Author: Dervarics, Charles
Date published: April 12, 2012
Journal code: BIHE
As partisan battles over budgets and taxes continue on A Capitol Hill, the next flashpoint for debate may be one issue with huge implications for higher education: the interest rate on federal student loans.
With rates on subsidized loans set to double on July 1 - potentially raising the average debt by S2,800 for 7 million students - consumer advocates and student groups are calling for the House of Representatives and the Senate to halt the increase. The United States Student Association, or USSA, U.S. PIRG and other organizations in March presented more than 130,000 student signatures to Congress protesting the planned increase from 3.4 percent to 6.8 percent.
Yet as critics of excessive federal spending call for curbing uncontrolled spending on education and other programs, the pending rate increase is a source of tension in an already heated presidential election year.
"For the average student and the average parent, the interest rate is a huge issue," said Rich Williams, higher education advocate at U.S. PIRG. Combined with state cuts in higher education spending and an uncertain job market, "It's basically a triple whammy for students and families," he told Diverse.
Without congressional action, the rate hike would affect millions of students and their families for the fall 2012 semester, he said. President Obama already has called on Congress to extend the 3.4 percent interest rate set by Congress in 2007.
"A rate of 6.8 percent was a good deal when the economy was good," Williams said. "Now it's very high compared to what people might get from other sources."
While a one-year fix of the interest rate is a short-term goal, however, students need a long-term solution to mounting debt, said Victor Sánchez, president of the United States Student Association.
Sánchez supports the new Struggling Students Act, which would allow many students to discharge their loans after 10 years if they make timely payments. The bill also would allow students to discharge private sector student loans in bankruptcy, a right not currently available to borrowers.
"You can discharge gambling debts in bankruptcy but not private student loans," Sánchez told Diverse. "We're giving basic consumer protections to gamblers but not to students."
While USSA supports a short-term "fix" on the interest rates, he said, "That's just scratching the surface of the problem." Rising tuition, declining state aid, a tight job market and families' inability to pay for college are combining to make college unaffordable for more students, he added.
But finding common ground on a solution presents its own challenges. While congressional Republicans have said little directly about the pending student loan increase, many say federal student financial aid programs are on an unsustainable rate of growth that government can no longer afford.
"The interest-rate hike students face is the result of a ticking time bomb set by Democrats five years ago," said Rep. John Kline, chairman of the House Education and the Workforce Committee. "Simply calling for more of the same is a disservice to students and taxpayers."
Some conservatives also argue that cutting back on federal student aid spending might convince colleges to stop raising tuition.
"The federal government, as the primary supplier of aid to students, has a critical role to play in restoring sanity to college pricing," said Neal McCluskey, associate director of the CATO Institute. "It must greatly reduce student aid."
Also in late March, Rep. Paul Ryan, R-Wis., chairman of the House Budget Committee, called for deeper cuts in domestic spending and sharply criticized the government's conduct on student loans.
With private lenders cut out of the federal student loan program since 2010, the government must borrow SlOO billion a year from global credit markets to keep funds flowing, Ryan said. But the White House also says that it is turning a profit, said the budget chairman, who called for new accounting measures that he said would track costs more accurately at a time when more students are approaching default.
"These extremely risky loans appear as profit-making investments in the federal government's books, thus, encouraging more loan expansion even though there is evidence that subsidized lending contributes to tuition inflation," his budget plan states.
While it is unclear how or if lawmakers will act to prevent the increase, one budget analyst said the federal government needs a better way of calculating interest rates that does not involve regularly relying on Congress.
"This should be a good opportunity for Congress to get out of the business of setting interest rates," said Jason Delisle, director of the Federal Education Budget Project at the New America Foundation in Washington, D. C.
Rather than having to rely on elected officials, students should be able to borrow based on more objective indicators and a choice of choosing a fixed or variable interest rate. Otherwise, he told Diverse, "This is just more of the same."