EDUCATION JULY 31, 2013
If the bipartisan student loan bill that originated in the Senate passes the House, which it likely will as early as Wednesday, it will drop interest rates nearly to where they were before they doubled July 1 (from 3.4 percent to 6.8), and become one of the only laws to survive this languid summer in the 113th Congress. But not everyone is celebrating: 17 Democrats refused to vote for the bill in the Senate, and most student advocates say it’s worse than no deal at all. “The bottom line is that students will pay more under this bill than if Congress did nothing,” a disgusted Chris Lindstrom of US PIRG told the AP. But in the short term, that’s false, and in the long term, experts say, it’s hard to judge. Democrats didn’t get everything they wanted in this bill, but it’s a decent fix. Other government programs meant to broaden access to higher education, on the other hand, are in far worse shape.
The debate over student loan interest rates boils down to a philosophical disagreement over how much the government should make off of its student loans program. Many Democrats think it should make nothing. This spring, Senator Jack Reed proposed a plan he hoped would be “budget neutral”—essentially, charging students enough interest to cover the administrative costs of the loans program and the inevitable cost when some borrowers default, so the government “breaks even.” Most Republicans, on the other hand, think the government spends far too much money subsidizing education. A bill that passed the House this May would have upped the burden on students with the express purpose of paying down the nation’s deficit.
The bill that emerged from the Senate this month tracks a middle path. Interest will be pegged to the rate of the 10-year Treasury note, plus 2.05 percentage points for undergraduates, so it will rise and fall with the health of the economy. House Republicans had pushed a 2.5 percent add-on; Democrats had rallied behind a proposal that set the rate as low as a flat 0.75 percent. And no matter how good the economy gets, undergraduate loans will be capped at 8.25 percent (and 9.5 percent for graduate students, and 10.5 percent for parent PLUS loans). Republicans had proposed an 8.5 percent cap for undergrads; many Democrats suggested it should be more like 6.8 percent. The prevailing bill was calculated to generate the same savings over the course of a decade as the current law it would replace, so that it would not affect the government’s preexisting spending plans or deficit calculations. According to some CBO reports, this means the government will make a $184 billion profit from student loans between 2013 and 2023 (though many economists say the method that produced this number is overly generous; if you’re curious about that debate, read this post from the New America Foundation), and maybe slightly more—a $715 million surplus—under the new bill than the previous law.
“Is $184 billion too much? I would say it’s too much,” David Bergeron of the left-leaning Center for American Progress told me. “Are the caps too high? Probably. But the choice was do you cut interest rates this fall, or do you not?" In sum: "It’s a good compromise because it assures every borrower a lower interest rate this fall.”
Undergraduates who take out loans this year will get roughly a 3.9 percent rate—far lower than the 6.8 percent they would have had without the bill. But that’s not the part that has many progressives up in arms. Their concern is that the bill is shortsighted, helping students this year but jeopardizing those of years to come, who will likely see higher rates as the economy recovers. This is certainly a possibility, but there are a few reasons to think it has been blown out of proportion. One is that the Obama administration allows debtors to cap their payments at a manageable percentage of their income if they can demonstrate “financial hardship.” Another is that the Higher Education Act is coming up for a major overhaul in the next several years, and student loan policy may be rewritten in the course of a larger debate about college aid and tuition. The CBO puts the interest rate under the new bill below the current level (6.8 percent) at least through 2016, and the HEA is supposed to come back on the table by 2014.
Jason Delisle of the bipartisan New America Foundation, who wrote a proposal for fixing interest rates to Treasury Notes last year that influenced the plan now on the table, mentioned another reason: “Say rates do go up, and the interest rate exceeds what it would have been had law not been passed. If rates are that high, the economy will be growing, and so will incomes, and the relative burden of paying off your student loan will be unchanged.” What’s more, he said, it’s almost impossible to predict what the economy will actually look like in a decade, or how accurate the CBO’s numbers will be.
Maybe the most important reason Democrats should stop expending political capital to lower the interest rate, though, is that loans do less to help needy students than other kinds of federal aid—in particular, grants. “As a progressive, I believe the public should be putting more support into higher education than it is,” Bergeron said, but if he had a blank check, the loans program wouldn’t top his list of priorities. “If it were for me to make the decision, I’d have Pell Grants twice the size,” he said, pointing out that this would also lessen the amount students need to borrow.
Last month, Robert Gordon, a former acting deputy director and executive associate director of the Office of Management and Budget, wrote a piece for this magazine that underscored the importance of grants over loans:
Cost matters to the decision to attend or stay [in college], but given everything we know from behavioral economics (and life) about human short-sightedness, what matters most is the total amount you need to pay while you’re in school, followed by the total amount you need to borrow. … Research shows that increasing the amount of grant aid, and hence lowering the amount that needs to be spent or borrowed, really does affect college attendance. This is why the Pell Grant program is so important. But there is no evidence that students are basing college attendance and completion decisions on fine calculations about monthly payments when they graduate.
To be sure, the bill currently awaiting its turn on the House floor is far from perfect, but it would avert the immediate problem of burdening students with debt before shoving them out the door into a lousy economy. It’s hard to say whether this particular piece of legislation will live to see the economy recover, or whether the same debates will be relevant if it does. In the meantime, we’ve spent the entire summer talking about a single aspect of a single aid program that the government provides for higher education—and far from the most important one. This fix will do for now. It’s time to turn our attention to another conversation.
Nora Caplan-Bricker is an assistant editor at The New Republic. Follow her on Twitter @NCaplanBricker.