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California Association of Private Postsecondary Schools

Much Ado About Double or Nothing

05/10/2012

The New York Times, May 9, 2012

By Mark Kantrowitz and Lynn O’Shaughnessy

THE interest rate on the popular Stafford federal student loan program is set to double in July, after the Senate could not reach agreement on Tuesday on a way to keep the rate at 3.4 percent. President Obama has blamed Republican obstruction for the looming rate increase; Mitt Romney says the lower rate should be extended but hasn’t specified how to pay for it.

But the partisan posturing is a distraction from far more pressing issues that face students and parents who must borrow to cover their college costs. What’s lost is how Congress, in numerous ways, has been hurting the most vulnerable college students and dithering on the crisis of college affordability.

The Stafford debate is more rhetoric than substance. If the rate on the subsidized Stafford loan program does double, as scheduled, to 6.8 percent this summer, very little will happen.

In fact, students who borrow through this program will ultimately end up paying only about $6 a month extra for one year of loans. And the rate increase won’t affect previous loans, only new loans borrowed for the 2012-13 school year.

Let’s look more closely at what’s on the table. The proposals that Congress has been debating would extend the 3.4 percent interest rate for only one year. If a student borrowed the average subsidized Stafford loan ($3,357) at 6.8 percent for the next school year, the higher interest rate would boost the borrower’s debt burden by $761 over a 10-year repayment period. Even if the interest rate doubles, the monthly payment on the subsidized Stafford loan would increase by only about one-sixth.

What few observers seem to appreciate is that the low rate of 3.4 percent took effect only last July. As recently as 2007, the rate was 6.8 percent. The Democrats made reducing the interest rate on student loans into a winning campaign issue in 2006 and they fulfilled their campaign promise by ushering through the College Cost Reduction and Access Act of 2007, which gradually reduced the subsidized Stafford rate over a four-year period.

Congress often passes this sort of legislation with a 5- or 10-year window, so it’s reasonable to ask whether this political battle was anticipated by Congressional Democrats, who knew they would gain political brownie points if the Republicans, in the months preceding a presidential election, balked at extending the low rate. (Each party has added conditions to the rate extension that are unacceptable to the other side. Republicans want to pay for a one-year extension on the lower Stafford rate by taking $6 billion out of the preventive health care fund established by the 2010 health care legislation; Democrats want to cover the tab by cutting oil subsidies and closing a corporate tax loophole.)

It’s true that a very high percentage of students who graduate with debt hold a subsidized Stafford loan: 70 percent come from families who make less than $50,000; 24 percent from families with incomes between $50,000 and $100,000; and 6 percent from six-figure-income families. However, there are far more urgent priorities for families with college students.

Congress has starved the Pell grant program, an educational lifeline for low-income families. This year Congress made it even tougher for poor students to qualify for the full Pell grant ($5,550, hardly a princely sum). This past academic year, families that made $32,000 or less automatically qualified for the maximum Pell grant, but for the coming year a household can make no more than $23,000 to qualify.

The Pell grant program helps currently enrolled low-income students pay college bills, reduces debt and increases graduation rates. The interest rates on the subsidized Stafford loan, on the other hand, don’t kick in until after the student has already graduated.

Here’s another issue that Congress has punted on: why the interest rates on other federal college loans remain so high even though interest rates are at historic lows. The interest rate for the Direct PLUS Loan for Parents is 7.9 percent — not counting a 4 percent fee on the amount of the loan — making it a profit center for the government.

Congress has also taken a pass on addressing the student loan debt that hundreds of thousands of borrowers are struggling to repay. Neither private nor federal college loans can be discharged in bankruptcy, unlike nearly every other type of debt. A growing number of borrowers have been defaulting as the collective outstanding balance on college loans has reached $1 trillion.

Finally, the Stafford proposals that Congress is debating would merely maintain the status quo. We aren’t seeing proposals for bold new investments in postsecondary education, nor ways to reduce the rising cost of college and the suffocating indebtedness of graduates.

These issues are a much bigger deal than a $6-a-month increase in loan payments. It’s a shame so few people are talking about them.