CAPPS - Avocacy and Communication Professional Development

California Association of Private Postsecondary Schools

Proposed Student-Loan Reforms Set Activists and Lawmakers at Odds

04/12/2013

THE CHRONICLE OF HIGHER EDUCATION.  APRIL 12, 2013.  With interest rates on federal student loans set to double this summer, student-advocacy groups have intensified their calls for Congress to find a way to avoid the increase, and lawmakers are scrambling to pass legislation that would overhaul the student-loan system.

President Obama’s loan-reform proposal, which he released on Wednesday as part of his budget for the 2014 fiscal year, suggests switching to a market-based rate, in which interest rates would be set annually and fixed for the duration of each loan.

But some experts say that the options being laid out, including the president’s proposal, will provide only short-term relief for borrowers, and that allowing the rates to double may be a better option in the long run.

Unless Congress acts before July 1, the rates on subsidized Stafford loans will double, from 3.4 percent to 6.8 percent. Lawmakers were in the same situation last year, but, in the midst of an election campaign, they voted to extend the rate cap. The hope was that such an extension would buy enough time to devise a comprehensive plan to make loans more affordable.

Under the Obama administration’s proposal, borrowers with subsidized Stafford loans would be charged a rate equal to the 10-year Treasury note plus 0.93 percentage points; borrowers with unsubsidized Stafford loans would pay an additional two percentage points; and parents and graduate students with PLUS loans would pay three percentage points more.

But rather than providing an interest-rate cap, which student-advocacy groups have been pushing for, the administration proposed expanding its “Pay as You Go” income-based repayment plan to all borrowers. If that proposal were adopted, no borrower would pay more than 10 percent of his or her discretionary income, and borrowers would have their debt forgiven after 20 years of repayment.

Although that plan would temporarily drop rates below the current 3.4-percent level (a subsidized loan made today would carry a rate of 2.7 percent, for example), Barmak Nassirian, an independent higher-education analyst, said rates would jump back up and surpass that mark by 2016.

Mr. Nassirian, a former top official at the American Association of Collegiate Registrars and Admissions Officers, compared the administration’s proposal to current law, under which rates would double, and applied it retroactively (based on 10-year Treasury notes) and prospectively (based on Congressional Budget Office projections). Mr. Obama’s proposal, he concluded, would be a temporary victory for borrowers that would be followed by a high, permanent rate increase for all unsubsidized-loan borrowers and an even higher jump for subsidized-loan borrowers.

“If we go down the path they’re proposing,” Mr. Nassirian said, “instead of reorienting this in a rational and truly sustainable direction, they will make the mess much worse.”

No matter what numbers you use, Mr. Nassirian said, a clear pattern emerges: a brief window of significantly lower rates, followed by a potentially decades-long window of permanently much higher rates.

The Institute for College Access and Success, known as Ticas, also calculated that interest rates would drop for one to two years before approaching or surpassing the 6.8-percent rate that could begin this summer.

Interest rates on subsidized and unsubsidized loans would drop to 3 percent and 5 percent, respectively, for the 2013-14 academic year, for example. But by the 2018-19 academic year, Ticas estimated that subsidized interest rates would reach 6.13 percent, while unsubsidized rates would climb to 8.13 percent.

According to a joint statement issued on Wednesday by several student-advocacy groups, one problem with the administration’s proposal is the lack of a cap for interest rates.

The proposal, they said, “offers no protection for students when rates inevitably begin to climb.”

Jason Delisle, director of the New America Foundation’s Federal Education Budget Project, first proposed such a rate structure. He said this week that interest rates would not be an issue because the income-based repayment plan would be extended to all borrowers. If monthly payments—which Mr. Delisle called the true indicator of loan affordability—were capped, then borrowers would not have to worry about the interest rates of their loans.

With the rates subject to change from year to year, Mr. Delisle said, it would be unclear who would get the better deal, taxpayers or borrowers. By capping interest rates, the government would create a “backwards” situation in which it would provide a larger subsidy when the economy was strong and a smaller subsidy when the economy was weak, he said.

“Rates could be higher or lower,” Mr. Delisle said, “but there’s no other way to do it if you want the rates to be based on something.”

Instead, Mr. Delisle said, student-advocacy groups should focus their efforts on spreading awareness of the income-based repayment plan and on making it easier for borrowers to enroll in the plan.

“You can’t talk about rates without mentioning income-based repayment now,” he said. “If this is available, why does the rate matter? It doesn’t.”

Still, Mr. Nassirian and student-advocacy groups said that more time was needed to develop a comprehensive and sustainable solution to the interest-rate problem.

As Mr. Nassirian put it, lawmakers should be willing to let interest rates rise to a higher level, even to 6.8 percent, “instead of making a permanent change that would effectively jack up the rates for everybody permanently.”