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A Blog from New America's Federal Education Budget Project

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Bipartisan Student Loan Interest Rate Reform Bill Released in the Senate

Published:  June 27, 2013

Would Senate Democrats walk away from a chance to cut interest rates and payments on student loans below where they would be if Congress enacted a one-year extension of current policy – a 3.4 percent interest rate for Subsidized Stafford loans and a 6.8 percent rate for Unsubsidized Stafford loans? Would they turn down a bipartisan plan to spend an estimated additional $30 billion over the next five years to lower rates for millions of borrowers? We will soon find out.

Today, a bipartisan group of senators officially introduced legislation, the Bipartisan Student Loan Certainty Act, that would lower rates and payments on student loans below an extension of the current 3.4 percent rate on Subsidized Stafford loans. The bill, led by Sens. Manchin (D-WV), Burr (R-NC), Coburn (R-OK), Alexander (R-TN), and King (I-ME), would tie fixed interest rates on newly issued student loans to the 10-year Treasury note rate – 1.81 percent for the 2013-14 school year – plus a markup of 1.85 percent on undergraduate Stafford loans, 3.4 percent on graduate Stafford loans, and 4.4 percent on PLUS loans.

The rates on the loan would be fixed for the life of the loan, but each year of loans would carry a new rate. The bill would maintain the existing cap on consolidation loans of 8.25 percent, a provision included (albeit not explicitly) in an earlier proposal from Sens. Coburn and Burr.

We’ve written a lot over the past few weeks about this bipartisan Senate proposal and in a recent analysis compare it to other plans. The benefits under the bipartisan plan exceed those of others proposals because it lowers rates on both types of loans undergraduates receive, Unsubsidized and Subsidized Staffords. And because Unsubsidized Stafford loans accrue interest while a student is in school, lowering rates on those loans reduces the amount of debt borrowers have when they leave school, cutting monthly and total payments, too.

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Why is the Democratic leadership in the Senate actively trying to defeat this bipartisan bill? And why are student and advocacy groups egging them on? Because they are worried that interest rates might, sometime in the future, on average, end up higher under the proposal than under current law (i.e. 6.8 percent). In that case, 6.8 percent would be a better deal they argue.

Senate Democrats and advocacy groups, in other words, have put their money on a big move up in long-term interest rates. Sure, they could be right, although the 10-year Treasury note would have to return to its 2007 pre-recession level for the rate under the bipartisan plan to exceed 6.8 percent. But what if they are wrong about future interest rates? What if rates stay lower for longer?

Take a look at Congress’ track record on picking interest rates for student loans. The rates are currently fixed at 6.8 percent because back in 2001 legislators picked that number based on Congressional Budget Office interest rate projections.

That should be reason enough to get Congress out of the business of setting student loan interest rates. But armed with another Congressional Budget Office interest rate projection (which simply extrapolates average interest rates from the past into the future), Democrats and advocacy groups are busy making tables and charts showing exactly where interest rates are headed, all to make the case that 6.8 percent is a good rate.

According to Sen. Durbin (D-IL), student groups have told Democratic lawmakers to let the rate on Subsidized Stafford loans double to 6.8 percent rather than consider any of the alternatives currently being floated. When Congress picked the 6.8 percent rate in the early 2000s, student groups rejoiced. They were sure it was a great deal for students. They even took out full page newspaper advertisements thanking Congress for "lowering rates." Later, as everyone knows, Democratic lawmakers and student advocates cried foul when rates plunged but the 6.8 percent rate remained. Could they be wrong again? 

Check back with Ed Money Watch for more details in the coming week.

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