A compromise bill in Congress could reverse the doubling of student loan interest rates that took effect at the beginning of the month, saving California students an average of $1,565 in loan repayments.
President Barack Obama and Education Secretary Arne Duncan are lobbying hard for lawmakers to approve Senate Bill 1334, dubbed the Bipartisan Student Loan Certainty Act of 2013, as quickly as possible. Another contingent of prominent Democrats is denouncing the bill, saying it would cost students more in the long run.
“This bipartisan compromise we absolutely believe is a win for students,” said Duncan during a conference call with reporters Tuesday.
The deal would help about 11 million borrowers, nearly 608,000 of them Californians, with federally subsidized and unsubsidized Stafford loans and PLUS loans for graduate and professional school students. Typically low- and moderate-income students and families take out these loans to help finance the ever-increasing costs of college.
The compromise ties interest rates to the 10-year Treasury note, but unlike an earlier Republican bill, it caps interest rates, and that amount remains fixed for the entire life of the loan.
The new rates would kick in immediately. Undergraduates taking out loans for the fall 2013 term would borrow at 3.86 percent, slightly above the last year’s rate, but much lower than the 6.8 percent increase that took effect on July 1, when Congress failed to take action to stop the rates from doubling. The rates would not be allowed to rise above 8.25 percent.
Graduate students would get loans at 5.4 percent, with a cap of 9.5 percent, and PLUS loans would start at 6.4 percent with a 10.5 percent cap. This is a change in policy for graduate student borrowers, who currently pay the same rate as undergraduates. Duncan said the increase reflects that, given their age and maturity, graduate students “have a better sense of the market and what they’re going into.”
Diana Fuentes-Michel, executive director of the California Student Aid Commission, said a key component of the bill is that it lets students know the cost of borrowing money for school so they can make educated decisions. “Students are now going to have some stability in knowing that there is a rate and here’s what it is. Then they can plan their repayment options,” said Fuentes-Michel.
A number of Congressional Democrats say the bill’s benefits are short term, only giving a significant interest rate reduction to student borrowers for the next two years or so, and they’re urging a no vote. In a floor speech Friday, Sen. Elizabeth Warren, D-Mass., who introduced her own bill to roll back rates for a year to the pre-July 1 levels, derided the bill as “offering its own teaser-rate student loan system.” She warned that it while it would benefit student borrowers for the next two years, after that an increase in Treasury rates could make loans unaffordable even with a cap.
The compromise will cost student borrowers an additional $715 million over the next decade, according to The Institute for College Access and Success, an Oakland-based organization that works to make college affordable.
In a statement on its website, the Institute argues that addressing loan rates is only a piece of the larger crisis of skyrocketing college costs, and called on Congress and the Obama Administration to use the upcoming reauthorization of the Higher Education Act “to improve the information and tools that can help students and families make informed decisions about where to go to college and how to pay for it.”
Duncan acknowledged that federal officials “worry a lot about the middle class being priced out of college,” and suggested that Congress take up that issue next in a similarly bipartisan manner. “If congress wants to start to become more functional we think there’s no better place to do that than in the education space.”