Under the bill, interest rates in 2013 would be
reduced immediately for all borrowers. The rates for undergraduate students and
graduate students would drop to 3.86 percent and 5.4 percent, respectively,
down from the current rate of 6.8 percent. The rate for parents and graduate
students getting PLUS loans would also drop to 6.4 percent, down from the
current 7.9 percent.
The compromise bill would protect students in the
future in two important ways. First, the bill rejects a variable loan interest
rate that resets every year—a feature of the House-passed companion bill—by
fixing the rate at the time of the loan’s origination. The compromise also caps
the maximum interest rates for undergraduate loans in future years at 8.25
percent, graduate loans at 9.5 percent, and PLUS loans at 10.5 percent.
Those opposed to the compromise, however, have
raised some important issues. Some, for example, have expressed concern that it
costs students more to borrow from the federal government than it costs banks.
This is an important point, but when the Federal Reserve provides
low-interest-rate loans to banks, these loans are generally short-term,
overnight loans that are intended to keep funds flowing between financial
institutions to ensure liquidity. Furthermore, banks do not get the benefits
that student borrowers receive, such as insurance against death and disability,
flexible repayment terms such as income-based repayment, and extended repayment
periods of up to 30 years.
Critics of the compromise bill have also expressed
concern that the federal government “profits” in making student loans. The
compromise charges undergraduate students the federal government’s cost of
capital—which here is assumed to be what the government would make if the same
funds were used to issue a Treasury bond—and a small mark-up to cover the costs
of the program, including repayment options and costs of default. The cap on
interest rates also has a cost because students are charged a small amount more
to effectively buy an insurance policy that allows them to receive a lower rate
if rates in the market exceed 8.25 percent.
The authors of the deal apparently sought a
deficit-neutral proposal—meaning the government would not make additional
revenue above what the program and new rates cost. How much revenue is actually
generated from the program cannot be accurately predicted, however, since the
proposal is based on the Congressional Budget Office’s best guess with respect
to future interest rates and program costs. But the proposal rightly seeks
deficit neutrality, in stark contrast to the House bill, which purposefully
charges students more in order to pay down the deficit.
There are good arguments for the government to spend
additional money to make loans even cheaper for students, and Congress should
certainly debate this issue in the context of reauthorizing the federal
student-loan program. Given the significant return on investment in
postsecondary education to the nation’s economy, it could make sense to
subsidize the federal student-loan program so that students pay less than the
market rate and the government covers a portion of the costs of the loans on
behalf of students. We believe this should be debated in the context of
reauthorization because this type of investment should be compared with other
potential investments in the student-aid system, including increased support
for the Pell Grant program.
In the meantime, a vote against the bipartisan bill
is a vote against student borrowers. It is a vote to keep student-loan interest
rates for undergraduates and graduate students at 6.8 percent. A vote for the
bill, however, is a vote to reduce the cost of borrowing for every student and
parent that takes out federal loans this year, saving an estimated $15 billion
in total. On average, under this bill, an undergraduate student that borrows
between July 1, 2013, and June 30, 2014, will save $1,500 over the life of the
loan. Based on current interest-rate projections, a vote for the bill is a vote
to keep rates below 6.8 percent for at least the next five years.
No deal is perfect. Unlike some earlier proposals,
the bipartisan bill was not crafted to increase revenues, but it does have some
incidental savings over 10 years. It would be preferable if these incidental
savings stay in the student-aid system. The caps are higher than we have
advocated for because we are concerned that high interest rates on student
loans could discourage some students from enrolling and persisting in
postsecondary education. We are satisfied, however, that the students would be
adequately protected should interest rates increase dramatically in the future.
On balance, the bill is a good deal for college
students when compared to current interest rates, and the bill also ensures the
long-term viability of the student-loan program. As Sen. Harkin has correctly
pointed out, Congress can revisit the provisions of this bill in the coming
months when it reauthorizes the Higher Education Act. In that context, Congress
should take another look at interest rates, but it also needs to aggressively
tackle the larger problem of out-of-control tuition rates and ensure that
graduates are getting quality programs.
It is time to deal with the reality that students
and their families today are trying to figure out how to pay their increasingly
expensive tuition bills. With the Bipartisan Student Loan Certainty Act,
student-loan borrowers would get a reasonable interest rate that does not
change over the life of the loan.
About the author: David A. Bergeron is the Vice
President for Postsecondary Education at the Center for American Progress.
This article was published by the Center for
American Progress.
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