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New Student Loan Bill Has Endless Summer

NEW YORK (MainStreet)—A group of U.S. Senators has lined up behind yet another student loan bill, and this time, they say it's the real a deal.

What they agreed to is a compromise where undergraduates with Stafford loans—subsidized and unsubsidized—would pay an interest rate of 3.85% next year—slightly higher than the 3.4% rate that expired on July 1 but less than the 6.8% rate that replaced it.

The gang of nine behind this plan now includes Senators Dick Durbin (D-Ill.), Tom Harkin (D.-Iowa), Jack Reed (D-R.I.) Elizabeth Warren (D-Mass.), Lamar Alexander (R-Tenn.), Joe Manchin (D-W.V.) Richard Burr (R.-N.C.), Tom Coburn (R.-Okla) and Angus King (I-Maine). Not all of them are wild about what they've signed up for. And it is a temporary, one-year fix—one that the House has yet to agree to.

What's more, the plan is linked to market rates—the 10-year Treasury bill--and rates are going up. There is a cap on how high they can go.

Undergraduate rates will stop at 8.25%. PLUS loans for graduate students would be limited to 9.5%, and loans co-signed by parents would peak at 10.5%.

"People signing up for their student loans will pay about half what they would have paid" without this bill, said Maine Independent Angus King.

But even with the caps, Stafford loans could go as high as 8.25% in future years—reflecting a major concession from some senate Democrats, including Warren and Harkin.

Chris Lindstrom, higher education director at U.S. PIRG said she was sure that a deal would get done this week with a vote in the Senate as early as next week. "Things will move very quickly from there in terms of conferencing and a White House signing," she said. "Even if it weren't done until September, then the deal would be retroactive."

But Lindstrom thinks it's a bad deal. Even if rates are kept 3.85--or less--for next year for subsidized Stafford borrowers, "that benefit is paid for by all borrowers who will see rates higher than current policy as soon as 2015. Worse, the deal makes permanent $184 billion of needless profit to be extracted from all borrowers over ten years for purposes of balancing the budget."

No one knows for sure if the bill will get 60 votes in the Senate. And the House? What will happen there--and when--is anyone's guess.

"Practically speaking, Congress needs to finalize this before the August recess," said Mark Kantrowitz, vice president and publisher of Edvisor's Network. "Most student loans aren't disbursed until mid-August, and it is the disbursement date that controls the interest rate."

"Legally, Congress cannot retroactively change the interest rate on loans that have already been disbursed," Kantrowitz continued. "That would be like changing the terms of a contract after the fact."

There are workarounds, Kantrowitz noted, "such as providing a monthly credit to borrowers whose loans were disbursed in the interim. Even if Congress tried to legislate a retroactive change by fiat, I doubt any of the beneficiaries of the rate reduction would complain."

So is there much cause for celebration? "This is still an interest rate increase masquerading as a decrease," Kantrowitz stated. "Interest rates are at historically low levels and have nowhere to go but up. The Congressional Budget Office based its cost estimates for these loans on a very conservative assumption that interest rates will not increase by more than 2% over the next decade. But a review of past economic downturns demonstrates that interest rates tend to increase during the economic recovery by about as much as they dropped at the start of the downturn, but take about twice as long to recover."

Because of the spiking rate environment, Kantrowitz believes that interest rates on new loans will probably exceed the current 6.8% rate in 2017 and certainly by 2020. "So while a student enrolling in college now will save money on their student loans, his or her younger sibling will pay a lot more," he said. "A few years from now students and parents will be demanding a return to fixed 6.8% interest rates."

"This debate is more about the politics than the policy," Kantrowitz stated. "It is a distraction from the real problem, which is the amount of debt, not the cost of the debt. The same day the Senate negotiators crafted an updated compromise, the Consumer Financial Protection Bureau reported that federal education debt alone has reached the $1 trillion milestone. Previously the combination of federal and private student loans had reached $1 trillion."

--Written by John Sandman for MainStreet

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