Members of Congress have introduced several bills this week to keep student loan interest rates from doubling in July.
Last June, after months of political wrangling, Democrats and Republicans in Congress passed legislation to prevent the interest rate on government-subsidized Stafford student loans from doubling from 3.4 to 6.8 percent on July 1 (see
Democratic Solutions
Freshman senator Elizabeth Warren, D-Mass., introduced her first piece of legislation this week aimed at giving student loan borrowers the same interest rate that big banks get when they borrow from the Federal Reserve’s discount window. A former Harvard professor who helped set up the Consumer Financial Protection Bureau, Warren campaigned last year on a platform of fighting against the big banks. She noted that on July 1 of this year, interest rates on student loans are set to jump from 3.4 to 6.8 percent, while banks can borrow from the Federal Reserve’s discount window at a rate of approximately 0.75 percent.
“Big banks get a great deal when they borrow money from the Fed,” she said in a speech on the Senate floor Wednesday. “In effect, the American taxpayer is investing in those banks. We should make the same kind of investment in our young people who are trying to get an education. Lend them the money and make them pay it back, but give our kids a break on the interest they pay. Let’s bank on students. … Unlike the big banks, students don’t have armies of lobbyists and lawyers. They have only their voices. And they call on us to do what is right.”
Another Democratic proposal, introduced Thursday by Senators Jack Reed, D-R.I., and Dick Durbin, D-Ill., and Representatives John Tierney, D-Mass., and Joe Courtney, D-Conn., would cap student loan interest rates and base them on the actual cost of operating student loan programs.
Their bill, the Responsible Student Loan Solutions Act, would offer adjustable-rate loans for students and parents with a cap on the maximum interest rate that could be charged to protect borrowers during periods of high interest rates. Interest rates for need-based, subsidized loans would be capped at 6.8 percent. Rates for unsubsidized and parent loans would be capped at 8.25 percent. The annual rate would be set based on the 91-day Treasury bill, plus a percentage determined by the Secretary of Education to cover program administration and borrower benefits. The Education Secretary would set the rate so that the student loan programs are revenue neutral.
The bill would also correct an inequity for undergraduate students who qualify for subsidized loans. Currently, a dependent undergraduate student can borrow up to a total of $31,000. However, the maximum amount that can be subsidized is $23,000, which means that needy students often have to resort to more expensive unsubsidized loans to finance a part or the remainder of their education costs.
The bill would allow borrowers with financial need to have up to the full loan limit in the lower cost program. In addition, the bill would permit borrowers who are stuck with high fixed-rate federal student loans to refinance those loans into the new variable rate loan with a cap. Unsubsidized loans currently carry at 6.8 percent fixed rate. PLUS loans made under the old bank-based program carry a rate fixed of 8.5 percent. PLUS loans made through the Federal Direct Loan program carry a fixed rate of 7.9 percent.
“Student loans are about helping middle-class kids get the education they need,” Reed said in a statement. “They shouldn’t see their rates skyrocket. The Responsible Student Loan Solutions Act is a fiscally responsible, common sense approach to making our financial aid system more effective, affordable and sustainable in the long run. The student loan interest rate offered by the government shouldn’t be needlessly high. It should be based on actual costs. Some who claim it is important to avoid burdening our children and grandchildren with national debt are all too willing to bury these young people in student debt.”
Reed has also introduced legislation in the Senate to extend the current low interest rate for federal student loans and lock it in for two years while a long-term solution can be crafted.
Republican Alternative
House Republicans have also introduced their own “market-based” solution to the student loan interest rate problem. Rep. John Kline, R-Minn., who chairs the House Committee on Education and the Workforce, and Virginia Foxx, R-N.C., who chairs the Subcommittee on Higher Education and Workforce Training, introduced the Smarter Solutions for Students Act, which aims to take politicians out of the business of calculating student loan interest rates by moving all federal student loans (except Perkins loans) to a new interest rate formula based on the 10-year Treasury note, likening it to a proposal in President Obama’s fiscal year 2014 budget plan.
"As I’ve said time and again, we’ve got to stop kicking the can down the road with short-term fixes to this interest rate problem,” said Kline in a statement. "The Smarter Solutions for Students Act is a lasting solution that will serve the best interests of students and taxpayers. Our proposal ensures millions of subsidized Stafford loan borrowers will not see their interest rates double this July, and other borrowers will actually have their rates reduced. I hope my colleagues in the House and Senate will join us in supporting this responsible bill, and look forward to continuing to work with the administration as we move this proposal through the legislative process."
The Smarter Solutions for Students Act would calculate subsidized and unsubsidized Stafford loans using a formula based on the 10-year Treasury note, plus 2.5 percent. It would also calculate graduate and parent PLUS loans using a formula based on the 10-year Treasury note, plus 4.5 percent.
The bill would also reset student loan interest rates once a year, allowing rates to move with the free market and ensuring borrowers can take advantage of lower interest rates when available. In addition, the bill aims to protect borrowers in high interest rate environments by including an 8.5 percent cap on Stafford loan interest rates and a 10.5 percent cap on PLUS loans.
AICPA Survey
A new survey from the American Institute of CPAs highlights some of the problems with student loan debt.
The national telephone survey of student loan borrowers and their parents conducted for the AICPA by Harris Interactive found that 75 percent of those surveyed said they or their children have made personal or financial sacrifices because of monthly student loan payments.
Forty-one percent have postponed contributions to retirement plans; 40 percent have delayed car purchases; 29 percent have put off buying a house; and 15 percent have postponed marriage. Most did not anticipate the financial strain, according to the survey.
Only 39 percent of the survey respondents said they fully understood the burden student loan debt would place on the future, and 60 percent now have at least some regret over the choice of education financing.
“As the pomp of graduation fades, many college graduates become keenly aware of their financial circumstance: in debt,” said Ernie Almonte, who chairs the AICPA's National CPA Financial Literacy Commission, in a statement. “They start out with an anchor that slows their progression toward future goals. It’s a difficult reality confronting a growing number of people, one that will come into sharp focus in the coming weeks as the nation’s colleges and universities produce a new crop of graduates.”
Nearly 39 million U.S. adults had student loan debt at the end of 2012, which was 70 percent more than in 2004, according to statistics from the Federal Reserve Bank of New York. During that same time, the total amount of student debt nearly tripled to $966 billion to become the biggest non-mortgage debt burden in America. The average student loan balance was $24,803.
“Education can be a powerful investment that improves job prospects and earning potential,” said Almonte. “But the payoff is diminished if you’re also burdened by debt that takes decades to pay off. For those nearing college, it should be approached like any other investment: with a clear understanding of the risks, rewards and expected return. Those already contending with the financial burden of student debt should redouble their efforts to manage and eliminate it.”
