If you're a college undergraduate seeking a loan to pay for tuition this fall, you're likely rooting for the U.S. House to go along with the bipartisan interest rate bill approved Wednesday by the Senate.
For those about to enroll, that bill slashes interest rates from the current 6.8 percent to 3.9 percent. That's about a $1,500 savings over the life of an average loan. It may also be the best this Congress can do — for now. On that basis, we hope it goes forward.
But if your perspective is longer than this fall's tuition due date, you have reasons for qualms about this bill:
• The 3.9 percent rate is no bargain. It's higher than that available in Minnesota for 60-month used car loans, according to mybanktracker.com. It's 0.5 percentage points higher than that charged last year for subsidized Stafford loans, the federal loan program for students from low-income families.
On July 1, the subsidized Stafford loan rate for undergraduates doubled from 3.4 percent to 6.8 percent as a policy set in 2007 expired. A desire to pare that rate before most student loans are issued in August is spurring congressional action now.
• Rates are expected to climb in future years. The Senate bill pegs future interest rates to the market rate for 10-year U.S. Treasury notes. That rate is widely predicted to rise as the nation continues its recovery from recession. The Senate bill puts a ceiling on the rates, but it's a high one by modern standards (see adjacent box). High rates are contrary to the purpose of federally subsidized loans, namely encouraging lower-income people to go to college.
• This bill makes no interest-rate distinction between low-income borrowers and those from families of greater means, reversing the policies of the past five years. It treats those who truly cannot enroll without borrowing the same as those whose families have more options for paying for college. That eliminates one incentive for middle-income families to save for their children's education.
• This bill makes student borrowers pay interest charges high enough to shrink the federal deficit by more than $150 billion over 10 years, according to the Congressional Budget Office. Federal deficit reduction is sorely needed. But to load that burden on college students and recent graduates of modest means is both unfair and shortsighted.
