A Good Short-Term Solution is Better than a Bad Permanent One

With just nine days until interest rates on subsidized Stafford loans are scheduled to double from 3.4% to 6.8%, policymakers keep scrambling to come up with a long-term fix. But so far, their long-term proposals – actual and rumored – fall short on the most important measure of all: keeping loans affordable for students, both now and in the future.

The table below uses CBO projections for 10-Yr T-Note yields (fiscal year) to compare how three recent long-term proposals compare to the current rates and scheduled rates for undergraduate subsidized Stafford loans over the next decade. As you can see, rates would rise sharply under all three proposals, increasing the cost of college for millions of students and families already struggling to pay for college.

 

Projected Rates for Undergraduate Subsidized Stafford Loans (2013-2023)

 

Years Rates Projected to  Exceed 7% (2013-2023)

Years Rates Projected to  Exceed 8% (2013-2023)

Cap on How High Rates Can Rise (Yes/No)

Scheduled Rate (6.8%)

NEVER

NEVER

Yes

Current Rate (3.4%)

NEVER

NEVER

Yes

Coburn/Burr/Alexander

2016-2023

2018-2023

No

Kline/Foxx

2013-2023*

NEVER

Yes

Manchin/King/Coburn

2018-2023

NEVER

Uncertain**

*Rate is projected to exceed 7% beginning in 2017 and would apply to all loans taken out after July 1, 2013,  because under the Kline/Foxx bill, the rates for all loans vary each year throughout the life of the loans.
**Media reports on this proposal vary, and the proposal itself has not been made public.

The table shows that in five years or less, projected rates under these long-term proposals would exceed 7%, more than double the current rate. Some conservatives have objected to including any cap on how high rates can rise. Others have suggested that the availability of income-driven repayment plans eliminates the need for an interest rate cap. But that’s simply not the case.

Still others have claimed that an interest rate cap isn’t necessary because federal consolidation loans would still have a maximum rate of 8.25%. They argue that students who borrow when rates are even higher could consolidate into a new loan at 8.25%.

However, the potential to consolidate is not a legitimate substitute for capping how high rates can rise. Consolidation comes with risks, which vary depending on the borrower’s specific circumstances. Among the risks of consolidation:

  • Consolidation costs you more by extending your repayment period: the longer you stretch out your payments, the more interest you pay. Standard consolidation repayment periods range from 10-30 years depending on your debt level.
  • Any accrued but unpaid interest is capitalized (added to the loan principal) when you consolidate.
  • Rates on consolidation loans are rounded up to the nearest 1/8th of one percent of the weighted average of the loans or 8.25%, whichever is lower. This can also add to the cost of your loan.
  • Consolidating prevents you from paying down your highest interest loan first to reduce the average rate and total cost of your remaining debt.
  • The way repayment periods are automatically set in consolidation makes it harder to qualify for Public Service Loan Forgiveness (PSLF). The only payments that count towards the 120 required for PSLF are income-driven or “standard” 10-year payments. But “standard” consolidation repayment periods are longer than 10 years if you have at least $7,500 in debt.
  • If you consolidate a Parent PLUS loan with your own student loans, the resulting consolidation loan will not be eligible for Income Based Repayment or Pay As You Earn.
  • Benefits and rights associated with individual loans are lost in consolidation.

Both today’s students and tomorrow’s deserve affordable student loans, not so-called solutions that let rates double and rise even higher without any upper limit. Congress must not rush to make permanent changes that leave students worse off than doing nothing at all. Instead, current rates should be temporarily frozen so that Congress and the Administration have time to come up with a plan that makes real sense for both students and taxpayers. The Reed/Harkin bill, supported by a majority of the U.S. Senate and the Administration, does just that: extending current rates for two years while fully paying for itself by closing unnecessary tax loopholes.

Posted in

| Tagged