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Fact Checking the Student Loan Interest Rate Debate

Published:  May 30, 2013

This post was updated on May 31 and June 3 with additional entries.

The White House and House Republicans are arguing over two competing proposals to reform how the government sets interest rates on federal student loans. As we wrote two weeks ago, this is a good sign and a big improvement over the debate on the exact same issue from a year ago.

But if you are scratching your head trying to understand how the House plan and the president’s plan are different, it is because they are in fact very similar. Both tie rates to the market. The president’s plan only offers borrowers fixed rates, but the rate offered changes every year. The House plan requires different rates on the same loan while the borrower is in school, but then gives them the option to elect a fixed rate, which, like the president’s plan, is different depending on the year. Under the House plan, borrowers wouldn’t know unless they consolidate their loans exactly how much they owe.

Unfortunately, incomplete and inaccurate information about the pending proposals abounds. Below is an incomplete list of such information along with additional facts to bring more clarity to the debate.

The New York Times:

The [House-passed] legislation would cut the deficit by $3.7 billion over 10 years, a small but politically significant number, since White House officials say the deficit should not be reduced on the backs of indebted college graduates.

The New Republic:

Obama (whose own proposal is designed to be budget neutral; no additional spending on, or revenue from, student loans)...

Key Details Missing:

According to the Congressional Budget Office, the White House’s proposal would reduce the deficit over 10 years by more than the House proposal. The official figure is $6.7 billion. Why is that the case? The CBO estimates that the White House proposal would charge borrowers higher interest rates overall than the Republican bill passed in the House. If you add in the cost of the president’s proposal to expand a more generous income-based repayment plan to more borrowers, his combined proposal still reduces the deficit by $3.1 billion over 10 years, about the same as the House plan. To address The New Republic, the president's plan does include new "revenue" from student loans.

The New York Times should have called the White House on this hypocritical charge. The New Republic's account is wrong and one-sided.

The Institute for College Access and Success:

To make matters worse, [under the House-passed bill] the rate on every loan will change each year… This means the monthly payments required under most plans will change each year as well.

Key Details Missing:

Interest rates on the loans under the House plan do in fact change once a year after issuance, but borrowers my lock that rate in at any point after they have left school. Under the House plan, borrowers always have the option to choose a fixed rate (a free option) over a floating rate at any point during repayment. The interest rate and payments on the loans will not change if borrowers elect a fixed rate. While in school, the loans will carry interest rates that change once per year.

Under the president’s plan, borrowers would be issued fixed rate loans, but each loan would carry a different interest rate each year. (We proposed something similar). The difference in rates depends on the year the student borrows. This year it could be 5 percent, and next year the newly-issued loan could carry a rate of 7 percent, or even 4 percent, depending on where market rates go.

David Hawkings of CQ Roll Call:

But the GOP bill being passed today takes the [president’s interest rate] idea a significant step further — so much further, in fact, that the Obama administration has threatened a veto. While the House measure would link the rate to T-bills, as Obama proposed, it would set a much higher cap than the president on the maximum interest rate: 8.5 percent. [Emphasis added]

Key Details Missing:

David Hawkins for some reason believes the White House is opposed to the House plan because the interest rate cap in the House plan is too high, higher than what the White House would support. But the president’s proposal has no cap! None whatsoever.  The House proposal, at least in that regard, is more generous to students than the president’s plan. [We Tweeted at David to alert him to the error last week, but no correction has been run.]

USA Today:

The House Republicans' proposal would tie loan rates to the interest rate on a 10-year Treasury note, plus 2.5%, with a cap that would prevent the interest rate on Stafford loans from rising above 8.5%. Obama's proposal would have set the rate at slightly less than 1% above the Treasury note rate.

Key Details Missing:

The president’s proposal would in fact set the mark-up over 10-year Treasury notes at 0.93, 2.93, and 3.93 percent for Subsidized and Unsubsidized Stafford and Grad/Parent PLUS loans, respectively. Therefore, the 0.93 mark up is true only for Subsidized Stafford loans. On the more widely available Unsubsidized Stafford loans, the mark-up is actually higher under the president’s plan than under the House plan. The House proposes a higher mark-up Grad/Parent Plus loans than the president.

In short, the mark-ups are different for each loan type. That is an important detail that USA Today glosses over in a way that paints the president’s plan as more generous when the truth is more complicated than that.

Rep. George Miller in the Detroit Free Press:

Democrats compare the plan to predatory adjustable rate mortgage practices that helped fuel the housing collapse during the financial crisis. “We just saw that history in America. We saw what they did,” said Rep. George Miller, D-Calif., the senior Democrat on the Education and Workforce Committee.

Economists and academics have roundly dismissed the claim that variable rate mortgages had anything to do with the housing crisis. In the words of several Federal Reserve economists, “the data are not kind” to that narrative. They show that variable interest rate and fixed interest rate mortgages defaulted at the same rates, and that borrowers who had variable rate mortgages were paying the same interest rate when they defaulted as when they took out the loan.

Rep. Miller says, "we saw what [the variable rate mortgages] did," but what he says they did is entirely unsupported by actual data or research. The claim should be left out of both the housing crisis debate and the student loan debate.

The New Republic:

Keep in mind that the current [interest] rate has already produced record levels of delinquincy--[sic] the Department of Education announced last week that 11 percent of loans were 90 days or more past due.

Key Details Missing:

The New Republic has invented a novel explanation for student loan delinquency. No credible source or research has linked the current interest rate on federal student loans to the record levels of past-due loans. Readers will notice that The New Republic article includes 13 different links to substantiate its statements of fact -- but not on this one. And good luck finding one. Everyone accepts  large loan balances, the economy, or high unemployment as possible causes, but interest rates?

Mother Jones:

The GOP plan also includes no provision capping monthly payments according to income level, as Obama's does.

Key Details Missing:

All outstanding and newly issued federal student loans include a provision capping borrowers monthly payments according to income level. A more generous version of that benefit applies to all newly-issued loan under the president's proposal and the House proposal -- the two proposals share the exact same income-based repayment benefits for new loans. That is because those benefits are standard benefits already in law. The president would change the law to add the more generous version of the benefit in place for new loans to loans not affected by the interest rate changes, generally loans made prior to 2007, and the House would not, though the less-generous income-based repayment cap still applies to all loans. In other words, the GOP plan includes no provision capping monthly payments because one already exists in current law.

The Debate Continues On

In the coming weeks, the Senate is likely to consider its own proposals for setting interest rates on student loans. That will add more options into the mix, and more confusion. But here is a shortcut to understanding the different proposals: The president’s plan, the House-passed plan, and a leading bill sponsored by Senate Republicans really aren’t all that different from one another. Maybe that’s why there is so much confusion. The plans differ in only nuanced and technical ways, not in the broad ideological terms that might otherwise clearly set them apart.

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