There is still a chance at preventing federal student loan interest rate hikes, but it just got a lot slimmer after yesterday. On June 6th, measures from Congress and the Senate both failed to win enough procedural votes to pass the full Senate and go to the White House for signature. Interest rates are now expected to double beginning July 1st unless some other type of compromise can be reached in the next three weeks.
In the short term, this means that Stafford Loan interest rates taken after 1 July will increase from 3.4 to 6.8 percent, the rate student loans were at prior to 2009. If those students take out the maximum amount allowed under current limits, the total increased interest will be $1,000 each year. In the long term, while this doesn’t sound like a huge amount; over the length of a ten year loan, that’s another $10,000 that can’t be applied to a down payment for a home or a new car. This also comes at a time when the US Government is recording record profits on Federal Student Loans.
What makes this recent rejection of both pieces of legislation unusual is that one of them, the Democrat measure, would have simply kept the student loan rates at their current level for two years. This would have given Congress time to properly examine economic projections, historical data and make the correct adjustments to the Federal Student Loan Programs. The sponsoring Senator was Jack Reed (D)-RI. While Reed has generally been successful with both parties in sponsoring previous legislation, he faced bipartisan opposition on this issue.
Unfortunately, this isn’t the first time the interest rate increase on Federal Student Loans has come up and many Senators may have just gotten sick of the process. Last year, it was the same situation and the problem was punted to avoid it being an issue for the Presidential election.
In 2012, a one year extension was approved by both Houses, keeping it at the current 3.4 percent. That almost didn’t pass over arguments on how it was going to be “paid for”. Democrats wanted to increase the payroll tax for those in the higher brackets and Republicans wanted to eliminate a small healthcare fund established by the 2010 Healthcare Reform Law. The compromise that finally passed generated income by changes to pension laws; a smaller tax than what was suggested originally by Democrats.
This time, Senator Joe Manchin (D)-WVA voted against the extension (and the Republican proposal) because he wanted his colleagues to fix the problem and not simply push it off for the next Senate to deal with in 2015. His colleague, Senator Richard Burr (R)-NC, was more emphatic, stating that it is not the Congress’ job to pick winners and losers when it comes to providing a college education. “…We need a long-term, permanent, transparent, predictable solution … once and for all”.
The legislation from the House of Representatives, although it did have bipartisan support there, was never expected to pass the Senate. Even if it did achieve the necessary procedural votes, President Obama had already promised to veto it a week earlier, calling it “not smart” even though it was not that different from his own budget proposal in 2012.
The GOP bill would have tied federal student loan interest rates to the financial markets. This would have reset loan rates every year, but would have capped those rates at 8.5 percent. The President’s proposal from last year would have had no cap on interest rates with a rate lower than 3.4 percent only in the first year after being adopted. The senior Republican on the Senate’s Education Committee, Lamar Alexander (R)-TN, was very vocal in his disappointment, stating yesterday that “This is a manufactured crisis.” echoing the words of Senators Burr and Manchin.
All of the public comments may be the proverbial bone of contention in this. Each political party wants to be seen as the one who presents a winning solution, despite their calls for a bipartisan solution. Add to that each House of Congress and the White House also wants to be seen charging in to rescue future students and their votes. Unfortunately for the students trying to continue their education, none of the political maneuvering is going to help them in either the short or long term.