U.S. House should focus on market-based rates for student loans

June 5, 2013

Despite a threatened veto from President Obama, the U.S. House on Thursday, May 23, passed a Republican-sponsored bill that would permanently peg federal student loan interest rates to those of the government. The bill, Smarter Solutions for Students Act, H.R., 1911, passed the House with a vote of 221 to 198 vote. In a mostly partisan vote, four Democrats supported the bill, while eight Republicans voted against it.

It will be noted later on why the eight Republicans who voted “no” were the wise ones, even if their votes at the time did not reflect the reason why a “no” vote was called for.

H.R. 1911 was passed as the Republican answer to stopping federally backed student loan interest rates from doubling from 3.4 percent to 6.8 percent on new subsidized Stafford loan originations after July 1. The bill addressed the impending July 1st rate increase on subsidized Stafford loans by moving all federal student loans, except Perkins loans (need-based student loans offered to assist in funding post-secondary education) to a variable rate.

Under H.R.1911, subsidized and unsubsidized Stafford loans would be calculated using the 10-year Treasury Note plus 2.5 percent. Graduate and parent PLUS loans would be an additional 2 percentage points higher than Stafford. An interest rate cap is set at 8.5 percent for Stafford and 10.5 percent for PLUS and graduate loans.  By comparison, undergraduate Stafford loans presently have a fixed interest rate as low as 3.4% and can be used to pay tuition and other school expenses.

Here in Illinois Representative Darlene Senger (R-Naperville) reacted to the May 23, U.S. House bill, citing the high cost of education and the need to keep interest rates low so more Americans can afford to get an education. Senger likewise followed through with action in the Illinois House by introducing a resolution calling on the U.S. Congress to take actions necessary to stop the rate increase. If approved copies of the resolution will be distributed to the Illinois congressional delegation by the Illinois House.

Until this past Friday, May 31, President Obama has been AWOL on the student loan issue, despite an earlier threat to veto H.B. 1911, although during the 2012 presidential campaign last summer Obama did advance the “Don’t Double My Rate” theme in a student loan dust up with Republicans.  At that time the House gave in and approved the one-year bill sought by Obama.

A reprisal of Obama’s “Don’t Double My Rate” theme occurred at a news conference in the Rose Garden on Friday, May 31.  Surrounded by college students, President Obama urged Congress to pass a new student-loan bill. It was then that Obama assured students that he too believed that young people shouldn’t be saddled with extensive debt just as they were starting out in life.  Obama also told students that on the average they would rack up an additional *$1,000 in debt per year.

According to an article in the Weekly Standard, Obama’s message to students was a misrepresentation of what his plan really would accomplish.  Obama’s has made claims based on how an incoming freshmen borrowing $27,000 will save $4,000 ($1,000 a year) under his plan.  Further calculations, however, show that the average savings for student loans in the range of $27,000 is more like $1,128, assuming students repay their loans over the expected period of 12 years. Instead of Obama’s much heralded $4,000 savings on student loan payments, the actual savings afforded by his plan over a period of twelve years ($1,128) would amounts to only $94.00 per year or a mere 24 cents per day!

Could it be that President chose this week to readdress the student loan issue as a way to avoid the Benghazi, the IRS and other scandals plaguing the trustworthiness of his administration?  After all the Democratic-led Senate has yet to vote on the legislation passed by the House on May 23.

While the Republican bill does prevent interest rates from doubling on July 1st and will likewise reduce rates immediately for most borrowers, it was not unexpected for President Obama to attempt to make political hay out of the issue instead of trying to work cooperatively across the aisle with Republicans.  Although little difference exists between the already passed House plan and the president’s plan, Obama’s claim is that the House bill doesn’t lock in low loan rates and could even end up costing students more money than the bill now in effect.

House Speaker John Boehener, and rightly so, accused President Obama of holding “a campaign stunt to try to score political points.”

Although the dynamics surrounding the current student loan debate will differ without election-year politics influencing the outcome, there is likely to be vigorous debate around the issue in the coming weeks.   It seems clear that reform should be in the works to address any rise in student loan interest rates.

Congress might readdress the student loan issue maintaining focus on short-term impact to existing lenders and borrowers, considering also the future functioning of the market and its role in the broader economy.  Policy makers employed a variety of creative solutions to facilitate lending during a period of crisis. They should proceed with similarly creative solutions to ensure an outcome which balances the interests of students and taxpayers.

The Heritage Position is to get the Government out of the “rate setting” role.  Once the government has a role in setting rate for loans for anything, rather than the markets, then any candidate can set rates in advance of an election in order to capture the youth vote.

For housing we had a period where the government was encouraging home ownership, through tax rebates and questionable FHA programs for the poor, but the government never said “Hey, home loans should be 3.2% if you will vote for me”.  If banks were setting these rates, they would be setting them at market rates based on credit history.  They would likewise be based on the fact that they are “guaranteed.”  That is, if the student defaults the government pays the bank.

Voting “yes” to peg these rates at 2.5 points over the Fed Rate must have appeared “market based” to Republicans in legislating and then passing H.R. 1911, but it is still setting the rates.

This is an instance where the eight “no” Republican votes in the House were right.  Hopefully they were holding out   in the hope of seeing movement toward true market-based loans.

Tuesday, June 04, 2013 at 12:01 PM | Permalink


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