Student loans mean a lot to a lot of people. I personally will be taking out some loans for law school, and many of the people I know at school are taking out undergraduate loans. Student loan interest rates for most undergraduate students doubled from 3.4% to 6.8%. Members of Congress found this unacceptable but were not able to stop it. I spoke with Senator Angus King’s office last week and a key congressional aide to understand the specific legislation.
Here’s my rundown of the different proposals in Congress:
There are 3 major types of student loans: subsidized Stafford loans (for undergraduates-formerly 3.4%), unsubsidized Stafford loans (for some undergraduates and most graduates-now 6.8%), and GradPlus plans for graduates with other expenses, that is at 7.9%.
Most of the reform plans involve calculations using the 10-year Treasury-Bill rate, which fluctuates with economic growth. The current T-bill rate is 1.81% (for the sake of calculations, let’s say 1.8%). It rises with growth and falls with economic decline. Let’s get into the bills. I’ll offer my political prognosis on some of the bills, but not my policy recommendations. I think that all of the proposals are imperfect.
The House Republican bill would set all rates at 2.5% above the T-Bill rates (4.3%). It offers the lowest current rate for graduate students, but reflects an increase in the rate for undergraduates. However, interest rates are scheduled to rise as the T-bill rate rises along with economic growth, with a cap at 8.5%. The interest rates reset after every year. It appears to reduce the deficit. It passed the House but only had 4 Democratic votes. It is opposed by the Senate Democrats and the President. It would be dead on arrival.
President Obama’s plan is very similar to the Republicans’ (gaining Democrats’ scorn for pushing it to the right in the process). Obama’s plan offers fixed rates for the life of the loan, and caps obligations at 10% of their discretionary income. It does not yet cap interest over the life of the bill, but would start subsidized rates around 2.74%. Graduate rates would start about 4.7%. The President is trying to negotiate a solution for all parties involved.
The Senate Democrats plan is to extend the 3.4% unsubsidized rate for one more year. It does not use the T-Bill rate and would be the most expensive. It would have a difficult time passing the Republican House.
The Bipartisan Loan Certainty Act (S. 1241) is an attempt to bridge these gaps. It sets rates around 3.7% for undergraduates and 5.2% for graduates. It has a cap of 8.25%. It has 5 Republican Senate sponsors and 3 Democrat Senate sponsors. Interest is fixed from the beginning of the loan. It has support from the Senate Republicans, but is opposed by the majority of the Democratic caucus, due to the probability of increased rates as the economy improves. For a deal to be made, I believe that the cap needs to be lowered and other arrangements made to have the necessary Democratic support.
Sen. Elizabeth Warren (D-Mass) has a plan out to tie rates to the Federal Reserve lending rates, but it doesn’t look like it has the votes to pass. Regardless, Congress needs to act to keep rates low. The Government made over $50 billion last year on student loans, siphoning money from hard-working middle-class families and students.