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.
It’s regrettable that Minnesota Sen. Al Franken and Washington’s Sen. Patty Murray got nowhere with an amendment that would have redirected government profits from student loans to fund Pell Grants, the tuition assistance that goes to the lowest-income students. That would have served the nation’s interest in keeping its best antipoverty program — higher education — functioning for those who need it most.
All that said, the Senate’s bill is an improvement over one that Minnesota GOP Rep. John Kline pushed through the House in May. It locks in interest rates for the life of the loans, unlike the House bill, and sets a slightly lower cap on future interest rates. For those reasons, both Franken and Minnesota Sen. Amy Klobuchar voted yes. With White House backing, an 81-18 bipartisan Senate send-off and Kline’s positive response last week, this bill seems poised for enactment.
But passage of the bill should not end the work of this Congress on student loans. The every-five-year reauthorization of the federal Higher Education Act is due before the end of the year. The nation has a strong economic imperative to raise the educational attainment of its population — especially its low-income people — while slowing the rising tide of student debt. Student loan policies should be better fashioned to serve those ends.