NEW YORK (MainStreet)While President Obama has threatened to veto the Republican sponsored House bill he says would result in a two-fold interest rate increase in student loans, the GOP proposal and his own are more similar than the partisan divide would suggest. Congress and the White House have until July 1 to act, when rates on most Stafford loans are set to double from 3.4% to 6.8%. Meanwhile some observers believe essence of the student loan crisis goes beyond the problems posed by interest rates.
The Smarter Solutions for Students ActHR 1911included flexible interest rates pegged to the 10-year Treasury billthe point where the two proposals are most similar. The Obama plan would tie rates to 10-year T-bills plus 0.9%. In the Republican bill, rates are tied to the T-bill plus 2.5% The Obama plan also has expanded income-based repayment and loan forgiveness options.
In discussing the Republican bill, Rep. John Kline (R-MN) said last week that "The legislation is based on the president's own proposal and provides a solid basis for negotiation through the legislative process." Obama's veto threat, he said. ". . .proves the president would rather pick a partisan fight with Congress instead of work in good faith on a bipartisan solution."
Rep. George Miller (D-CA) likened the Republican solution to the "teaser rates" that lead to the home mortgage crisis of 2007. Over the long haul, he said, a variable rate system would emerge, forcing students to pay higher rates on old loans when rate environment changes and those rates go up.
Senate Democrats, meanwhile, have an alternative plan to freeze rates until 2015 at 3.4%. Passage of the House Republicans may drive them to an unwanted compromise as the July 1 deadline closes in.
The notion that burgeoning student debt, estimated by the Consumer Financial Protection Bureau and others to exceed $1 trillionwon't be substantially change if the fix is limited to interest rate adjustment is gaining adherents among observers of the student loan crisis. Some say that reforms focusing only on loans to the exclusion of alternative solutions slams the already over-burdened: students with loans and tax payers that end up subsidizing them.
The Consumer Financial Protection Bureau, in its May 15 report on student loans, pegged changing rates as a risk for borrowers, especially for re-financed loansif you can find one.
"Look closely at the ARP," Rohit Chopra, CFPB student loan ombudsman wrote in the report. "The monthly payment on your loan might be lower, but the interest rate could be higher. This can occur because the (re-financed) loan term might be spread out over more years."
Mark Kantrowitz, publisher of Edvisors, a Website offering educational resources for parents and students, expressed skepticism over the amount of relief that would be obtained from the rate ranges currently on the table. "It won't make much difference to the individual student borrower," he said. "One year's worth of subsidized Stafford loans at 6.8% instead of 3.4% increases the monthly payment by about $7 on a 12 year term loan." However, he added that in the aggregate, a one-year extension will cost the federal governmentand taxpayers--$6 billion.
"I would much rather see them spend that money on increasing grants, which will reduce debt, than on reducing the interest rate," Kantrowitz said. "Interest rates have no impact on who enrolls in college or who graduates from college. All they do is affect the cost of the loans after the student graduates."
"We already have income-based repayment as a good safety net for students who graduate with debt that is out of sync with their income," he stated. "We should focus on making college more affordable by reducing the average debt at graduation."
--Written by John Sandman in New York