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Time Running Short for Congress to Keep Student-Loan Rates From Doubling
By Cory Bennett


Student-loan reform has emerged as one of the few bipartisan bridges in a budget battle marked by stark divides. After gaveling open a House hearing on federal student-aid programs Tuesday, Rep. Virginia Foxx, R-N.C., called President Obama’s student-loan reform plan “one bright spot” in his budget—a budget Foxx called “disappointing” last week.

Here’s where Republicans and Democrats agree: Interest rates on need-based student loans can’t double from the current rate of 3.4 percent—which will happen for 7.4 million students July 1 without congressional action.

But there is little agreement on solutions. Rep. Tom Petri, R-Wis., wants to create a “simple universal, income-based repayment with wage withholding done by employers,” he said at Tuesday’s hearing. Republican Sens. Tom Coburn of Oklahoma and Richard Burr of North Carolina want to tie interest rates to market-based, 10-year Treasury rates. Obama wants to combine elements of both those plans. And Rep. Joe Courtney, D-Conn., wants to extend the current rate for two years and tackle student-loan reform as part of a more holistic approach to making higher education more affordable.

“There’s actually pretty bipartisan agreement that we need to do more than a one-year fix,” Courtney said. “That really was not at all present last year.”

Faced with the same July 1 rate-doubling deadline, Congress last year “cobbled something together” to extend the 3.4 percent rate for another year, Petri said. But everyone knew that couldn’t become an annual tradition. This year, conversations started earlier, drifted into more congressional hearings, and turned into numerous legislative proposals.

Obama’s proposal would fix rates for the life of most loans by taking the interest rate on 10-year Treasury notes and adding 2.93 percent. The variable rate would not be capped. But income-based repayment, along with 10- and 20-year loan-forgiveness plans, would manage total debt payment, regardless of the initial rate.

The White House “painted themselves into a corner” this year, said Jason Delisle, director of the Federal Education Budget Project at the New America Foundation, a public-policy think tank. The administration needed a plan to keep rates low without raising the ire of GOP debt hawks, so it blended the market-based rate from the Coburn-Burr plan and the income-based repayment plan from Petri’s proposal.

Since August 2011, 10-year Treasury note rates have hovered around or below 2 percent, so tying rates to this bellwether would only marginally increase rates for now. But over time, assuming consistent economic growth—as Obama’s budget does—those rates would rise. That would also help reduce the deficit—a selling point for the president’s plan. If 10-year Treasury rates top 4 percent within five years and stay there—a big “if,” according to Delisle—the plan could take $14 billion off the deficit in 10 years. For each year the current rate continues, the government loses $6 billion in potential revenue.

The pressure to strike a deal is mounting. By 2020, roughly 40 percent of the electorate will have been born after 1982. Forty-six members of Congress now have student debt of their own.

It’s even having an impact on the dating life of some young men, said Petri, citing a recent story in The New York Times. “The question the girl asks is, ‘What is your credit score?’ … This is one small but important step to help remedy that.”

This article appears in the April 17, 2013, edition of National Journal Daily as Tough Test Ahead on Student-Loan Interest Rates.