Congress appears set to pass a bill tomorrow that allows certain undergraduate students to borrow up to $5,500 for the coming school year at a fixed interest rate of 3.4 percent instead of 6.8 percent. The president spent months making the case for the one-year, low-rate extension, and Congress spent almost as much time debating how to pay for it. The whole episode raises a lot of questions that students, reporters and policymakers should have been asking all along.
For all the effort the president went to in arguing for the lower rate, why did he ask Congress for only a one-year fix? Did he think a longer extension would be too expensive at more than $6 billion a year?
It looks that way: His 10-year budget request sent to Congress earlier this year included only the one-year extension. That is, when the president had his choice about where to set spending and revenue levels for every line item in the federal budget, he didn’t make room for more than a one-year interest rate extension. Why?
Why didn’t the president and Congress use these past months to enact more meaningful reforms to the student loan program?
The program is far from perfect. Congress set the interest rates on federal student loans back in 2002 and doesn’t allow them to adjust for changes in market rates. Ed Money Watch showed how lawmakers could peg the rates to U.S. Treasury rates, offering lower rates for all borrowers next year and even providing borrowers who would get the 3.4 percent interest rate with more savings. The proposal would save $6 billion, and it would be permanent. When asked about this alternative, the White House had no comment.
Why didn’t the president invest his time and energy to put the Pell Grant program, which provides grants to nearly ten million college students from the poorest families, on better financial footing?
Temporary funding for the Pell Grant program runs out next year and the maximum grant is scheduled to drop by about half in 2014. But $6 billion – the same amount the president convinced Congress to spend on the interest rate extension – would stop that from happening. Why weren’t student aid advocates up in arms that the president challenged Congress to find $6 billion for the interest rate fix over Pell Grants? Even the Washington Post said that the president had his priorities wrong.
How was the president able to argue that the interest rate fix was meant to help borrowers weather a weak job market given that:
1. The loans to which the interest rate hike would apply (Subsidized Stafford) are interest-free for borrowers who are unemployed or have low incomes; and
2. The Obama Administration in 2011 expanded the income-based repayment plan on federal student loans so that no borrower with loans issued since 2008 ever has to pay more than 10 percent of her monthly income on her debt, regardless of the interest rate she is charged. Loans are then forgiven after 10 years for public sector employees and 20 years for everyone else.
These benefits make a one-year extension of the 3.4 percent interest rate irrelevant for borrowers who are unemployed or earning too little to make full monthly payments.
Had students, the news media, policymakers, and others been asking these questions all along, the interest rate fix might not be headed to the president for his signature tomorrow. Instead, perhaps a bill with far more meaningful reforms and benefits for students would be.