College & Workforce Readiness

Obama Administration Urges Passage of Senate Student-Loan Compromise

By Caralee J. Adams — July 23, 2013 4 min read
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The Obama administration is endorsing the latest bipartisan Senate plan to set student-loan interest rates to the market, initially lowering the cost to 11 million college borrowers.

A statement from the White House Tuesday called on Congress to swiftly pass the Bipartisan Student Loan Certainty Act (S.1334), which a group of eight U.S. senators proposed last Thursday. A vote is expected this week.

“The plan allows borrowers to benefit from the low interest rates currently available in the marketplace and guarantees that borrowers are able to lock in these rates over the life of their loans,” the administration statement says. “In the future, fixed rates would be determined each year by market conditions, helping ensure that borrowers’ rates are more in line with the government’s own cost of borrowing, while capping how high rates can rise.”

In a press call today, Secretary of Education Arne Duncan said he was pleased to see Congress coming together to keep rates low, saving undergraduates an average of $1,500 over the life of a loan.

“We believe this is a win for students and a significant improvement over the original Republican proposal,” he said.

A House GOP bill addressing student loan rates passed in May, but didn’t advance in the Senate.

As important as it is to get this student-loan legislation passed, Duncan said this debate is simply about the cost of student debt and not about debt itself, which is the much bigger issue.

“This is an important first step, but it is just a first step” he said. “We look forward to working with Congress in a bipartisan way to figure out how to bring down overall debt students have to incur to go to college. We’ve heard a lot about the middle class being priced out of college. We need to move on to these larger, more complex issues.”

The new compromise plan would affect interest rates on new federal student loans issued after the first of this month. About 8.8 million undergraduate borrowers would see their rates on new loans drop from 6.8 percent to 3.86 percent, and rates on Graduate Unsubsidized Stafford borrowers (about 1.5 million) would drop from 6.8 percent to 5.41 percent. The legislation also proposes reducing rates for about 1 million GradPLUS and Parent PLUS borrowers from 7.9 percent to 6.41 percent.

Rates on subsidized undergraduate student loans went from 3.4 percent to 6.8 percent on July 1 when Congress couldn’t agree among the many fixes being floated. A major hang-up was on caps, just how high student-loan interest rates could rise before some protection would kick in. In the Bipartisan Student Loan Certainty Act, undergraduate loans would be capped at 8.25 percent, graduate loans at 9.5 percent, and PLUS loans at 10.5 percent.

Because interest rates would be allowed to fluctuate with the market, students in the future would likely pay more in interest. This changed the bottom-line estimate that the new legislative approach would generate $715 million over 10 years for the government.

In the call today, Duncan said it was not accurate or fair to characterize the student-loan program as making a profit; rather, the figure was a projection and may be needed to cover defaults and other protections in the program for students.

Sens. Patty Murray, D-Wash., and Al Franken, D-Minn., plan to offer an amendment to the bill that would take some of the budgetary savings from the Senate proposal and direct them to providing greater resources for the Pell Grant program and restoring some eligibility requirements that had been recently been cut for students enrolled in career-pathway programs. This amendment is supported by the American Association of Community Colleges.

Some student groups have criticized the latest compromise proposal, expressing concern about the bill’s future cost of borrowing.

The Young Invincibles, a national advocacy organization for young people, issued a statement saying that while the deal relieves political pressure on lawmakers to keep rates from doubling in the short-term, it does little to relieve the mounting pressure on students and borrowing in the long run. “The deal includes caps on how high the interest rates can go—a welcome addition—but the caps are too high, and the rates are set in a way that allows them to rise significantly,” the statement says. “The rates will start out lower for students for the first few years, but interest rates on federal Stafford loans could easily jump above 6.8 percent, meaning the deal is actually worse than letting rates double.”

The group urges Congress to work with students on college-affordability issues in the reauthorization of the Higher Education Act.

The Institute for College Access and Success issued a statement voicing similar concern over the compromise being a “missed opportunity” for lawmakers to make college more affordable.

Others, such as the American Council on Education and the Center for American Progress are supporting the compromise.

“On balance, the bill is a good deal for college students when compared to current interest rates, and the bill also ensures the long-term viability of the student-loan program,” writes David Bergeron of CAP.

David Hawkins, director of public policy and research for the National Association for College Admission Counseling, said the proposed legislation is a textbook example of a political compromise, where no party came away completely satisfied.

“While we think students could have gotten a better deal, we are nonetheless appreciative that Congress acted in a bipartisan fashion to attempt to bring about a longer-term solution to the challenge of setting the student-loan interest rate,” Hawkins said in an email response.

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A version of this news article first appeared in the College Bound blog.