On May 31st, President Obama finally held a press conference and spoke publicly on the impending July 1st rise in Federal Student Loan Interest Rates. Unless he and the Congress move together and quickly, the rate available from the federal student loan programs is going to double from 3.4 percent to 6.8 percent.
Although the only legislation on the table right now to prevent a rate hike was submitted from House Republicans last week, the President has deemed this to be “not smart” and called for something better. The only suggestion from Mr. Obama however was a few paragraphs in his proposed budget earlier this year. Even though it is short on details, it is not too different from the House proposal and even more similar to what Senate Republicans are now working on as well.
At the press conference, President Obama once again asked for all parties involved to find common ground. As he put it, “We can’t keep saddling young people with more and more debt, just as they’re starting out in life”. Unfortunately, for the President, these press conference calls for action in place of actually sending legislation for consideration is wearing thin for many students and parents in a barely recovering economy.
“No one should be fooled by today’s campaign-style event at the White House” was Senate Minority Leader McConnell’s (R-KY) comment later that day. Political gamesmanship aside, he isn’t too far off. The White House and both houses of Congress need to permanently reform how interest rates are calculated against the current economic realities and build in safeguards for future borrowers that need federal student loans.
There is definitely hope for a resolution though. In the White House budget proposal earlier this year, federal student loans would be pegged every year at the beginning market rate + 0.93 percent. For federal student loans issued in 2014, this means borrowers would pay 2.9 percent interest for the life of their student loan.
The budget proposal also provides more funding for Pell Grants and expands work-study programs. The outstanding drawback, which critics have jumped on, is that it eliminates a cap on interest rates. This actually puts future students at risk of paying much higher interest than even the 6.8 percent currently looming on the horizon.
Under the previously mentioned House plan, the rates for subsidized and unsubsidized loans (i.e. Stafford Loans) would be calculated each year for the life of a loan. They would then be pegged against U.S. Treasury notes + 2.5 percent. These loans would be capped and not allowed to go over 8.5 percent. While this would mean that borrowers for 2014 will most likely pay a higher interest rate than under the Obama suggested plan, future borrowers would likely pay an equivalent amount irregardless of which is passed into law.
The Senate plan that both parties are working on will keep the student loan interest rates at their current levels for the next two years. This allows both houses of Congress to work on a long term solution and try to take the issue out of the political arena in the upcoming midterm elections.
Not every organization monitoring student loan debt is excited about these plans though. The Institute for College Access and Success opposes any change that ties loan access (and therefore college access) to the open market. Their claim is that borrowers could easily find themselves unable to qualify for federal loans and then have to take out riskier private loans or forego college until they can save enough for tuition on their own. Neither option is very attractive in this economy and job market.
When it comes down to it, those people borrowing later this year will not be crushed under immediate debt. The doubled interest rate will translate to an additional $7 per month over the life of a student loan. The long term problem is that the current loan program was set up in 2001. It has to be fixed not just for the next election cycle, but for the next generation of borrowers and their parents.
The President, despite his choice of venue, may have said it best last week. “We know that the surest path to the middle class is some form of higher education. Earning their degree isn’t just the best investment they can make for their future; it’s the best investment they can make in America’s future.”