It’s Friday. Do You Know Where Your Student Loan Rate Is?

Capitol DomeHello, today is Friday, June 28, 2013 and the Congress has shut down for the 4th of July Recess and Fund Raising Season.   What’s still on the picnic table? Student loan interest rates, which will double on Monday from 3.4% to 6.8%.

“Congress has a slim window for action following the July 4 recess, as the majority of student loans are made before the end of the summer. Democratic Sens. Kay Hagan (D-N.C.) and Jack Reed (D-R.I.) pitched a plan Thursday to extend the current rates by one year, giving the HELP committee time to revisit the issue later this year as part of a broader review of the Higher Education Act, which is due for reauthorization. The bill would pay for the reduced rates by closing a tax loophole on inherited individual retirement accounts and 401(k)s.” [Politico]

What happened to the previous plans?

There was S. 1003 sponsored by Senator Tom Coburn (R-OK) which tied student loan rates to the bond market:

“Comprehensive Student Loan Protection Act – Amends title IV (Student Assistance) of the Higher Education Act of 1965 to set the interest rate on Direct Loans, for any 12-month period beginning on July 1 and ending on June 30, at the bond equivalent rate of 10-year Treasury bills auctioned at the final auction held prior to such June 1, plus 3%.

Makes: (1) that formula applicable to Direct Loans first disbursed on or after July 1, 2013, and (2) the rate set on such loans applicable for the life of the loans.”

S. 1003 failed a cloture vote on June 6, 2013.  In fact, the bill which was co-sponsored by Senator Dean Heller (R-Nevada & the American Bankers Association) fell flat, securing only 40 votes in the Senate.

Now, why would five Republican Senators be supporting a bill to reduce the student loan rate? Possibly because it really doesn’t quite do the job.  Coburn’s bill would first change the nature of the interest rate for student loans from a fixed rate to a variable rate.  Remember all the interesting things that happened when mortgage originators shifted their emphasis from fixed rate to variable interest rate loans?

Under Coburn’s formula the fixed rate would become a variable rate which is left UNCAPPED.   Therefore, what banker wouldn’t love a guaranteed loan, which is all but impossible to discharge in bankruptcy, and which is Un-Capped over the life of the loan?  The NEA’s assessment summarizes the problem with Coburn’s “solution.”

“Based on Congressional Budget Office (CBO) estimates, students would be locked into rates above 8 percent by 2018. The additional revenue from higher rates on student loans would be used to reduce the deficit by $16 billion. Instead of protecting students from overcharges and unmanageable debt, the federal government would be balancing the budget on their backs. Low-income students struggling to pay the substantial costs of post-secondary education would be saddled with the greatest costs.”

We can get down into the weeds a bit further in the Congressional Research Services summary of the legislation:

“Under S. 1003, the interest rate in effect for the award year during which the loan is made would remain the same from the time the loan is disbursed until it is paid in full. On an annual basis, a new fixed interest rate would be established for loans to be made during the upcoming award year. The interest rate on Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans would be the 10-year Treasury Note rate, as of the last auction held prior to June 1, plus 3.0 percentage points. There would be no differentiation by loan type. Also, under S. 1003, there would be no cap on the maximum interest rate a borrower could be charged. Under this policy option, borrowers who obtain multiple loans over a period of successive years would typically have different fixed interest rates on loans made during different award years.”

Those who attempted to assert that the Coburn bill really wasn’t a variable rate program conveniently ignored the part in which borrowers who secured loans in successive years would have the interest rates predicated on the Treasury Note rate (plus 3%) as determined in the year the loan was made.  Even nicer for the financial sector — the system was made permanent.  Little wonder, the Big Banker’s Ally Senator Dean Heller found much to love in this proposal.

Senator Jack Reed’s bill from the Democratic side of the aisle, S. 953, also failed a cloture vote, 51-46 [vote 143].   Senator Reed’s bill was a two year extension of the 3.4% fixed rate student loan system, with no 3% add on, and a maximum cap of 6.8%.  A side by side comparison of the two measures brought to the Senate Floor could be shown as follows:

Student Loan bill comparisonAbout the only “good” news concerning the Republican version of the student loan bill is that it would be permanent — permanently favoring the financial sector and those who trade in student loans and their derivatives.

As we can certainly surmise, the Republican controlled House of Representatives has it’s version of a student loan rate bill, H.R. 1911, which includes:  (1) a market based variable rate; (2) based on the 10 year Treasury Note; (3) a 2.5% Add On; (4) and a maximum cap of 8.5%.   The House passed this version on May 23, 2013 on a party line vote, 221 to 198. [roll call 183]  Nevada Representatives Heck and Amodei voted in favor of the bill, Representatives Titus and Horsford voted “no.”

There are things a student loan rate bill should and should not contain if it is to be of benefit to middle and lower income students and their families; let’s concentrate on the positive.

There should be (1) a more or less permanent fix to the problem.  The interest rate should be (2)  fixed.  The only sector which benefits from variable interest rates are the bankers, definitely not the students and their families.  There should be (3) a minimal or zero add on.  These loans are guaranteed! They are all but impossible defaults! There is no logical reason for “adding on” anything except perhaps pure unadulterated greed.

It’s time for the Congress to do something about it’s 10% approval rating, and over-time in the student loan rate legislation debacle.  There is no more time for yet more legislation intended for the benefit of the Big Banks and the money shops which traffic in student loan paper.   We either want an educated workforce and are willing to invest in it or we aren’t.   And, it certainly isn’t time for Congress to take time out for its own fund raising while American families are trying to calculate how to raise the funds for their children’s education.

* For a full explication of all the recent bills related to student loan interest rates go to the Congressional Research Service’s June 5, 2013 report.  (pdf file)

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