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Student Loan Rate Hike Pending, Congress Bickers Over Politics

By | June 4, 2013 - 5:17 pm

Politicians have been sounding alarms that student loan rates will soon double. And you could be forgiven if you’re worried your rates will jump.

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“The political discussion surrounding this suggests that these are students who already in repayment and are going to see higher payments due starting in August. That’s just not the case,” Beth Akers said. “It’s new students who are taking out loans now, who are in school now and will start making payments after they graduate.”

Akers, a fellow at the Brookings Institution, said unsubsidized Stafford loans are available to all students. The debate is over the federally subsidized ones that go disproportionately to low-income students. The government pays the interest on the loan while a student is enrolled in school.

The current interest rate is 3.4%. It’s slated to spike to 6.8% in just four weeks.

Congress has the authority over the interest rates. And it’s prepared to do something huge: Cede power.

The House passed a bill two weeks ago that ties the interest rate to the ten year Treasury note.

“The interest rate would fluctuate over the course of a loan, just like a variable rate mortgage would,” she said.

The plan would cap any interest rate at 8.5%. The House passed it along mostly partisan lines. Congressman Don Young skipped the vote.

It’s not wholly different from President Barack Obama’s plan, but speaking at the White House Friday morning, he objected to the idea rates could change year-to-year with the ten year Treasury note.

“That’s not smart. It eliminates safeguards for lower income families,” he said surrounded by students. “That’s not your fair. It could actually cost a freshmen starting school this fall more over the next four years than if we did nothing at all.”

The president said he wants students to permanently lock in one rate for the lifetime of the loan.

The Senate is preparing to vote on a package this week.  Senator Mark Begich supports an idea floated by Senator Elizabeth Warren of Massachusetts. That plan would keep rates at .75% for one year – the rate banks borrow money at.

“Why would we loan money to banks and then stick it to our students?” he asked rhetorically.

Akers dismissed the idea as politics. But there are substantive reasons she thinks the rates should be higher than .75%.

“When you set interest rates really low, you’re essentially making the financing of education really cheap, which is going to have the effect of driving up tuition prices. But it also has the effect that students become less weary of this financial decision they’re making,” she said.

If this sounds vaguely familiar, it’s because Congress had this very fight last year, right in the middle of the presidential campaign, and nobody wanted to be labeled as voting to increase student loans rates.

Instead of fixing the problem, Congress delayed the rate increase a year. And now we’re four weeks away from the delayed deadline.

Senator Lisa Murkowski would not commit to any package – the President’s or the House version.

And she does not seem optimistic for any legislative action. It’s possible Congress once again delays the increase without fixing the problem.

“Is a one year fix a good deal? No it’s not a good deal,” she said Tuesday afternoon. “But is it maybe what we’re left with? Maybe.”

Some of the uncertainty could begin to vanish later this week when the Senate takes an initial vote.

Education advocates are encouraging students to submit their FAFSA applications for aid regardless of the political fight.

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