Congress Gets a Late Penalty for Student Loans

Up next on the list of Fiscal Speed Bumps is the July 1 deadline upon which the 3.4 percent interest rate for subsidized Stafford loans is set to revert to 6.8 percent. Unfortunately, recent reports indicate that the Senate is unlikely to make the deadline as they have to find a passable bill. The delay is especially disappointing considering the proposals each side has made and their seeming willingness to find a solution.

In the Senate, the current proposal from the Democratic majority would pay for two years of the extended 3.4 percent rate with tax increases. The Senate Republicans would tie all Stafford loan rates to the ten-year Treasury rate plus three percentage points, which would reduce the deficit over ten years. Neither bill was able to pass the Senate. The Hill reports that a bipartisan group of Senators are working on a bill that would set student loan rates at the 10-year Treasury rate plus 1.9 percentage points.

Meanwhile, the House has passed on a 221-198 vote a bill to set the Stafford loan rates at the ten-year Treasury rate plus 2.5 percentage points but capped at 8.5 percent. The loans in the House bill would be vary year-to-year but could be repackaged into a fixed rate loan upon graduation if the student chooses. There is also a proposal in the President's budget to set the subsidized Stafford loan rate to the ten-year rate plus 0.93 percentage points and the unsubsidized rate to two percentage points above that. In contrast to the House's proposal, the rate would be fixed over the life of the loan. These two proposals and the potential Senate proposal are similar in their mechanism, but there would need to be an agreement on the rate. 


Source: CBO

There are many different ways to reform the student loan rate, and most are better than the status quo of letting student loans immediately double. Hopefully, with the deadline in sight, Congress will come to an agreement that permanently deals with the student loan rates. The ten-year Treasury rate solution is a particularly elegant one in that it keeps rates low upfront but pays for that cost over the longer term.

But this episode is also a reminder of the need to come to the negotiation table early -- as we approach the fiscal hurdles upcoming this fall -- last minute solutions could be politically and economically destabilizing. Even though going past the deadline for a short period of time is not a huge deal, the uncertainty for prospective borrowers is unnecessary. This principle applies similarly to other budget negotiations.