Federal

Stafford Interest Cut Gets Bipartisan Support

By Alyson Klein — January 23, 2007 5 min read

Following through on a campaign promise to alleviate mounting student debt, Democratic leaders in the House of Representatives last week pushed through a proposal that would cut interest rates on some federal higher education loans for a limited period of time.

The measure, part of a package of bills championed by the new Democratic majority during its first 100 legislative hours, would gradually reduce the current 6.8 percent annual interest rate on new, federally subsidized Stafford loans for undergraduates over the next five years, to 3.4 percent by July 1, 2011.

Despite White House opposition to the bill, it garnered support from 124 Republicans and every Democrat, passing 356-71 on Jan.17.

“We can no longer ignore the fact that students are drowning in debt,” Rep. George Miller, D-Calif., the chairman of the House Education and Labor Committee, said on the House floor.

The legislation would cost about $6 billion over five years and be paid for by trimming federal subsidies to private lenders. Under the measure, the 3.4 percent interest rate would expire on Jan. 1, 2012, and the annual interest rate would revert to 6.8 percent.

The bill’s GOP detractors repeatedly drew attention to that expiration date during the floor debate, saying that students would only get maximum benefits out of the measure for a scant six months from the full phase-in by mid-2011. But Rep. Miller said he would aim to extend the lower interest rate in subsequent legislation.

White House Opposition

Even though it garnered broad support, the future of the measure remains tenuous. The Bush administration issued a statement on Jan. 16 opposing the bill, arguing that it would only help recent college graduates—not students, since it affects only repayment of the loan, not upfront college costs—and could encourage borrowers to take out larger loans. It also argued that the legislation would do nothing to curb rising tuition.

While the White House didn’t explicitly issue a veto threat, it strongly suggested that was a possibility.

Federal Student Loans

A bill approved last week in the House of Representatives would gradually lower interest rates on federal Stafford loans for college undergraduates from 6.8 percent to 3.4 percent. Some facts on current Stafford loans and the expected effects of the bill include:

Number of subsidized borrowers at four-year institutions (2004-05): 3,301,841

Savings for the average student starting in 2007 over the 15-year life of the loan: $2,280

Average subsidized Stafford loan debt for four-year-college graduate (2004-05): $13,821

Savings for the average student starting in 2011 over the life of the loan: $4,420

SOURCE: U.S. Public Interest Research Group

“Student debt loads have soared in recent years, and it is not clear that encouraging more loans is a wise course,” the White House statement said. “Instead, the administration would support efforts to direct savings to additional grant support for low-income students. Furthermore, encouraging more student debt can also fuel today’s upward tuition spiral.”

But Jamie P. Merisotis, the president of the Institute for Higher Education Policy, a Washington-based nonprofit research organization, disputed that contention. He said that while it is “theoretically possible” that colleges take the level of federal financial aid available into account when setting tuition rates, no study has found evidence of such behavior.

“Very few, if any universities, look at student aid and say, ‘We’re going to get X out of that’ and then let that determine how much tuition to charge,” Mr. Merisotis said in an interview.

During debate on the House floor, congressional Republicans echoed some of the administration’s arguments, saying the measure would do little to increase college access, since it would benefit graduates repaying their loans, not students trying to figure out how to pay college costs.

“At its core, it is not a student-aid bill,” said Rep. Howard P. “Buck” McKeon of California, the ranking Republican on the House education panel. “Would it bring a low- or middle-income student any closer to the dream of attending college? Unfortunately not.”

Instead, he said, Congress should ensure colleges are using tax and tuition dollars efficiently. He noted that some public institutions spend their money on what he called “extravagant” student amenities such as hot tubs and rock-climbing walls.

Rep. Ric Keller, R-Fla., an education committee member, voted for the bill, but said he would rather see the money go toward increasing the maximum Pell Grant award, which has been stuck at $4,050 for the last four years.

“The question before us is one of access: Should we help college students on the front end afford to go to school or help graduates on the back end?” Rep. Keller said on the floor. “Whatever we do with Pell Grants, it will be $6 billion less than it could have been.”

But Rep. Miller called those arguments disingenuous, since Republicans, who until recently controlled the House, failed to raise Pell Grants since the 2003-04 school year. He said Democrats planned to bolster Pell Grants in this year’s spending bills and ensure that colleges are more transparent about their costs.

Senate Prospects

Sen. Edward M. Kennedy, D-Mass., the chairman of the Senate Health, Education, Labor, and Pensions Committee, pledged to introduce the Stafford measure in that chamber. But he might fold it into a broader package aimed at increasing college access. That proposal would include an immediate increase in the maximum Pell Grant to $5,100.

Colleges and student advocates say lender opposition could derail the bill in that chamber, where Democrats hold a 51-49 majority.

Nearly every top “lobbyist in town is now on the payroll of one of the big boys in student lending, frantically trying to dissuade the Senate side from taking action,” said Barmak Nassirian, the associate executive director for external relations at the American Association of Collegiate Registrars and Admissions Officers, a Washington-based group of more than 10,000 college officials that supports the House bill.

Lenders say the proposed changes, coupled with more drastic cuts to their subsidies enacted in the Deficit Reduction Act of 2005, could force them to stop offering special deals and cut services such as financial counseling to student borrowers.

“They’re going to hurt profit margins, they’re going to make it harder to provide the service that schools depend on and students depend on,” said Harrison M. Wadsworth, a special counsel to the Consumer Bankers Association, an Arlington, Va.-based group of lenders that participates in federal student-loan programs.

He said lenders are not opposed to an interest-rate decrease, but believe Congress should offset the costs of such a decrease elsewhere in the federal budget, not continue to cut subsidies to the lenders.

But supporters of the House bill brushed those arguments aside.

“These are very small cuts to one of the most profitable industries in the country,” said Luke Swarthout, a higher education associate for the U.S. Public Interest Research Group, a Washington-based consumer-advocacy organization.

A version of this article appeared in the January 24, 2007 edition of Education Week as Stafford Interest Cut Gets Bipartisan Support

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