Political solutions to student loan problem fail (essay)
While total student debt topped $ 1 trillion last year, more than 35 percent of borrowers under 30 who were repaying were at least 90 days late on their payments. The first three months of 2013 were the worst ever recorded for defaults on student loans. College education always pays off, but rising tuition fees, low graduation rates, and soaring debt levels are making post-secondary degrees out of reach for too many students. Meanwhile, the government expects to earn a $ 34 billion profit on federal loans next year.
Congress is about to make matters worse. Last spring, students fought and won a battle to prevent interest rates on subsidized Stafford loans, lower interest rate loans on which the government pays interest while students are enrolled, do not double. Yet Congress only fixed the problem for a year. If our leaders in Washington do not act again, more than 7 million students would see their interest rates drop from 3.4% to 6.8% on July 1. This adds $ 1,000 to the repayment per school year for someone who borrows the maximum amount each year – an additional $ 4,000 for a student who graduates in 4 years. Students are fed up with fabricated crises and band-aid policies. We need a comprehensive solution that permanently fixes the way the federal government sets interest rates on student loans. But the current long-term proposals are far from sufficient.
Proposals do not solve the problem
A flagship reform idea, adopted by both Senate Republicans and President Obama, would replace the current system, fixed interest rates set by Congress, with rates that vary with market conditions but are fixed over the life of the loan, such as a mortgage. Students would pay less when aggregate interest rates are low, and more when aggregate interest rates are high. The rate would change over time, without Congress needing to get involved. Allowing for flexibility would be fairer to borrowers and provide the kind of long-term, comprehensive solution that students need. Global interest rates are currently at historically low levels: the federal government can borrow for less than 2 percent on a 10-year Treasury note, but federal student loans are pegged at rates ranging from 3.4 percent up to 7.9 percent.
With a market-based rate, however, comes the risk that interest rates will skyrocket. If treasury rates were to increase by 10%, which happened in the 1980s, not only would it dramatically increase costs for students, it could deter students from going to college. A market-based rate with no cap is just bad for students.
That’s why the devil is in the details. Senate Republicans, who want to use student borrowers to pay down the deficit, start with a 10-year Treasury bill rate plus 3 percent, a rate that will inevitably rise further with the market. They would also allow interest to grow while students are in school, further fueling student debt and using the money to reduce the deficit. Previous rounds of deficit reduction followed by sequestration have already slashed the federal education budget. Students need reform that makes university more affordable, not less.
The president’s budget proposal is also disappointing. It changes the rates to a market-based rate, but there is no cap on how those rates might move. This approach keeps rates low now, but pays for it by letting rates rise later. It also subjects these rates to the whims of the market – who could have predicted today’s low rates?
A better approach would combine a market-based rate with a strong cap and require borrowers to repay loans based on their income. Under this model, interest rates would follow market conditions at the time of issuance, but would be fixed throughout the life of the loan.
Fixed rates and a strong cap would balance flexibility with the need to provide certainty for students. Borrowers would know their expected monthly payment as soon as they took out their loans. A dramatic rise in interest rates would never seriously threaten investment in education. Finally, the annual adjustment of a market-based fixed rate removes Congress from the rate-setting process – something anyone can appreciate.
However, changing interest rates alone will not reduce the rise in defaults in a tough economy. That is why we need a broader reform of the student loan system. We need better advice, better loan service, and most importantly, a simple system that allows students to qualify for Income Based Repayment (IBR). By forcing students to pay back their loans based on what they earn, we would ensure that graduate students in tough economic times do not pay more than they can afford. The IBR is not a substitute for an interest rate cap because it does not limit the total debt owed or the time required to repay it. Rather, it limits monthly payment amounts, an essential tool in stemming the tide of defaults that are ruining credit scores and livelihoods.
Finally, we need comprehensive federal and state reforms that will truly tackle the underlying driver of student debt – the rapidly rising cost of a college education.
Last year, Congress worked together to avert a self-inflicted crisis only to address another 12 months later. We have to deal with rising college costs and increasing accountability for schools, but we also face a looming deadline to take action on student loans and ensure an affordable and stable system for years to come. And if comprehensive student loan reform proves politically impossible, we must at least come to a short-term deal that keeps student rates low and leads us down the path to that long-term solution.
As the July 1 deadline approaches, one thing is clear: Students cannot afford Congress to fail in its responsibilities.