On July 1, interest rates on subsidized Stafford loans doubled from 3.4 percent to 6.8 percent. The news was a blow to the nearly 7 million students who are expected to take out new loans at the beginning of the academic year but hardly surprising to anybody with an eye on the issue.
To summarize long story, the rate on subsidized loans increased because Congress — par for the course — failed to act in time. The interest rate is determined by Congress, which last year voted to keep rates at 3.4 percent and has been debating the issue for months. The July 1 ticking clock was ostensibly a mechanism designed to encourage lawmakers to find a timely alternative to the current system. Most parties agree that the current system is not effective but strongly disagree on what a new system should look like.
In particular, at issue is whether rates should be indexed to the 10-year Treasury and if the rate should be capped.
The issue was tabled for the weeklong Independence Day recess, but with Congress back in session, policymakers announced that they are getting back to work. Senate Majority Leader Harry Reid (D-Nev.) said on the Senate floor that “there is progress being made on a compromise.” A group of senators has reportedly been meeting at Senator Dick Durbin’s (D-Ill.) office to hash out the details.
On Wednesday, the Senate voted on whether to end debate on a motion to proceed with the Keep Student Loans Affordable Act (S. 1238). The act would extend the 3.4 percent rate for one year while Congress figures out a more elegant long-term solution, but the vote failed to pass.
Most long-term solutions peg the loan rate to the 10-year Treasury plus some amount. The Bipartisan Student Loan Certainty Act — championed by Senator Joe Manchin (D-W.Va.) — would use the 10-year rate plus 1.85 percent with no cap except on consolidated loans at 8.25 percent. Some Democrats are unhappy with the proposal because it does not have a cap. Without one, rates are expected to exceed 6.8 percent within 10 years.
Other proposals, like the Smarter Solutions for Students Act — passed by the House on May 23, but that’s as far as it got — advocate a market-based approach to the rates. The bill would set rates based on the 10-year Treasury note plus 2.5 percent, with a cap of 8.5 percent.
The Reed-Harkin Student Loan Affordability Act suggests that Congress will need as long as two years to put together reasonable student loan reform. According to the U.S. Senate Committee on Health, Education, Labor & Pensions, the Reed-Harkin Act of 2013 (S. 953) would “freeze need-based student loan interest rates for two years while Congress works on a long-term solution to slow the rapid accumulation of student-loan debt, and is fully paid for by closing three egregious tax loopholes.”
Not to be left out of the fray, President Barack Obama laid out his own solution in the 2014 budget. “Under current law,” it says (this was published well before July 1), “interest rates on subsidized Stafford loans are slated to rise this summer from 3.4 percent to 6.8 percent. At a time when the economy is still recovering and market interest rates remain low, the budget proposes a cost-neutral reform to set interest rates so they more closely follow market rates, and to provide students with more affordable repayment options.”
Still, perhaps eager for action of any kind, the White House issued a statement ahead of the vote on the Keep Student Loans Affordable Act on Wednesday in support of the bill. “The Administration strongly supports Senate passage of S. 1238, the Keep Student Loans Affordable Act, because it meets the test of restoring student interest rates to the lower levels and would apply to all loans first disbursed after June 30, even loans already disbursed, saving seven million students nearly $1,000 per student and giving the Congress time to pass a long-term solution,” the White House statement says.