Capitol Hill Lawmakers Mull Several Solutions to Student Loan Interest Rate Dilemma

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Finding a Solution to Student Debt  Several Solutions to Student Loan Interest Rate Dilemma

Faced with record-high tuition costs, undergraduate and graduate students seeking higher education opportunities were recently handed another blow – the doubling of student loan interest rates. July 1 marked an increase in Stafford student loan interest rates from 3.4 percent to 6.8 percent. The increase, which affects seven million students, does not affect existing loans; it only applies to new loans.

Stafford loans are low-interest rate loans available to students with financial need. Twenty-six percent of federal student loans are obtained through the subsidized Stafford loan programs.

The U.S. Senate is expected to vote on July 10 on a proposal that would extend the 3.4 percent interest rate for another year. The White House has expressed confidence that the Senate will remedy the problem and include retroactive protection for students who borrow after July 1. It is not clear, however, what reception a Senate-favored solution will receive in the U.S. House of Representatives. Most new loans won’t be taken out by students until late August or September. However, some say that with this Congress’ pattern of acting at the last minute, they might not arrive at a solution until late August or September. Congress voted to cut student loan interest rates to 3.86. This bill was passed on July 24 with a vote of 392-31.

Bills Pegged at Stafford Loan Interest Rates

Capitol Hill lawmakers have introduced several bills aimed at establishing interest rates on subsidized Stafford loans.

  • The Smarter Solutions for Students Act was passed by the U.S. House of Representatives in May. It ties student loan interest rates to market-based rates. Once a year, student loan interest rates would reset to move with the free market. Senate Democrats opposed the bill, explaining that it would reduce the deficit on the backs of students and middle-class families. President Barack Obama has threatened to veto the bill, saying it would saddle low-and middle-income students with the highest interest rates and does not offer extended repayment options to borrowers who have already finished their schooling.
  • Under the Bipartisan Student Loan Certainty Act, interest rates for newly-issued student loans would be tied to the U.S. Treasury 10-year borrowing rate and add 1.85 percent for subsidized and unsubsidized undergraduate Stafford loans. The Congressional Budget Office estimates this plan would reduce the deficit by $1 billion over a ten year period.
  • Under the Bank on Student Loans Fairness Act, the interest rate on federal Stafford loans would be 0.75 percent, the same rate the Federal Reserve charges banks for loans. Sen.Elizabeth Warren (D.-Mass.) drafted the legislation. Her bill has not been voted on, but has already been endorsed by 28 colleges and universities.

“Some people say that we can’t afford to help our kids through school by keeping student loan interest rates low,” Sen. Warren said in a statement introducing the bill. “But right now, as I speak, the federal government offers far lower interest rates on loans, every single day – they just don’t do it for everyone.”

“Right now, a big bank can get a loan through the Federal Reserve discount window at a rate of about 0.75 percent. But this summer a student who is trying to get a loan to go to college will pay almost 7 percent. In other words, the federal government is going to charge students interest rates that are nine times higher than the rates for the biggest banks – the same banks that destroyed millions of jobs and nearly broke this economy. That isn’t right. And that is why I’m introducing legislation today to give students the same deal that we give to the big banks,” she said.

The White House has its own ideas on the matter. President Obama has submitted his own proposal that would involve fixed-rates and be budget-neutral.

According to a Federal Reserve Bank of New York report, Americans owe $1 trillion in education loans – more than auto loans ($730 billion) and credit card loans ($693 billion).

Student loan debt is an important issue. The Federal Reserve Bank of New York found that young adults under age 30 are putting off home ownership and buying cars – activities that could help spur the economy – because of high student loan debt.

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