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A Blog from New America's Federal Education Budget Project

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Bipartisan Student Loan Interest Rate Bill: Compromise vs. Trivial Talking Points

Published:  July 23, 2013

The Senate is expected to vote today to approve a bill that would change how the government sets interest rates on federal student loans. The Bipartisan Student Loan Certainty Act of 2013 (S. 1334) was developed by a bipartisan group of senators and is backed by the White House. But there are still a few holdouts, including student advocacy groups and some Senate Democrats, particularly Senate Health, Education, Labor, and Pensions (HELP) Chair Tom Harkin (D-IA). Senator Harkin did ultimately co-sponsor the bill despite his stated misgivings.

One of their main beefs with the bill is that if interest rates rise over the next 11 years exactly as the Congressional Budget Office projects, the bill would save taxpayers $715 million compared to current law. 


Sen. Harkin, et al., have turned that figure into a key talking point – the bill reduces the budget deficit “on the backs of students” – but in actuality, it is a trivial matter. Let’s put the $715 million in savings into context.

Financial Literacy Advocates, Call Your Office

The Congressional Budget Office expects the federal government to issue $1.4 trillion in student loans over the next 11 years. So changing the interest rates on $1.4 trillion in loans in a way that is estimated to increase interest payments by $715 million is hardly a meaningful increase – it’s effectively a rounding error. Imagine how silly Senator Harkin and the student advocates would sound if they went out to dinner, racked up a bill of $1,400.72, and then decided they got a raw deal because of the 71.5 cents on the end of the $1,400 bill.

I’ll Gladly Pay You Tuesday for a Hamburger Today

Just about everyone understands that what the CBO projects for the next one, two, and six years is more likely to occur than what the budget office projects for seven and 11 years out. The bipartisan interest rate bill is projected to cost $25 billion over the next six years, $8.1 billion of which will occur in 2013 and $12.7 billion of which will occur in 2014. The bill’s sponsors mainly rely on interest payments in the later years of an 11-year estimate to maybe offset those big costs. In other words, the bill gladly pays budget hawks on Tuesday for tens of billions spent to lower interest rates on student loans today.

Recall that the House-passed interest rate proposal was engineered to save money over six and 11 years to avoid the spending-now/savings-later gamble present in the bipartisan interest rate bill. But now that Republican senators are willing to take that $25 billion gamble, and the president is too, House Republicans look set to go along with it. That sure looks like a victory for anyone who wants to spend more, not less, on student aid.

Normally, the budget hawks balk at a spend-now/save-later deal, but instead they’ve endorsed the bipartisan interest rate bill. Meanwhile, Sen. Harkin and the advocacy groups seem to believe that $715 million in projected savings over 11 years is a good reason to take a pass on $25 billion in spending over the next six.

Big Compromise and Good Policy vs. Trivial Talking Point

The bill is likely to pass the Senate this week, and it’s no wonder why – it lowers interest rates for all borrowers this year, ends the arbitrary rates in place since 2006, makes interest rates sensitive to the economy, and was crafted by Republicans and Democrats who compromised to reach an agreement. An 11-year projection showing that the bill might produce a miniscule amount of savings sure looks like a trivial reason to oppose the bill.

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