Student loans: Could GOP, White House strike a compromise on interest rates?
Here are some of the key elements up for debate:
- How “variable” should the rates be? The Obama administration (which the Senate Republican bill closely resembles) would set the rate anew each year, but for the borrower that rate would then be fixed. Representative Kline’s proposal would vary the rate of the loan yearly for the life of the loan.
- How many different loan types should there be? Currently, the three major programs are subsidized Stafford loans, at 3.4 percent; unsubsidized Stafford loans, at 6.8 percent; and PLUS loans for parents, at 7.9 percent. Under Kline’s proposal, the unsubsidized and subsidized programs would be combined at a rate of the 10-year treasury plus 2.5 percentage points; PLUS loans would tack on 4.5 percentage points to the treasury. President Obama’s plan would keep the three loans separate, tacking on 0.93 percentage points, 2.93, and 3.93, respectively. (For more comparison of the plans, see Inside Higher Ed.)
- Should the rates have a cap? Kline’s bill would cap Stafford at 8.5 percent and PLUS at 10.5 percent. Mr. Obama’s proposal doesn’t include caps, because the administration argues that makes loans more expensive – and students have repayment options that cap their monthly payment in relation to their income and that eventually forgive remaining debt.
The move away from Congress “arbitrarily” setting student interest rates is welcome, but “both the House proposal and the administration’s proposal miss the mark,” says Pauline Abernathy, vice president of The Institute for College Access & Success (TICAS) in Washington.
Under the president’s proposal, for instance, rates on unsubsidized Stafford loans are projected to exceed the current 6.8 percent by 2016 and top 8 percent by 2018, she says. A student borrowing $20,000 and earning $30,000 in income (that rises 4 percent a year) would end up with $7,000 more in costs if he or she has an 8 percent interest rate instead of 6.8 percent, according to a TICAS analysis.