Wednesday, July 24, 2013

David A. Bergeron: The bipartisan Student Loan Certainty Act would protect our students

  This week the Senate will vote on the Bipartisan Student Loan Certainty Act, a bill written by Sen. Tom Harkin (D-IA), chairman of the Senate Health, Education, Labor and Pensions, or HELP, Committee. Sen. Harkin worked with Sens. Dick Durbin (D-IL), Joe Manchin (D-WV), Tom Carper (D-DE), Lamar Alexander (R-TN), Richard Burr (R-NC), Angus King (I-ME), and Tom Coburn (R-OK) to develop this bipartisan compromise, which would lower interest rates for the 11 million student-loan borrowers who either have taken out or will take out a new federal student loan after July 1, 2013.

  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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