an expansion of Pell Grants, which go to the neediest students, and as their name implies, require no repayment at all.
House Republicans would also use 10-year Treasuries as the baseline but add 2.5 percentage points for both subsidized and unsubsidized loans. And while rates under Obama’s plan would be fixed, House Republicans would let them fluctuate over the course of the loan, up to a cap of 8.5 percent. Republicans say their goal is to make the program budget-neutral. The cost of the current policy was almost $6 billion last year, according to the CBO.
Senate Democrats have taken a different tack. They want to freeze the current 3.4 percent rate for two years, at a total cost of $8.3 billion. Longer term, they propose a cap of 6.8 percent, increasing the odds that Congress will subsidize the cost of borrowing for years to come.
Although Obama supported a failed Senate plan to freeze rates, the president’s earlier plan remains the preferable approach. Republicans are right to keep pushing for market-based rates, but they should join Obama in seeking to increase Pell Grant funding. In 2010 the U.S. ranked 14th among Organisation for Economic Co-operation and Development countries in the share of 25- to 34-year-olds with a postsecondary degree. Reducing federal funding for education won’t improve that dismal standing.
Extending the current below-market rate would make college cheaper for the roughly 7 million students who get subsidized Stafford loans, but it’s not the best use of scarce government funds. That money should be moved to Pell Grants or similar programs with a better chance of getting kids to college who couldn’t otherwise afford it.
The challenge now is for the House and White House to resolve their relatively minor differences and bring Senate Democrats on board by July 1. Better access to higher education is a vital component not just of economic prosperity but of a healthy democracy.