Student Borrowers: The Latest Victims of the Capital Leadership Crisis

By: Addison Pierce

Who would have guessed that the “shameful and irresponsible” congress would once again let the clock run all the way down to the final hours before addressing critical legislation?  While the recent sequestration showdown surely outranks the student loan legislation bottled up last week in Congress, it is amazing how one chamber or the other (really one party or the other) will seize a national issue, push its own agenda, all the while holding the piece of legislation hostage while the my-way-or-the-highway argument plays out.

On July 1, 2013, subsidized student loan rates increased from the standard 3.8% to the unsubsidized rate of 6.8%.  While the media has done an adequate job producing the usual doom and gloom, claiming that millions will see their rates go up on July 1, rates will not be doubling for millions of students.  The “doubling will only affect loans originating after the July 1 deadline and will not affect any current subsidized loan holders.  Furthermore, the doubling will only last until a retroactive bill is eventually passed.  While this may make the in-action more excusable, it is also important to realize that this is the time of year when millions of people are preparing for college and, for an estimated 7 million, it also means borrowing new Stafford loans.  If this story sounds familiar, it should; our country was in this very position a little over a year ago.  While kicking the can was all that could be agreed upon then, now is the time for long‑term solutions.

Back in May 2013, a long-term solution was finally agreed upon in the House of Representatives.  In a solution echoing a proposal by President Obama, the House bill keeps Congress where they need to be in the process—out of it.  Instead of kicking cans and politicizing higher education, the House bill sets the student loan rates for all Stafford loans, subsidized or not, at the 10-year Treasury note, plus 2.5 percentage points, and capped at 8.5%.  For the 7 million borrowing for the first time, and more importantly the millions of current borrowers, rates would settle around 4.4% this year.  The bill would also peg rates on graduate student and parent loans to the 10-year T-bill, plus 4.5 percentage points, capped at 10.5%.  The Congressional Budget Office found that the House bill would save the government $1 billion over five years and $3.7 billion over a decade.  The only difference between this plan and the plan proposed by the President is that the House bill includes caps—a massive improvement for those planning for the full cost of their education.  This small difference aside, the President called for student loans rates to be tied to the market and the Republican House delivered.

With a Presidential call to action and a House approved bill there were moments where a partisan solution seemed possible. However, when the President’s support for reform turned into a veto threat for the Republican solution all hope was lost.  While no one is surprised that the Senate failed to adopt a bill with majority Republican support, the failure to propose any long-term solution in the last year is still somewhat surprising.  Instead of fixing the problem for the last time, Senate Democrats would like to renew last year’s agreement for another year or two and “give congress time to come up with a longer-term solution through the normal budget process.”  While this may appease those looking to originate a loan in the next two years, I wonder just what the Senate considers to be the “normal budget process,” considering it has passed only one in the last four years, and only after the “no budget, no pay” provision was added.  The current criticism surrounding the House bill was voiced by Rep. George Miller (D-Calif.), the education committee’s ranking Democrat, who said he opposed the bill because annual variable rates would “create a huge amount of uncertainty for students and families thinking about financing their education.”  But how is doing nothing better?  If the concern is really about certainty, what is uncertain about the House bill when every new borrower would know the maximum cost scenario for his or her education less tuition increases?

Second only to mortgages, student debt is the largest debt carried by consumers.  Unlike mortgagors, however, students have fewer tools to plan for the true cost.  On top of facing unpredictable tuition increases, students are currently exposed to the political process. While Senate Democrats and President Obama have rejected the House plan, citing the variable rate as unpredictable, the choice to defer creates even more uncertainty for those planning for their future.  Had President Obama maintained leadership on the issue and his support for a market based solution, it is very likely this mess would be over.  One thing that I can say to Rep. Miller’s concern for a lack of certainty is that we are certainly no better off with inaction.

My opinion mirrors that of Rep. John Kline (R-Minn.), chairman of the House Education and the Workforce Committee: “We’re in this predicament because politicians put themselves in charge of setting interest rates, guaranteeing exactly this type of down-to-the-wire uncertainty for students and their families.  What we need is a long-term solution that gets Washington out of the business of setting rates altogether.” And to achieve this we need leadership from the chamber to help the millions of student borrowers in limbo.

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